Strong Performance: RCOM records significant increase in profits

After registering a decline in its bottom line for the past several quarters, Reliance Communications (RCOM) recorded a significant increase in net profits for the three-month period ended September 2013. RCOM?s strong quarterly results have surpassed the industry?s estimates and raised hopes of a turnaround for the sector, after Bharti Airtel and Idea Cellular also reported improved performance.

RCOM reported a net profit of Rs 6.75 billion for the quarter ended September 2013, as compared to Rs 1.02 billion for the corresponding quarter in 2012. The improvement in the bottom line can be attributed to provisioning for a write-back of Rs 4.41 billion during July-September 2013. Even excluding the write-back, the its profits grew by about 130 per cent. Voice tariff hikes, the growing adoption of data services and cost optimisation have been the key drivers of the increase in profits.

The company?s total revenues increased by 12.16 per cent from Rs 52.02 billion to Rs 58.35 billion during the review period. A rise in the top line led to a higher earning before interest, taxes, depreciation and amortisation (EBITDA) margin of 39.9 per cent for the quarter ended September 2013, as compared to 31.5 per cent for the same quarter in 2012. While revenues from Indian operations grew by 5.4 per cent from Rs 43.87 billion during July-September 2012 to Rs 46.23 billion during the corresponding quarter in 2013, that from global operations reduced from Rs 11.43 billion to Rs 11.3 billion.

RCOM has fared well on the operational front as well. The operator?s ARPU increased by 26.35 per cent from Rs 95 for the quarter ended September 2012 to Rs 120 for the corresponding quarter in 2013. The visitor location register, which shows the number of active subscribers, also improved from 76.2 per cent to 93.7 per cent.

The operator performed strongly in the voice segment. Its voice ARPU grew from Rs 72 during July-September 2012 to Rs 92 during the corresponding quarter in 2013 on account of a 20 per cent tariff hike in May 2013. Higher call charges also resulted in an improvement in the realisation per minute from Re 0.30 to Re 0.34 during the review period. Although higher tariffs and disconnection of inactive subscribers led to a decline in minutes of usage by 1.7 per cent to 101.5 billion during July-September 2013, voice usage per subscriber increased by 17.37 per cent to 277 minutes.

In contrast, in July 2013, 3G tariffs were reduced by about 50 per cent to drive service uptake. The operator has asserted that this encouraged one-third of its 3G handset owners, who were earlier using 2G data services, to migrate to the 3G network. The move also led to an increase in 3G data usage per customer by 40 per cent.

RCOM?s 3G subscriber base increased from 4.8 million in September 2012 to 9.1 million in September 2013, and data usage (2G and 3G) per customer increased by 66 per cent from 232 MB for the quarter ended September 2012 to 385 MB in the corresponding quarter in 2013.

The operator?s debt grew from Rs 367.23 billion to Rs 411.69 billion during the review period, owing to foreign exchange losses resulting from the depreciation of the rupee during July-September 2013. In real terms, the net liabilities reduced by Rs 11.55 billion. Debt reduction was effected through securitisation of the proceeds received from the Rs 12 billion intercity fibre network deal signed with Reliance Jio Infocomm Limited (RJIL). The operator also intends to securitise the proceeds from the tower sharing deal with RJIL to pare its debt.

However, RCOM may find itself in a tight spot in the near future despite its efforts to reduce its liabilities. The company may participate in the upcoming spectrum auction, especially for airwaves in the 900 MHz band, which are considered more efficient for offering 2G services than those in the 1800 MHz band. Though spectrum in the 900 MHz would enable RCOM to offer improved 2G services, these short-term benefits may impact its balance sheet. In order to win spectrum, the operator will have to raise significant funds. This could be challenging given RCOM?s highly leveraged balance sheet. Also, this would negate the debt reduction steps taken so far. Thus, RCOM will need to balance the trade-off to remain competitive.

Overall, RCOM?s performance for the quarter ended September 2013 was better than expected and could be a sign of revival for the company as well as the telecom sector. Going forward, the operator will need to ensure higher data service uptake and reduce debt significantly in order to maintain profitability.