Reliance Communications Ltd reported decent results for the quarter ended 30 June, with India telecom revenues growing by 2.2% and overall Ebitda (earnings before interest, taxes, depreciation, and amortization) margin rising 100 basis points. In end-June, the company had announced a $1 billion ( 6,100 crore) equity fund raising, which would help cut its massive debt by about 15%. Post its June quarter results, the company said it expects an annualized reduction of 600 crore in interest costs. Pre-tax profit stood at 165 crore last quarter, which essentially means that the interest reduction will result in a big jump in profit.

Despite all this, the company’s shares have declined by 20% since it announced the fund raising. While steep valuations were one cause for the correction, investors also seem to have concerns about the company’s core operations. Analysts at Citigroup wrote in a note to clients in June that R-Com is more vulnerable than other telecom operators to the increase in sector capacity owing to Reliance Jio Infocomm Ltd’s expected launch. Also, in June, R-Com announced a new tariff plan called “One India One rate", where it offers customers the same tariff for local, long distance as well as roaming calls. This has got some analysts worried about the expected impact on the company’s average revenue per user, as existing customers are migrating to the new plan.

Coming back to the June quarter results, there are some signs of improvement—barring the struggling CDMA voice business, the company’s GSM voice and data business grew by 3.5% sequentially, according to a company official. Volumes in the GSM voice business, i.e. minutes carried on the company’s GSM network rose by about 1.6% sequentially, while average tariff realization inched up marginally.

On the one hand, considering the lacklustre growth in the past many quarters, last quarter’s performance comes as a pleasant surprise. On the other, it also means that it makes sense to wait and see if the company sustains the growth momentum.

The company said that it plans to cut debt by another 30% in the next 12 months by selling stakes in some assets such as real estate. News flow on this front could help increase interest in the stock; in the interim, the above-mentioned concerns should check irrational exuberance—although past history shows that investors do tend to get carried away with this stock.

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