Following a better-than-expected financial performance from Bharti Airtel and Idea Cellular in the quarter ended June 2013, the industry was anticipating a similar result from Reliance Communications (RCOM). However, slow revenue growth and an increase in interest costs affected the latter?s quarterly performance. RCOM recorded a 33.34 per cent decline in net profits from Rs 1.62 billion for the quarter ended June 2012 to Rs 1.08 billion in the corresponding quarter in 2013. This was largely on account of the increase in financing costs from Rs 5.53 billion to Rs 6.87 billion during this period.
Despite voice tariff hikes and withdrawal of promotional offers, RCOM?s revenues increased by a marginal 1.72 per cent, from Rs 53.19 billion for the quarter ended June 2012 to Rs 54.11 billion in the corresponding quarter in 2013. In contrast, the earnings before interest, taxes, depreciation and amortisation (EBITDA) margin grew from 31 per cent to 31.4 per cent during this period, reflecting an improvement in operational efficiency.
The company?s wireless operations recorded an increase in net revenues from Rs 34.16 billion during April-June 2012 to Rs 35.55 billion during April-June 2013. However, revenues from the global enterprise business, which includes submarine cable unit Reliance Globalcom, declined from Rs 19.06 billion to Rs 17.22 billion during this period.
Improved operational performance
Despite its weak financial performance, RCOM scored well on operational parameters. Its voice ARPUs grew from Rs 98 during the quarter ended June 2012 to Rs 129 during the same quarter in 2013. Three factors contributed to this ? a 25 per cent hike in tariffs to Re 0.015 per second in September 2012 and withdrawal of promotional offers including free voice calls in May 2013, an increase in minutes of usage per subscriber per month from 228 to 283, and deactivation of several mobile connections owing to non-usage of services.
RCOM?s data service business also registered growth. The non-voice segment accounted for 21.3 per cent of overall wireless revenues for the quarter ended June 2013, as compared to 20.2 per cent in the corresponding quarter in 2012. The increase in non-voice revenues was due to higher data usage and growth in the data user base owing to a 50 per cent reduction in 3G tariffs. The company?s 3G user base grew from 4 million during April-June 2012 to 7.7 million during the corresponding quarter in 2013. Data usage per subscriber also rose from 240 MB to 342 MB during this period, an increase of 42.5 per cent.
Debt challenge
Debt continues to be the single biggest growth hurdle for the operator. RCOM?s debt stood at Rs 388.64 billion as of June 2013, which implies a debt-to-EBITDA ratio of 5.65 ? the highest in the industry.
So far, all efforts to reduce debt have been ineffective. RCOM had been in talks with Bahrain Telecommunications, which was backed by private equity (PE) players including Carlyle, to divest stake in Reliance Globalcom, but the deal was cancelled due to a dispute over valuation. The plan to list the submarine cable unit on the Singapore bourses was also shelved owing to poor market conditions in 2012.
Deleveraging initiatives
In July 2013, RCOM reduced high-cost domestic debt through securitisation of its proceeds from an intercity fibre sharing agreement with Reliance Jio Infocomm Limited. It also reduced its foreign borrowing by about $1 billion during the month. As a result, the company?s debt has reduced by about Rs 72 billion to Rs 309 billion.
It has also revived talks to sell stake in Reliance Globalcom and has attracted interest from PE player Samena Capital. RCOM is also in talks with the Sun Group to merge their direct-to-home businesses, with the former holding 26 per cent stake in the merged entity. RCOM plans to sell its stake in the merged entity in the future.
Apart from these initiatives, RCOM is banking on voice tariff hikes and higher data uptake to increase its revenues. The operator is of the view that the actual impact of the tariff hike will be realised in the next quarter when all existing subscribers will be shifted to new tariff plans.
Nevertheless, there is uncertainty about the company?s ability to deleverage its balance sheet. According to UK-based bank Barclays, RCOM is highly leveraged and has limited ability to increase capex, which will affect its mobile business growth. If the operator manages to reduce its debt substantially, a continuous increase in voice and data revenues could help it re-establish itself as a leading player in the industry.
