R-Com’s March quarter results disappoint after excluding one-offs

R-Com’s March quarter results disappoint after excluding one-offs

Reliance Communications Ltd’s (R-Com) results for the March quarter got a boost, thanks to a change in the accounting policy. Adjusting for this change, the results are disappointing, with earnings before interest, tax, depreciation and amortization (Ebitda) declining by 4.6% sequentially.

Reported revenue and Ebitda jumped by 57.4% and 147.1%, respectively, on a sequential basis, after the company changed the manner in which it accounts for licence revenue from the sale of bandwidth on an indefeasible right of use (IRU) basis.

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An indefeasible right of use is a contractual agreement between a provider of communications cable services and its client for the exclusive, unrestricted and indefeasible right to use a pre-agreed bandwidth capacity.

Earlier, the revenue from such sales was accounted for over the life of the contract. Starting this quarter, R-Com will account for the revenue upfront, for contracts that are not cancellable and are not refundable. This change in accounting policy added Rs2,545 crore to revenue and Rs2,530 crore to Ebitda.

Revenue growth was decent at 6.5% even after adjusting for the IRU revenue, but as pointed out earlier, profit growth was disappointing, as margins fell on a sequential basis.

For the core wireless business, things improved in terms of traffic growth. Total minutes of usage on R-Com’s network rose by 3.2%, which is much better compared with the 3.3% drop in traffic reported in the December quarter. With average tariff realizations being stable, revenue also grew by around 3%.

However, Ebitda fell by 2.6%, just like in the December quarter, mainly due to a jump in network operating costs as well as higher sales and marketing. The company management told analysts in a post-earnings call that sales and marketing costs increased on account of higher customer acquisition costs, while network operating costs rose due to the expansion of the company’s second-generation (2G) telecom network.

While the return to revenue growth is welcome, the drop in profit for both the core wireless business as well as for the overall enterprise is disappointing. Besides, R-Com’s net debt position continues to be high at over Rs32,000 crore. In about 9-10 months, foreign currency convertible bonds worth $1 billion (Rs4,500 crore today) will be due. Needless to say, the high debt position remains a major concern for investors.

In the midst of all this, the company is also embroiled in the 2G spectrum auction scam, which has hit its shares hard. As the chart alongside shows, R-Com’s shares have underperformed the market by a huge margin this year, and unless the company finds concrete ways to raise funds and repay debt, its shares should continue to languish.

Graphic by Yogesh Kumar/Mint

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