CMP: INR66 TP: INR40 (-39%) Sell

Transcription

1 BSE SENSEX S&P CNX 24,486 7,436 Bloomberg RCOM IN Equity Shares (m) 2,382.0 M.Cap.(INRb)/(USDb) / Week Range (INR) 92/46 1, 6, 12 Rel. Per (%) -19/11/-4 Avg Val, INR m Free float (%) 40.3 Financials & Valuation (INR b) Y/E Mar E 2017E Net Sales EBITDA Adj. Net Profit Adj. EPS (INR) Adj. EPS Gr. (%) BV/Sh (INR) RoE (%) RoCE (%) P/E (x) P/BV (x) Estimate change TP change Rating change 27 January QFY16 Results Update Sector: Telecom Reliance Communications CMP: INR66 TP: INR40 (-39%) Sell EBITDA miss yet again; significant upgrade in capex guidance 3Q revenue/ebitda below estimates: RCOM s 3QFY16 revenue declined 1.1% QoQ to INR53b (3% below estimate), led by lower India as well as global revenues. EBITDA grew ~1% QoQ to INR18b (our estimate: INR18.7b). India EBITDA grew ~1% QoQ to INR16.2b (4% below estimate). Global segment EBITDA grew ~4% QoQ to INR1.83b (our estimate: INR1.82b). PAT beat led by lower-than-expected depreciation and finance cost: Reported PBT grew 59% QoQ primarily led by lower-than-anticipated depreciation, which declined ~4% QoQ to INR8.9b (10% below estimate) and finance cost (declined ~4% QoQ to INR6.8b (our estimate: INR7.2b). Tax provision for the quarter stood at INR344m vs negative tax during 2QFY16. India KPIs disappoint: India EBITDA grew ~1% QoQ to INR16.2b (our estimate: INR16.9b) despite revenue decline. Telecom revenue declined ~1% QoQ to INR45.5b (our estimate: INR46.9b), impacted by the decline in voice traffic (-2% QoQ). Voice RPM remained flat QoQ at 32.7p. Data traffic growth remained relatively soft at 6% QoQ. Global EBITDA broadly in-line: While Global segment revenue grew 4% QoQ (5% above estimate); flat margins at 16.6% implied in-line EBITDA (up 4% QoQ). NLD/ILD minutes grew -1%/2% QoQ; global voice revenue grew ~29% QoQ. Net debt up QoQ: Net debt increased from INR399b in 2QFY16 to INR405b in 3QFY16. Net debt/annualized EBITDA stood at 5.6x. Current liabilities remained largely flat QoQ at ~INR150b and includes spectrum related payments. Valuation and view: The stock trades at EV/EBITDA of 8x FY16E and 7.5x FY17E. We are cutting our EBITDA estimates by 1-5%. Maintain Sell with a target price of INR40 based on FY18 EV/EBITDA of 6x for core business (ex Reliance JIO contract) and INR40b for upside from signed contracts with Reliance JIO (~5x steady-state EBITDA). Quarterly Performance (INR Million) Y/E March FY15 FY16 FY15 FY16 (Consolidated) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE Gross Revenue 55,231 54,030 54,690 57,030 55,413 53,553 52,983 52, , ,385 YoY Growth (%) QoQ Growth (%) EBITDA 18,629 18,270 18,505 19,760 18,752 17,819 18,033 17,501 71,900 72, YoY Growth (%) QoQ Growth (%) Margin (%) Net Finance Costs 7,674 6,700 6,522 6,660 7,042 7,114 6,813 6,930 24,270 27,899 Depreciation & Amortization 9,310 9,430 9,477 9,950 9,731 9,240 8,897 10,167 38,170 38,035 Profit before Tax 1,645 2,140 2,506 3,150 1,979 1,465 2, ,460 6,169 Income Tax Expense / (Income) , ,260 2,127 Adjusted Net Profit / (Loss) 1,635 2,120 2, ,890 1,618 1, ,200 4,042 YoY Growth (%) QoQ Growth (%) NA Margin (%) Extraordinary Exp/Minority Interest , ,421 Reported Net Profit / (Loss) 1,316 1,530 2,011 2,280 1,766 1,559 1, ,140 5,463 Shobhit Khare (Shobhit.Khare@MotilalOswal.com); Jay Gandhi (jay.gandhi@motilaloswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Exhibit 1: RPM and voice traffic Traffic (b min) RPM (p) QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14* 2QFY14* 3QFY14* 4QFY14* 1QFY15* 2QFY15* 3QFY15* 4QFY15* 1QFY16* 2QFY16* 3QFY16* Exhibit 2: Leverage trend Net Debt (INR b) Net Debt/ Annualised EBITDA (x) ,335 13,744 14,957 18,390 17,852 15,582 15,997 16,340 17,610 16,288 15,538 16,119 17,443 17,334 17,833 17,268 17,527 17,879 16,832 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 2QFY Exhibit 3: Network cost trend Network operating expenses % of revenue QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 Source: Company, MOSL 27 January

