Monday, May 4, 2009

[Investors Please Listen] RCOM Q4FY09 result update; Wireless growth concerns exist ; HOLD ; Target: Rs225

Reliance Communications

 

Wireless growth concerns exist


HOLD

 

CMP: Rs215                                     Target Price: Rs225


RCOM's Q4FY09 operating performance was below our estimates, although headline results were in-line. Revenue growth at 4.7% QoQ to Rs61.2bn (higher than our estimate of Rs60.8bn) was driven by global and broadband business (and not mobile business) where as net profit (Rs14.5bn v/s our estimate of Rs13.2bn) was once again driven by other income of Rs1.7bn v/s 1.5bn in Q3FY09. EBIDTA grew by just 1.3% QoQ to Rs23.8bn and EBIDTA margins dropped by 130bps QoQ to 38.9% due to 80bps drop in mobile margins and higher losses from DTH business. Despite phenomenal subscriber growth of 18.5% QoQ, the mobile revenue growth was just 2% QoQ, affected by 11% QoQ drop in ARPU, which we see as prime concern in the results.

RCOM has further cut its capex spend for FY09 to Rs194bn v/s reduced capex guidance from Rs300bn at beginning FY09 to Rs250bn in Q3FY09. It has also reduced the capex guidance for FY10 to Rs100bn v/s Rs150bn as guided earlier. RCOM has not disclosed its balance sheet and cash flow statements for the quarter which we believe were critical considering the rising debt, large current liabilities due for payment and CWIP getting capitalized.

We continue to remain concerned on the growth in mobile segment which is the key driver of the industry growth. We are tweaking our FY10E estimates to factor high subscriber growth and sharp ARPU fall resulting in 1% revenue cut and lower capex and hence lower debt resulting in 2.8% increase in FY10E earnings. Our EPS estimates are Rs23.8 and Rs25.7 for FY10E and FY11E respectively. We retain HOLD rating on the stock with revised target price of Rs225. We highlight that non-improvement in wireless revenue growth remains key risk to our estimates.

 


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