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RCom earnings in June quarter underscore underperformance trend

RCom earnings in June quarter underscore underperformance trend
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First Published: Sun, Aug 14 2011. 10 24 PM IST
Updated: Sun, Aug 14 2011. 10 24 PM IST
Reliance Communications Ltd (RCom) has reported another set of lacklustre quarterly earnings.
Reported revenue and profit fell sharply on a sequential basis. But that was expected since the March quarter had got a boost, thanks to a change in accounting policy. The results were weak even after accounting for this.
The company had changed the manner in which it accounts for licence revenue from the sale of bandwidth on an indefeasible right of use (IRU) basis.
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Earlier, the revenue from such sales was accounted for over the life of the contract. But since the March quarter, the company has been accounting for this revenue upfront, for contracts that are not cancellable and are not refundable.
Being the first quarter when this change was implemented, such revenue booked in earlier quarters also found its way into the March quarter earnings.
Given this backdrop, it makes sense to compare the June quarter results with the December quarter, before the change in accounting policy. Sadly, over this two-quarter period, the company’s total revenue declined by 1.3%, and earnings before interest, tax, depreciation and amortization (Ebitda) fell 4%.
The wireless business seems to have performed relatively better, with revenue growing by 3.1% sequentially, and by 6.5% over the two-quarter period. Margins in the business, however, have been under pressure. They have dropped by nearly 200 basis points in the past two quarters. One basis point is one-hundredth of a percentage point.
The trend in volume growth continues to be sluggish, relative to peers, with total minutes carried on the company’s network growing by 3.1% sequentially.
It’s interesting to note that while the company’s shares had rallied sharply late last month after Bharti Airtel Ltd announced an increase in tariffs in select circles, it has since corrected. Since the time Bharti announced the tariff hikes, RCom shares have fallen by around 7%, even though they had initially risen by as high as 19%. Bharti shares have given up most of those gains in the recent market correction, but haven’t fallen; while shares of Idea Cellular Ltd trade around 17% higher. While RCom is expected to benefit from the improving trend in tariffs, investors are more concerned about its high leverage and the uncertainty related to the 2G scam investigations. It is also evident that its financial performance is relatively weaker than its peers who are listed.
Graphic by Ahmed Raza Khan/Mint
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First Published: Sun, Aug 14 2011. 10 24 PM IST