RCom: Weak signal

Even as Reliance Communications (RCom) prepares to roll out its GSM network, a sharp sequential fall in the average revenue per user (ARPU) has resulted in its topline for the June 2008 quarter remaining flat.

An 11 per cent drop in the ARPU to Rs 282 per month, combined with a one per cent fall in the minutes of usage (MoU) resulted in revenues for the quarter at just Rs 5,229 crore. Declining ARPUs have been an industry trend for some time now but the fall for peers like Bharti Airtel, in the June quarter, has been far lower.

Besides, Bharti’s ARPU at Rs 350 per month is far higher than that of RCom. Moreover, unlike peers, RCom hasn’t seen an increase in usage despite tariffs having been reduced though it could happen with a lag. The company’s flat topline together with higher network operating costs put pressure on the operating profit margin which came off by 160 basis points to 41.3 per cent.

RCom, which currently offers services mainly on a CDMA platform, will start rolling out its GSM network towards the end of the year in 14 additional circles. Analysts believe the dual network strategy could help the company acquire a better mix of customers and help it grow market share.

However, since some of its existing CDMA subscribers may switch to the GSM network, the increase in the subscriber base may not happen as rapidly in the initial phase. Operating with both the GSM and CDMA technologies may also help the firm when 3G services are offered. The company is also planning to launch DTH services and a rollout is expected soon.

RCom is expected to end FY09 with revenues of about Rs. 23,700 crore, a growth of around 22 per cent with net profits increasing by about 24 per cent to Rs. 6,200 crore. The earnings per share is expected to increase by about 13-14 per cent to Rs.30.

At the current price of Rs.442, the stock trades at a shade under 15 times its estimated FY09 earnings.