Reliance Communications - Macquarie

 

Less of wireless; Investing in future

 

Event

􀂃 Reliance Communications reported in line operating results for 4QFY08

although PAT came in ahead of expectations. We shift our Top Pick recommendation to Bharti Airtel even as we reiterate our Outperform on RCOM.

 

Impact

􀂃 4Q results driven by outperformance in the non-wireless businesses of Global and Broadband/Fixed Line, while wireless EBITDA came in line with our estimates. Wireless metrics were weak with ARPU and Minutes of Use surprising negatively while ARPM and EBITDA per minute were largely in line.

􀂃 MOUs decline sequentially at RCOM, in-contrast to trends at Bharti and

Idea. RCOM registered 4Q ARPU of Rs317, 3.6% below our estimate of 329, marking declines of 6.5% QoQ and 15.9% YoY. Similarly, monthly MOUs in 4Q at 430 were 2.8% below our estimate of 442. This is contrary to a sequential uptick in MOU seen in Bharti's (+7% QoQ) and Idea's (+9% QoQ) 4Q results.

􀂃 We believe RCOM is increasingly becoming an integrated telecom story

with the non-wireless businesses likely to drive operating performance for the next 3-4 quarters. Management is consciously focusing on EBITDA market share in the wireless business and RCOM now boasts of the highest EBITDA margins in the overall business and in the wireless segment across Indian telcos. Investors, however, are likely looking at subscriber and revenue market shares, while taking the view that profitability will follow. This apparent disconnect between management focus and market focus may cap stock valuations. We believe both revenues and margins will be equally important.

 

Earnings revision

􀂃 We are reviewing numbers for the sector and all three stocks post 4Q results.

 

Price catalyst

􀂃 12-month price target: Rs865.00 based on a Sum of Parts methodology.

􀂃 Catalyst: 1) Ramp-up in tenancy ratio in the towers business, 2) IPO of the TowerCo leading to value unlocking, 3) Successful GSM launch by end CY08.

 

Action and recommendation

􀂃 We continue to like RCOM as a company with strong future growth

drivers; it is investing aggressively in future growth (capex of US$11bn guided for FY09–10E). While this will likely deliver strong growth in topline and earnings post 2010–11E, the flip sides are a sharp increase in capital intensity, delayed free cash, lower return on capital in near-term and execution worries.

􀂃 RCOM's valuation re-rating may get pushed back by couple of quarters:

We believe that in the next 2–3 quarters, RCOM is unlikely to deliver positive surprises in operating performance. This will only improve with the launch of pan-India GSM service in the next 9–12 months. We think investors in the interim will be focused on execution and network rollout schedules as promised.

􀂃 Bharti our new Top Pick in Indian telecoms: We see Bharti as a well-oiled execution machine in the near term, delivering consistent positive surprises on key operating metrics. The widening chasm between Bharti & RCOM in QoQ wireless revenue growth will likely mean that catch-up in valuations between the two will likely be delayed. We shift our Top Pick reco in Indian Telecoms to Bharti Airtel (BHARTI IN, OP, Tgt Price: Rs1,400, Upside: 56%).