Friday, August 20, 2010

RCOM's Growth Course.

Reliance Communications (RCOM) reported an unexpected fall in net profit during the June 2010 quarter. The disappointing performance was on account of declining minutes of usage on its wireless network and higher interest expenses. In the near term, operations of the second-largest publicly-listed wireless operator are expected to reel under competitive pressure. Its long-term prospects largely depend upon how well the company carries out its ongoing business structuring.

The company’s operating parameters were rather erratic during the June quarter, compared with the performance of its peers Bharti Airtel and Idea Cellular. These operators had earlier reported continued growth of 3-4% in the minutes of usage per user per month (MoU) on a sequential basis. RCOM on the other hand reported a sharp 7% drop in MoU. MoU reflects the extent of network capacity utilisation and a drop in this parameter means lower network efficiency.

RCOM’s management has cited the reduction of free minutes on its network as a reason behind lower MoU. The company had earlier offered such free minutes to attract customers. In the June quarter, it did away with over half of the free minutes and a further drop is expected in the coming quarters. RCOM’s wireless business president Syed Safawi thinks the reduction would improve the quality of revenue going ahead. It, however, needs to be seen whether the declining free minutes intensifies its subscriber churn, given the highly-competitive nature of wireless business. This may adversely impact future revenue from the segment.

Another concern for investors is the declining trend in its global business, which includes carrier voice, bandwidth, enterprise data and consumer voice services. Revenue from this segment fell by a sharp 30% sequentially during the June quarter. This can be attributed to the recessionary phase in the European zone. RCOM’s management has indicated that the duration of decision-making cycle in this region has nearly doubled to 7-8 months. The situation is not expected to change sooner given the continued economic troubles in the region. The global division constitutes one out of every four rupees of total revenue and hence a slack in its operation will significantly impact RCOM’s topline.

The company is in the process of restructuring its business. To sell its tower business, RCOM has struck a deal with telecom tower company GTL Infrastructure. It is also looking forward to raising funds by selling partial equity. These initiatives should help RCOM reduce its debt burden and also finance costs. At Friday’s closing stock price of Rs 168, RCOM’s enterprise value works out to be nine times its operating profit before depreciation. This comes at a discount to Bharti’s 13 times. Bharti’s higher premium reflects its better revenue visibility in the future given its overseas operations. For RCOM’s investors, the wait is long before the company may see a meaningful turnaround in its operations.


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