RCom: Elusive elasticity

Investors are fast learning that additional subscribers does not translate into profitability.

Reliance Communications (RCom), which has been on the forefront of the tariff war in the telecom sector, is still getting the short end of the stick operationally. It saw the subscriber base rising 9 per cent in the March 2010 quarter, as compared to the previous quarter. This was slightly below the 11 per cent rate at which the industry grew.

The concerns are that even the growth in subscriber adds does not amount to minutes of usage, a critical parameter for telecom companies. The growth was around 5 per cent in the same timeframe, much lower than that for the industry peers, where traffic was up by about 13-18 per cent. On the financial front, pressures remain unabated. Consolidated revenues for FY10 were down 3.4 per cent to Rs 21,496 crore over the previous year. Earnings before interest, tax, depreciation and amortisation (Ebitda) dipped 16 per cent year-on-year to Rs 7,821 crore. Operating margins were down 5.2 percentage points to 35.3 per cent. Higher tax outgo dragged the net earnings down by 23 per cent to Rs 4,777 crore.

On a quarterly basis, net revenues were down 6 per cent sequentially to Rs 4,196 crore, while operating profits dipped nearly 12 per cent. Margins compressed 2.6 percentage points to 31.5 per cent. Segmentally, wireless and global segmental revenues rose about 2 per cent, while broadband revenues dipped 3.5 per cent, but operating margins narrowed 2.3-2.6 per cent across the board. The company’s net debt was up 5 per cent to Rs 19,889 crore; the company has a net debt to equity ratio of 0.5 times with net debt to Ebitda ratio of about 2.5 times. The stock was down 2 per cent to Rs 141.60, underperforming the Sensex by a percentage point.