Reliance Communications Ltd’s September quarter results were marginally weaker than expected. Headline numbers seemed alright, with revenues declining by 2.2% and earnings before interest, tax, depreciation and amortization (Ebitda) being only 0.7% lower compared with the June quarter. But the improvement in profitability was primarily in the non-core business.
Just like other telecom companies, volumes were expected to decline because of seasonal weakness in voice usage. Phone usage drops in the monsoon across the country, primarily in rural areas. Reliance’s volumes fell by 2.5% last quarter—with the total number of voice minutes carried on its network falling to 102.5 billion minutes. Earlier, Bharti Airtel Ltd reported a 2.1% decline in volumes to 234.2 billion minutes.
The drop in revenues, therefore, was on expected lines. The improvement in margins came as a surprise, but it’s important to note here that wireless margins were flat and margins in the global enterprise business, which includes long distance and enterprise services, fell. Overall margins improved only because of a sharp increase in margins in the others category, which includes DTH services, retailing (Reliance World), property leasing and investments.
Needless to say, investors weren’t too impressed with the improvement in profitability driven by the others category. Besides, interest charges rose by 7% sequentially and there was a surprise jump in cash outflows on account of capital expenditure last quarter. According to the company, this is related to the capital expenditure (capex) that was done in the past, but on which cash payments were made only now.
The company’s shares fell by over 2% on Friday. RCom shares have now fallen by over 30% in the past one year, on the back of worries about its debt. Plans to raise capital by selling a stake in either its tower infrastructure business or its undersea cable business haven’t been successful. Its net debt stood at Rs.36,723 crore, and its net debt to Ebitda ratio was almost five times based on past 12 months Ebitda. Ebitda is a key measure of profitability.
The company has curtailed capital expenditure owing to its high indebtedness and the constraints on investing in the business are telling on its growth. Investor interest is unlikely to pick up unless the company finds success with its fund-raising plans.