Citi puts Sell rating on R Com Audit Report – Says Revenue Reconciliation Needs Greater Clarity

Reliance Communications, the nation’s second largest wireless telephony company, on Saturday announced 51% decline in quarterly profit due to forex loss.

RCOM, part of the Reliance Anil Dhirubhai Ambani group, has posted net profit of Rs 740 crore in the September quarter, compared to Rs 1,531 crore in the year-ago period. The forex loss of Rs 283 crore forced the company, which posted a marginal 1% rise in revenue to Rs 5,703 crore, to post a sharp decline in profit.

The results were worse than the expectation. A survey of ETIG and four brokerage houses estimated RCOM’s net sales at Rs 6,356 crore and net profit at Rs 1,171 crore. However, the company would have posted a net profit of Rs 1023 crore, had there been no forex loss.

The wireless revenues, main money spinner for the telco, dropped 7.5% to Rs 4010 crore while EBIDTA margin fell 540 basis points to 35.4%. In a statement, the company said higher competitive intensity, aggressive tariff restructuring by the telecom operators and higher network and operational costs owing to a nationwide GSM rollout have impacted wireless segment and EBIDTA margin.

The domestic telecom sector is witnessing steeper fall in valuations after the operators reduced tariffs significantly to gain market share. The valuations of Bharti and RCOM slipped 27% and 36%, respectively, in one month. Analysts have downgraded future revenue expectations of the top players citing the sharp fall in average revenue per user due to the recent tariff revision.

As per the latest Citi Equity Research report dated 27 October 2009, Citi has maintained Sell rating on the stock given High leverage (Net Debt at 3.2x FY10E EBITDA) which makes RCOM more exposed to industry risks and strong collateral damage from the ongoing tariff war on tower company tenancy and hence valuation and capital raising.

As per earlier Parekh Committee Report, RCOM booked certain revenue items totaling Rs26.5bn in FY08, which is key to the revenue reconciliation. It seems to comprise either (i) one-off items (sale of debtors, sale of expired pre-paid cards, refunds) or (ii) non-wireless items (handset sales/incentive, dealer network sharing and foreign sub income). If true, Citi estimate this may have resulted in “true” mobile ARPU and EBITDA being lower by c15% and c26% respectively in FY08.

There have been been media reports sale of debtors of Rs6.17bn is to four entities, namely Neptune Steel Strips Ltd., Shriyam Autofin Ltd., Mahima Mercantile Credit Ltd. and Traitrya Construction Fin Ltd. Though the sale may have happened at a big discount to the bill value, the ability of these companies to take on (from a funding perspective) and recover the debtors which were earlier written off, is questionable, especially if they pertained to the handset bundled schemes launched 4-5 years back (Monsoon Hungama).

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