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Relcom Angel Aug07

Relcom Angel Aug07

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Published by: api-3719573 on Oct 14, 2008
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03/18/2014

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August 1, 2007
1
+
Sector
Telecom
Market Cap (Rs cr)
1,08,487
Beta
1.4
52 WK High / Low
592 / 254
Avg Daily Volume
1797002
Face Value (Rs)
5
BSE Sensex
14,936
Nifty
4,346
BSE Code
532712
NSE Code
RCOM
Reuters Code
RLCM.BO
Bloomberg Code
RCOM IN
Shareholding Pattern (%)
Promoters
66.8
MF/Banks/Indian FIs
7.2
FII/ NRIs/ OCBs
14.8
Indian Public/ Others
11.2
Share Price Vs Sensex
Performance Highlights
\ue000 Wireless Business powers Topline, aided by soaring ARPUs:Reliance

Communications (RCOM) recorded a 32.8% yoy and a 9.7% qoq Topline growth in Q1FY2008. This was driven by the Wireless Business unit, which recorded a 38.7% yoy and a 13.6% qoq growth in gross revenues. This business accounted for over 81% of incremental revenues of RCOM on a yoy basis and over 84% on a qoq basis. The company\u2019s mobile subscriber base now stands at 31.9mn, which implies an increase of 3.9mn over the quarter. This is the second-highest ever quarterly addition made by RCOM. This growth comes after a fall of 2.0mn subscribers in the last quarter on account of subscriber disconnections made to comply with the subscriber re- verification norms. In fact, due to these disconnections, the company\u2019s average revenues per user (ARPUs) rose significantly this quarter, by 10.0% qoq. On a yoy basis, the fall was just 1.1%.

As regards the other segments, the Global Business, which includes long- distance services, carrier-related services and bandwidth capacity sales, grew by a mere 5.6% yoy and by 0.7% qoq. The Rupee appreciation, to some extent, seemingly impacted revenue growth for this business. Revenues per minute continue to witness a secular decline, falling by as much as 37.2% yoy and by 11.2% qoq, even as minutes of usage have soared by an impressive 68.2% yoy and by 13.4% qoq. As for the Broadband Business, this segment clocked a strong 68.8% yoy and a 16.5% qoq growth during the quarter.

\ue000 Margins continue to surge, at par with Bharti Airtel: RCOM recorded an

impressive 580bp yoy margin expansion on account of operating leverage and cost management. Even on a qoq basis, EBITDA margins rose by 82bp. With this performance, RCOM\u2019s EBITDA margins are now at par with those enjoyed by industry leader, Bharti Airtel.

\ue000 Bottomline steams ahead on margin expansion, forex gains: Due to the
margin expansion and forex gains (Rs204.2cr), RCOM witnessed a surge in
Bottomline by over 138% yoy and by 19.2% qoq during the quarter.
Exhibit 1: Key Financials
Y/E March (Rs cr)
FY2006
FY2007
FY2008E
FY2009E
Net Sales
10,628
14,262
19,599
26,264
% chg
34.2
37.4
34.0
EBITDA Margin (%)
22.5
38.7
41.3
42.8
Net Profit
444
3,163
4,962
6,967
% chg
612.0
56.9
40.4
EPS (Rs)
2.1
14.7
23.0
32.3
P/E (x)
257.7
36.2
23.1
16.4
RoE (%)
7.6
19.7
21.8
24.7
RoCE (%)
3.8
9.0
13.6
17.2
Sales/GFA (x)
0.5
0.4
0.4
0.4
EV/EBITDA (x)
46.6
20.0
14.0
10.2
ARPUs (Rs/user/month)
384.8
370.8
352.3
324.1
Source: Company, Angel Research
Q1FY2008 Results Update
Angel Broking
Service Truly Personalized
India Research
Reliance Communications
Bu
y
CMP: Rs531
TM
Harit Shah
Tel: 022 \u2013 4040 3800 Ext: 345
e-mail: harit.shah@angeltrade.com
Target Price: Rs627
(12 Months)
250
285
320
355
390
425
460
495
530
565
600
1/8/2006
14/09/2006
31/10/2006
13/12/2006
31/01/2007
16/03/2007
4/5/2007
18/06/2007
31/07/2007
Dat e
Price(Rs)
10500
11050
11600
12150
12700
13250
13800
14350
14900
15450
16000
Sensex
RCOM
Sensex
August 1, 2007
2
Reliance Communications
Angel Broking
Service Truly Personalized
India Research
TM
Wireless Business continues to witness robust growth

