The third quarter numbers for Reliance Communications Ltd (RCom) failed to meet our expectations on the core operations front. Revenue fell mainly due to subdued broadband and global businesses, with the wireless business witnessing only marginal growth.
We expect the current challenges faced by the industry—in terms of per second tariff plans, delayed 2G, 3G and mobile number portability implementation—to affect the company’s short-to-medium-term performance until the environment stabilizes.
RCom recorded a fall of 6.8% year-on-year (y-o-y) (3.9% quarter-on-quarter, or q-o-q) in revenue during the third quarter of FY10, mainly attributed to a q-o-q fall in the revenues of global and broadband businesses.
However, the company managed to witness a 0.3% q-o-q growth in the wireless business segment, where it added 7.7 million gross subscribers, taking the total subscriber base to 93.8 million in the third quarter of FY10.
RCom recorded a contraction of 452 basis points (bps) y-o-y (expansion of 82 bps sequentially) in its earnings before interest, tax, depreciation and amortization (Ebitda) margin, mainly due to higher network operation costs.
In spite of the higher interest income, minority share and lower depreciation costs, the company recorded a 21.4% y-o-y decline (up 49.7% sequentially) in its profit after tax, which was mainly on account of lower margins coupled with lower other income and a higher tax outgo.
At the current market price, the stock is trading at a price-earnings multiple of 9.1 its estimated FY12 earnings per share, an enterprise value (EV)/Ebitda multiple of 5.9 its estimated FY12 Ebitda and an EV/subscriber of $38.8, on our FY12 subscriber estimates.
However, the worst seems to have already been discounted for telecom companies and any positive moves on the regulation front would only create an upside opportunity. Hence, taking into consideration the recent fall in the stock and the expected recovery in the long-term, we recommend an accumulate on the stock. Out target price is Rs197 (including Rs30 per share as the value of the tower company, Reliance Infratel Ltd).