Right signals

Reliance Communications (RCOM), the country’s second-largest private-sector mobile service provider, has a dominant presence in the broadband and long-distance (international and national) services.

For the quarter ended June 2007 (Q1), RCOM beat analyst’s forecasts by reporting a 9.3% sequential growth in revenues to Rs 4,304 crore (over the quarter ended March 2007; Q4), led by strong growth in the mobile and broadband businesses.

The mobile business saw per minute realisations improve to 74 paisa compared with 70 paisa in Q4 2006-07. However, on an average, RCOM’s subscribers spoke for fewer minutes; average monthly usage was down 5.7% to 510 minutes. Hence, average revenues per subscriber (ARPU) per month was marginally lower by 0.53% at Rs 375, better than the 3.9% decline (to Rs 390) reported by Bharti Airtel, during Q1.

All that along with addition of 3.87 million new subscribers (up 13.8%) in Q1 led to mobile revenues rising 13.6% to Rs 3,373 crore-the highest growth in the last few quarters.

Here, Shobhit Khare of Man financial believes that the higher per minute realisations were on account of lower bundled talk-time in new schemes, which has been accompanied with higher handset subsidies. Ganesh Duvvuri and Shreyash Devalkar of SSKI believe that deactivation of a few connections led to higher churn rate and consequently, the assumption of longevity of subscribers was reduced.

This led to booking higher revenues to the extent of Rs 58.70 crore (on lifetime and fixed validity schemes) during Q1. But, even adjusting for the latter, the growth in mobile revenues is respectable at 11.6% though it would mean that ARPUs would have also been lower at Rs 368.

Leveraging its optic fibre network of 20,000 km, RCOM increased its broadband subscriber based by 13.5% to 705,000. Revenues thus jumped 16% sequentially to Rs 383.30 crore, even as monthly billing per user remained flat. Since these two businesses account for nearly three-fourth of revenues and enjoy huge margins (about 40%), total operating profit grew faster (by 11%) to Rs 1,814 crore.

Overall revenue growth was pulled down by the global business (long-distance services and FLAG submarine cable system), which reported flat revenues despite 13.4% rise in traffic to 7.23 billion minutes. Since RCOM carries nearly 40% of the incoming calls from the USA to India, a strong rupee impacted revenue growth.

A net gain of Rs 204.20 crore on account of foreign exchange and flat depreciation charges helped more than offset the four-fold surge in tax outgo to Rs 103 crore. Hence, net profit grew by an even sharper rate of 19.2% to Rs 1,221 crore.

Meanwhile, RCOM aims to more than double its network coverage to 23,000 towns and 600,000 villages, which will enable it to cover about 90% of India’s population. This will ensure that its mobile business continues to grow at healthy rates. In the global and broadband business too, RCOM has drawn up growth plans. All of which, analysts indicate, should lead to RCOM’s revenues and profits growing at an average rate of 36-40% each in the next two years.

Moves to unlock value (sale of stake in tower-company, real-estate development at Dhirubhai Ambani Knowledge City, Navi Mumbai and listing of Flag Telecom) are also seen in positive light. Analysts have pegged the value of RCOM between Rs 645-675, including the tower business. At Rs 530.60, the stock trades at a PE of 24 based on estimated earnings for 2007-08 and, merits attention.