During Q1FY2008, RCOM recorded a 32.8% yoy and a 9.7% qoq growth in Topline. The key growth driver for this performance was the Wireless Business, which grew by 38.7% yoy and by 13.6% qoq. At the end of June 2007, RCOM had a total of 31.9mn mobile subscribers on its network, recording net adds of 3.9mn over the quarter, giving it an incremental share of 19.6% of industry net adds over the period. The company has clearly made a strong comeback since March, when it had to disconnect 5.6mn subscribers to comply with the subscriber re-verification norms. In June, RCOM added its highest-ever monthly subscriber additions, at over 1.45mn. The company remains the second-largest wireless operator in the country, with a total marketshare of 17.6% (up from 17.4% in March).

As far as average revenues per user (ARPUs) are concerned, these saw a spurt of 10.0% qoq to Rs375.5 per user per month on a blended basis (Rs341.3 per user per month in Q4FY2007). On a yoy basis, the fall was not that significant, at just 1.1%. This was primarily due to the low base effect of the last quarter, when RCOM reported a 2mn fall in subscribers over the quarter. Thus, even as the subscribers who were generating negligible revenues have been cleaned out from the company\u2019s network, its other customers and new additions to the network continue to generate revenues at a strong pace, leading to the quarterly spike in ARPUs. However, we believe that this is just a temporary phenomenon and that ARPUs will resume their downward trend going forward.

Exhibit 2: Wireless Business revenue break-up
Q1FY07
Q4FY07
Q1FY08% chg yoy % chg qoq
Gross revenues (Rs cr)
2,432
2,969
3,373
38.7
13.6
Mobile subscriber base (Mn)
22.5
28.0
31.9
41.7
13.8
ARPUs (Rs/user/month)
379.6
341.3
375.5
(1.1)
10.0
Total minutes of usage (Mn)
31,440
42,500
45,800
45.7
7.8
Revenues per minute (Rs)
0.77
0.70
0.74
(4.8)
5.4
Minutes of usage (Per user/month)
491
541
510
3.9
(5.7)
Source: Company, Angel Research

A peculiar feature of this quarter\u2019s results is that the minutes of usage (MoUs) in the Wireless Business fell 5.7% qoq, while revenues per minute actually rose 5.4% qoq. Typically, these metrics move in the opposite direction when compared with what RCOM has reported this quarter. The reason attributed by the management for this is that the company, due to its strong focus on selling its own \u2018Classic-branded\u2019 handsets rather than those of Qualcomm, gave out a lesser number of free minutes. Thus, given this factor, subscribers this quarter ended up talking less on their phones, which also resulted in revenues per minute rising. RCOM\u2019s total MoUs on the network rose 45.7% yoy and 7.8% qoq, while revenues per minute reduced by 4.8% yoy (rise of 5.4% qoq).

Exhibit 3: Minutes of usage \u2013 Strong growth trajectory
16,000
22,000
28,000
34,000
40,000
46,000
Q1FY06
Q2FY06
Q3FY06
Q4FY06
Q1FY07
Q2FY07
Q3FY07
Q4FY07
Q1FY08
(Mn)
CQGR 12.4%
Source: Company, Angel Research
August 1, 2007
3
Reliance Communications
Angel Broking
Service Truly Personalized
India Research
TM
Broadband business shows robust performance, Global business subdued

RCOM recorded an impressive 68.8% yoy and a strong 16.5% qoq growth in Topline this quarter in its Broadband Business. This was driven by a strong increase in the number of access lines by an outstanding 118.9% yoy and by 13.7% qoq. The company\u2019s average revenues per line (ARPL) per month saw a decline of 26.4% yoy, but a rise of 1.1% qoq.

