Mumbai: Reliance Communications Ltd (RCom), the mobile telephony arm of the Reliance-Anil Dhirubhai Ambani Group (R-Adag), said it’s moving away from offering free minutes to subscribers and focusing on improving paid minutes of usage, marking a shift in strategy as it seeks to shore up revenues.

Regardless of the reduction in free talk time that it has already undertaken, earnings announced by the company on Friday for the quarter ended June were below estimates.

While operational parameters showed improvements, foreign exchange fluctuation and higher interest costs on account of debt secured to pay third-generation (3G) spectrum fees saw RCom’s net profit in the first quarter of 2011 plummet to Rs251 crore, a quarter-on-quarter (q-o-q) slump of 80%, and a decline of 84.66% from the year-ago period. RCom recently paid Rs8,585 crore to the government to secure 3G spectrum in 13 circles.

Profit after tax was less than half the estimate by Bloomberg based on a poll of 24 analysts.

The country’s second largest mobile phone operator by subscribers made a notional provision of Rs440 crore, which included around Rs200 crore in anticipation of higher outgo on account of finance charges due to forex fluctuations.

For the quarter ended June, the rupee weakened 3.3% against the dollar.

Graphic: Paras Jain / Mint

RCom’s shares declined 2.94% in Friday trade on the Bombay Stock Exchange to Rs168.10, while the benchmark Sensex gained 0.52%.

“Based on our models and forecasts, RCom’s results were disappointing both from a topline and bottomline perspective," said Archit Singhal, research analyst at Jaypee Capital Services Ltd.

At a conference call following the announcement of its quarterly results, the management of RCom told analysts that the company has halved the amount of free minutes offered on its network in the last three quarters, which has helped RCom improve its revenue per minute (RPM) to 44 paise, which, according to the management, is the industry average. Three quarters back, RCom’s revenue was 8-10 paise lower than this.

The intense tariff war in a 15-operator market has seen many telecom firms bleed as they slashed charges and doled out free minutes to garner a larger share of the market.

Syed Safawi, president of RCom’s wireless business, told analysts that it would not be possible to do away with free minutes completely and some such free talk time would continue to exist. “However, increased paid minutes would start adding to the company’s bottomline," he said.

“On the ground, feedback confirms that the company has been reducing free minutes over the last quarter or so. How that will impact volume (minutes of usage) growth and subsequently revenue growth remains to be seen," said a telecom sector analyst with a Mumbai-based domestic brokerage, who did not want to be identified. “Despite free minutes, over the last couple of years, RCom has lagged other larger telcos in terms of volume growth."

“Our focus is now on improving the quality of customers we acquire by inducing discipline in our tariffs and offering operational efficiency. The RPM we have achieved gives us the flexibility to sustain profitable growth," Mahesh Prasad, president (wireless business) said in an interview. RCom’s average revenue per user has shown a sequential increase of Rs1 to Rs130 in the June quarter, he said, and the minutes of usage have improved 13.3% from the year ago.

In the interaction with analysts, Satish Seth, group managing director at RCom, said that while the slide in tariffs appear to have been “arrested", those offered by some incumbent operators and their challengers in certain circles were still “unsustainable".

“Only integrated operators might be able to survive this competition," Seth said.

Prasad said since a couple of new operators had launched operations around nine months ago, the domestic telecom market hadn’t seen any serious price wars. “Though the tariff war appears to be mostly over, irrational tariffs still exist in some pockets, and we are going to approach the situation on a circle-by-circle basis," he said.

According to Jaypee Capital’s Singhal, growing minutes of usage for RCom and other players in the market is a good sign as it shows that larger players are regaining a competitive edge.