The 8.1% growth in the sequential operating profit of Reliance Communications Ltd (RCom) last quarter was lower than Bharti Airtel Ltd’s growth of 10.8%. What’s more, it provided little reason for analysts to raise earnings estimates. Based on current estimates, RCom trades at close to a 30% premium to Bharti’s enterprise value/earnings before interest, taxes, depreciation and amortization (Ebitda).

Apart from the recent developments on spectrum allotment, which go against the interest of Bharti and other players in the global system for mobile communications (GSM) space, there’s little reason why Bharti should trade at a large discount. Thanks to Reliance’s outperformance in the recent past, its market capitalization is now just 5% short of Bharti’s, although its operating profit last quarter was as much as 28% lower.

Coming to the nitty-gritty of the results, RCom’s wireless business did better than that of Bharti’s, as a rise in minutes of usage offset the fall in average revenue per user. Both revenues and operating profit of the division grew in double digits, unlike Bharti, which saw a growth of 8% and 9%, respectively, on these fronts. But the non-mobile businesses grew profit by just 4%, unlike Bharti, which witnessed a 20% jump in profit of the non-mobile divisions. RCom’s growth was pulled down by the performance of its long distance calling services. Both revenues and profit of this division grew by just 1% sequentially. Analysts say that while valuations have run up sharply in the recent past, the company’s results in the past few quarters provide no reason for a large upgrade. Much of RCom’s outperformance has come about since department of telecommunications’ (DoT’s) proposals on spectrum allocation to GSM players became public. Prior to that, RCom’s market cap was about 38% lower than that of Bharti and its enterprise value (EV)/Ebitda valuation was at a discount. The regulatory stance against GSM players has changed all of that, but analysts say that, given Bharti’s longer track record, the current valuation gap is too high.

Betting on ITC?

Tobacco firm ITC Ltd’s stock was recommended by a slew of analysts after the June quarter results, when it became clear that the company would shrug off the impact of coming under the value-added tax (VAT) ambit. ITC’s second quarter results for its cigarettes business have proved the analysts right, with cigarette volumes falling by around 4% in line with most estimates. The company had gone in for price hikes of an average of about 20% to offset the impact of the new taxes and the result has been a net sales growth of 11.6% in the cigarette segment, compared with the year-ago period. And although margins fell by 91 basis points (bps) in the segment, earnings before interest and tax rose by 9.8%. Unfortunately, the company’s ability to take such shocks in its stride doesn’t seem to have helped its stock, which continues to be a huge underperformer.

ITC’s other businesses haven’t done well at all during the September quarter, and the company’s profit after tax (PAT) growth of 13.4% owes much to higher “other income," including a tax refund, dividends from subsidiaries and treasury profits. Operating profits were up a mere 6.1%.

The company’s agro-business division took a big hit because of the ban on exports of pulses, maize and bajra, as a result of which the company had to sell its stocks at distress prices in the local market. Net revenues in the segment fell 12.5%, compared with the year-ago period, while profits fell 78%. Rupee appreciation hurt this business and also the company’s hotels division, with profits from hotels up 14.3%—much lower than the 31% growth seen during the second quarter of last year. The company’s paperboard division also didn’t do well, but the new fast-moving consumer goods (FMCG) categories did excellently, growing revenues sharply and reducing losses. But the company is in the middle of fighting a major battle against established players in the FMCG business that will require substantial investment. Analysts say cigarette volumes are likely to pick up in the second half of the year. But with consensus estimates of earnings growth well below its fiscal 2008 forward price-earnings multiple, room for upside remains limited.

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