RCom: Debt reduction key for further upside

While the company's performance was better due to one-offs, the Street will be watching for announcements on debt cuts

Led by higher revenues per minute and stable volumes on voice traffic, Reliance Communications (RCom) posted a higher revenues at the consolidated level for the September quarter. Revenues were up 6.5 per cent on a year-on-year basis to Rs 5,361 crore.

Revenue growth coupled with lower employee costs helped the company improve its Ebitda by 26.3 per cent to Rs 1,854 crore. Employee costs were down 35 per cent year-on-year as company outsourced its network operations and the related employees.

Consequently margins too were up 542 bps to 35 per cent. Higher operating profits and a one-time write back of provisions related business structuring amounting to Rs 441 crore helped the company report a three-fold increase in net profit to Rs 675 crore. However, adjusted for this net profit was up 129 per cent to Rs 234 crore. Analysts had estimated a profit after tax (PAT) of Rs 118 crore. The company’s financials continue to be impacted by higher interest costs which were up 14 per cent to Rs 676 crore.

While the operating performance were above expectations, the Street will look at the company’s plans to further deleverage its balance sheet. At six times its net debt to Ebitda level is more than two to three times that of its listed peers Bharti Airtel and Idea Cellular. The company is looking at bringing this number down to three times its net debt to Ebitda level. This is being planned through organic growth and its free cash flow and monetisation or divestment of non-core assets. The deals that the company has signed with Reliance Jio will also help in enhancing its revenue flows. Of the reduction a major part is expected to come from the asset monetisation exercise.

The company is looking at cost optimisation by outsourcing its network management services to Ericsson and Alcatel Lucent. This has helped it to move 9,500 employees from its rolls to that of its partners. Further the company is also outsourcing its call centre staff of 5,500 for enterprise, international calling and back office business.

At the current price of Rs 129.15, the stock which lost five per cent in Tuesday’s trade, is available at 11.5 times its FY15 earnings estimates as compared to 22-24 times for Bharti Airtel and Idea Cellular.

While there will be upgrades given the recent performance, so far most analysts have a ‘sell’ on the stock.

Revenue growth was led by India operations which posted a growth 5.4 per cent while global operations were down 0.3 per cent year on year. Analysts say while the voice revenue growth over the year ago quarter was good, it is lagging behind the peers on a sequential basis.

Average revenue per user (ARPU) was, however, much better than peers both on a year-on-year while it lagged behind peers on a sequential basis. ARPUs were up 26 per cent over the year ago quarter while its listed peers saw a growth of 8-10 per cent. On a sequential basis the company’s, ARPUs were down seven per cent compared to Bharti and Idea’s which were in the four to six per cent range.