Reliance Communications (RCOM) recorded its slowest-ever topline growth of just 10.4% y-o-y in 4QFY2009.
Sequentially, topline growth came in at just 2.2%. The disappointing performance was yet again a result of the poor growth recorded in the company’s Wireless Business Unit, which grew in single digits, by just 8.2% y-o-y and 2% q-o-q.
This was the case even as the company’s mobile subscriber base grew by an outstanding 58.7% y-o-y and by 18.5% q-o-q to touch 72.7 million on the back of its pan-India GSM launch in January.
Quarterly net adds stood at 11.3mn, the highest-ever in the history of the Indian Telecom Sector.
However, on account of significantly lower average revenues per user (ARPUs) earned from its new GSM subscribers, overall gross ARPUs fell by as much as 30% y-o-y and by 10.6% q-o-q to hit Rs224 (Rs320 in 4QFY2008 and Rs251 in 3QFY2009). As expected, MoUs fell 14.3% y-o-y and 9.1% q-o-q to 372 minutes.
As regards the other business segments, RCOM’s Global Business grew 23.2% y-o-y (12% q-o-q) aided by a 43.2% y-o-y growth in minutes of usage (MoUs, 5.6% q-o-q).
On the other hand, the Broadband Business clocked a robust 38.7% y-o-y growth powered by an impressive 34.3% y-o-y increase in Access Lines, which touched nearly 1.4mn. Sequentially too, the growth was impressive at 8.2%, with Access Lines growing by 3.7%.
Going forward, we expect RCOM to post a 21.8% CAGR in topline over FY2009-11E, while bottomline is expected to record a CAGR of just 4.1% over the period.
At the CMP, the stock is trading at a P/E of 8.7x FY2010E EPS, EV/EBITDA of 6.9x FY2010E EBITDA and at an EV/subscriber of US $91.7 on our FY2010 subscriber estimates.
While the company is expected to post strong growth in its subscriber base on account of its pan-India GSM launch, the quality of subscribers remains a concern.
We have factored in a 36.4% CAGR in mobile subscriber base going forward over FY2009-11E, while also modeling for a 12.5% compounded fall in ARPUs. Thus, the ARPU fall is expected to limit topline growth for the Wireless Business to 24.5% CAGR over FY2009-11E, which is decent, albeit considerably lower than the subscriber CAGR.
We have mentioned the numerous issues that persist, viz. the consistently worsening operating metrics being reported particularly in the key Wireless Business, poor quality of subscribers, accounting issues, high leverage, the possibility of more debt being taken on to finance the 3G Spectrum Auction as and when it is held and of course, the issues that are being faced by the sector in general such as heightened competitive intensity and regulatory risks.
Apart from this, the company did not give out Balance Sheet details this quarter, which we believe is a negative, especially when serious questions abound about the quantum of debt on its books.
Thus, we believe all these factors will lead to the stock trading subdued in spite of seemingly cheap valuations.
We downgrade the stock from BUY to Accumulate, given the recent run-up in the stock price and have a target price of Rs244, including Rs212 for its core business (8x FY2010E EPS) and Rs32 for the Towerco, Reliance Infratel, assuming 50% captive tenancy.