3 Exhibit 4: RCOM - Segment wise summary (INR m) 3QFY15 2QFY16 3QFY16 YoY% QoQ% 3QFY16E vs Est (%) Revenue India - Telecom 46,751 45,962 45, , India-Others 1,236 1,043 1, , India-Total 47,987 47,005 46, , Global 12,361 10,623 11, , Total Revenue 60,348 57,630 57, , Inter-segment eliminations -5,658-4,075-4, , Consolidated Revenue 54,690 53,555 52, , EBITDA India 17,050 16,054 16, , EBITDA Margin (%) bps 68bps bps Global 1,456 1,765 1, , EBITDA Margin (%) bps -5bps bps Total EBITDA 18,506 17,819 18, , Corporate and others Consolidated EBITDA 18,505 17,819 18, , Consolidated EBITDA margin (%) bps 76bps bps Depreciation and amortization 9,477 9,240 8, , Net finance cost 6,522 7,114 6, , Profit Before Taxes (Adjusted) 2,506 1,465 2, , Total Tax NA NA 541 NA Effective Tax Rate (%) bps 2525bps bps PAT before minority/extraordinaries (Adj.) 2,341 1,618 1, , Extraordinary Expenses + Minority Interest Reported Net Profit 2,011 1,559 1, Revenue Drivers 3QFY15 2QFY16 3QFY16 YoY% QoQ% 3QFY16E vs Est (%) Wireless Total Minutes of Use (b mins) Data traffic (b MB) Effective Wireless Rev. per Min.(INR) Global NLD Minutes (m) 14,685 15,677 15, , ILD Minutes (m) 5,079 4,971 5, , Capex (INR M) 3QFY15 2QFY16 3QFY16 India 3,482 3,423 9, Capex/Sales (%) Global Capex/Sales (%) Consolidated Capex 3,482 3,595 9, Consolidated Capex/Sales (%) Leverage Net debt (INR b) Net debt/annualised EBITDA (x) bps 1bps 27 January

4 Exhibit 5: RCOM - A Snapshot Y/E March FY11 FY12 FY13 FY14* FY15E* FY16E* FY17E* FY18E* Wireless Subs (m) YoY (%) Average subs (m) YoY (%) Netadds per month (m) YoY (%) Total mobile traffic (b min) YoY (%) Average Rev Per User (INR/month) YoY (%) Minutes of Use/Sub/Month YoY (%) Wireless RPM (INR) YoY (%) Y/E March FY11 FY12 FY13 FY14* FY15E* FY16E* FY17E* FY18E* Global Minutes carried NLD minutes (b) YoY (%) ILD minutes (m) YoY (%) January

5 Financials and valuations Income Statement (INR Million) Y/E March E 2017E 2018E Revenues 205, , , , , , , ,690 Change (%) EBITDA 65,515 64,506 66,101 72,843 75,173 72, 77,923 85,309 % of Gross Sales Depn. & Amortization 39,739 39,783 38,452 45,338 38,166 38,035 40,222 41,942 EBIT 25,776 24,723 27,649 27,505 37,007 34,069 37,700 43,367 Net Interest and others -10,723-15,901-24,992-30,192-27,564-27,899-29,914-29,669 PBT 15,053 8,822 2,657-2,687 9,443 6,169 7,786 13,698 Tax 117-1, ,209 3,256 2,127 2,685 4,723 Rate (%) Adjusted PAT 14,936 9,884 1,945 7,522 6,187 4,042 5,102 8,975 Change (%) PAT after EO 13,457 9,274 6,727 10,483 7,135 5,464 7,231 12,170 Balance Sheet (INR Million) Y/E March E 2017E 2018E Share Capital 10,320 10,320 10,320 10,210 12,441 12,441 12,441 12,441 Additional Paid up Capital 90,306 90,306 90,306 90, , , , ,266 Reserves 256, , , , , , , ,104 Net Worth 357, , , , , , , ,810 Loans 373, , , , , , , ,665 Minority Interest 8,245 8,602 7,253 7,435 5,124 5,900 3, Capital Employed 739, , , , , , , ,049 Gross Block 1,002,814 1,045,869 1,084,561 1,128,726 1,144,159 1,237,813 1,279,302 1,313,050 Less : Depreciation 273, , , , , , , ,734 Net Block 729, , , , , , , ,316 Investments 1,089 1,230 1, Curr. Assets 160, , , , , , , ,980 Inventories 5,172 5,663 4,967 4,147 4,006 3,034 3,171 3,350 Debtors 40,017 35,839 39,105 39,191 49,164 51,264 53,584 56,598 Cash & Bank Balance 53,272 10,785 12,814 11,451 27,159 21,721 21,721 21,721 Other Current Assets 62, , , , , , , ,312 Curr. Liab. & Prov. 151, , , , , , , ,173 Net Curr. Assets 9,023-21,105 2,323 26, ,784 85, ,285 99,807 Appl. of Funds 739, , , , , , , ,049 E: MOSL Estimates 27 January