Exhibit 4: Broadband Business \u2013 Powered by growth in access lines
Q1FY07
Q4FY07
Q1FY08
% chg yoy
% chg qoq
Gross revenues (Rs cr)
227
329
383
68.8
16.5
Access lines ('000)
322
620
705
118.9
13.7
Average revenues per line/month
2,619.0
1,908.1
1,928.5
(26.4)
1.1
Buildings directly connected
180,759
488,661
593,805
228.5
21.5
Source: Company, Angel Research

However, as was the case in the previous quarter, RCOM\u2019s Global Business Unit proved to be the party spoiler, as this business grew by just 5.6% yoy and by a marginal 0.7% qoq. This was the case, even as the minutes of usage soared by an impressive 68.2% yoy and by 13.4% qoq. Clearly, the significant fall in revenues per minute was the chief culprit that restricted the growth of this business, despite strong volume growth. Revenues per minute fell by as much as 37.2% yoy and by 11.2% qoq.

Exhibit 5: Global Business \u2013 No respite from fall in realisations
Q1FY07
Q4FY07 Q1FY08
% chg yoy % chg qoq
Gross revenues (Rs cr)
1,234
1,294
1,303
5.6
0.7
Total minutes of usage (Mn)
4,299
6,376
7,229
68.2
13.4
Revenues per minute (Rs)
2.87
2.03
1.80
(37.2)
(11.2)
Source: Company, Angel Research
Scale benefits result in margin expansion

RCOM recorded an impressive 580bp yoy expansion in EBITDA margins in Q1FY2008 and an 82bp expansion on a qoq basis. Continuing scale benefits led to this performance, with major cost items, including Access charges and License fees, Network Expenses, Staff Costs and G&A costs declining as a percentage of sales. However, a spike was witnessed in Selling and Marketing (S&M) costs, which increased to 15.1% of sales (9.4% in Q1FY2007, 10.1% in Q4FY2007).

Higher margins, forex gains lead to Bottomline soaring

Due to the impressive margin expansion witnessed this quarter, as also significant forex gains to the tune of Rs204.2cr, RCOM\u2019s Bottomline witnessed an astonishing 138.1% yoy and an impressive 19.2% qoq growth.

Marks entry into the global enterprise data market through the acquisition of Yipes

RCOM during the last quarter acquired Yipes Holdings Inc, a US-based provider of managed Ethernet and application delivery services. This is RCOM\u2019s largest-ever acquisition so far. Ethernet is the fastest-growing segment of the data communication market and as per various industry sources, will record a CAGR growth of 30% over 2006-10, when it will achieve a size of US $25bn (approximately Rs1,00,000cr) globally. Yipes has a total of nearly 1,000 enterprise customers focused across four industry verticals \u2013 financial, legal, government and healthcare, which account for 50% of the Ethernet market. The company has over 22,000 route-kilometers (R-kms) of fibre across 14 US metros, covering 40% of the total US datacom market. Yipes also has a presence in London, Hong Kong and Tokyo.

RCOM acquired Yipes for a total consideration of US $300mn (approximately Rs1,200cr). Yipes\u2019 Topline stands at around US $100mn, with EBITDA margins of over 50%. Thus, the deal has been valued at an EV/EBITDA multiple of around 6x, which appears reasonable, given the well- established credentials of the company. With the acquisition, RCOM will also get access to the global enterprise data market, worth US $100bn (approximately Rs4,00,000cr). The company will also be able to better serve its international customers directly in the US. The acquisition has been made through RCOM\u2019s subsidiary, FLAG Telecom.

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