6 Financials and valuations Ratios Y/E March E 2017E 2018E Basic (INR) EPS Cash EPS Book Value DPS Payout %(Incl.Div.Taxes) Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios Debtors (Days) Asset Turnover (x) Leverage Ratio Debt/Equity Ratio(x) Cash Flow Statement (INR Million) Y/E March E 2017E 2018E Op.Profit/(Loss) bef Tax 64,036 63,896 70,883 75,803 76,120 73,524 80,054 88,505 Other Income Interest Paid -10,723-15,901-24,992-30,192-27,564-27,899-29,914-29,669 Direct Taxes Paid , ,209-3,256-2,127-2,685-4,723 (Inc)/Dec in Wkg. Cap. -120,718-61,424-57,399-52,078-72,853-1,500-14, CF from Op.Activity -67,522-12,367-12,220 3,742-27,553 41,997 32,833 54,590 (inc)/dec in FA + CWIP -53,752-25,153-16,194-17,247 3,244-88,258-41,489-33,748 Free Cash Flow -121,274-37,520-28,414-13,505-24,310-46,260-8,656 20,842 (Pur)/Sale of Investments CF from Inv.Activity -53,642-25,294-16,079-16,946 3,194-88,320-41,489-33,748 Issue of Shares , Inc/(Dec) in Debt 126,284-4,579 32,280 11,769-18,811 40,108 10,787-17,646 Dividends Paid Other Financing Activities , , ,131-3,196 CF from Fin.Activity 125,852-4,823 30,330 11,843 40,070 40,886 8,659-20,839 Inc/(Dec) in Cash 4,687-42,487 2,029-1,363 15,708-5, Add: Opening Balance 48,585 53,272 10,785 12,814 11,451 27,159 21,721 21,721 Closing Balance 53,272 10,785 12,814 11,451 27,159 21,721 21,721 21, January

7 Corporate profile Company description Reliance Communications (RCOM) is an integrated telecom operator, with presence in wireless (CDMA+GSM), long distance (wholesale voice and data), and broadband segments. 'Global Enterprise' segment includes wholesale voice services, retail ILD calling cards, network infrastructure based services and also caters to data, video, Internet, and IT infrastructure requirements of enterprises. Exhibit 1: Sensex rebased Source: MOSL/Bloomberg Exhibit 2: Shareholding pattern (%) Dec-15 Sep-15 Dec-14 Promoter DII FII Others Note: FII Includes depository receipts Source: Capitaline Exhibit 3: Top holders Holder Name % Holding LIC of India 6.6 Europacific Growth Fund 3.5 New World Fund Inc 2.1 Clsa (Mauritius) Ltd 1.7 Vanguard Funds 1.2 Source: Capitaline Exhibit 4: Top management Name Anil D Ambani Prakash Shenoy Designation Chairman Company Secretary Exhibit 5: Directors Name A K Purwar J Ramachandran R N Bhardwaj Name Deepak Shourie Manjari Kacker Exhibit 6: Auditors Name BSR & Co LLP Chaturvedi & Shah V J Talati & Co Source: Capitaline Type Statutory Statutory Cost Auditor Source: Capitaline *Independent Exhibit 7: MOSL forecast v/s consensus EPS MOSL Consensus (INR) forecast forecast Variation (%) FY FY FY Source: Bloomberg 27 January

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