Reliance Communications (RCOM), like most other operators, continued to report declining profits for the quarter ended September 2011 on a year-on-year basis. Its net profits dropped by 43.5 per cent to Rs 2.52 billion for the quarter ended September 2011 from Rs 4.46 billion in the corresponding quarter in 2010. Total revenues declined by 1.5 per cent from Rs 51.18 billion to Rs 50.4 billion during this period. Also, its earnings before interest, taxes, depreciation and amortisation (EBITDA) decreased from Rs 16.59 billion to Rs 16.05 billion and the EBITDA margin declined from 32.4 per cent to 31.8 per cent.

Unlike other operators which have suffered on account of foreign exchange-denominated debt becoming more expensive due to the depreciation of the rupee, RCOM did not face such challenges because of its agreements sanctioned by the Bombay High Court. The agreement allows RCOM to offset any mark-to-market loss on loans (or derivatives) incurred due to foreign exchange fluctuations against its general reserves. As on September 30, 2011, the operator’s general reserves stood at Rs 310.33 billion. Without such a court-sanctioned scheme RCOM would have had to bear an additional burden of Rs 27.14 billion towards finance charges, which would have pushed the operator into losses for the reviewed quarter. RCOM continued to be free cash flow positive in the quarter and expects the financial year ending March 2012 to be the first full year of free cash flow positive. 

The company’s net debt increased from Rs 291.896 billion during the quarter ended September 2010 to Rs 319.036 billion for the corresponding quarter in 2011. However, RCOM is confident about the repayment of its future debt maturities. The operator had refinanced its 3G spectrum fee payments through external commercial borrowing from the China Development Bank and is benefiting from the extended loan maturity of 10 years, resulting in annual interest cost savings of around Rs 5 billion.

The company’s capex for the quarter under consideration was Rs 3.5 billion, which is significantly lower than the investments of Rs 9.29 billion for the corresponding quarter in 2010. While addressing shareholders during the earnings call, Syed Safawi, president, wireless business, RCOM, said, “All major projects have been implemented and the peak capex is behind us. All future capex requirements are only incremental and focused on network quality, capacity, the enterprise data centre and wireless data growth.”

Operational highlights

With a subscriber base of 147.09 million (corresponding to a market share of 16.84 per cent) as of September 2011, RCOM has maintained its position as the country’s second largest wireless operator. On the 3G front, the operator has rolled out services in all its 13 licensed circles, covering 333 towns. The operator’s active 3G subscriber base stood at 2.1 million as of September 2011.

Its minutes of usage (MoUs) increased from 94.6 billion during the quarter ended September 2010 to 98.9 billion during the corresponding quarter in 2011. However, following the industry trend, its ARPU declined from Rs 122 to Rs 101 during this period. This, in fact, is amongst the lowest in the industry.

Despite increasing competition, RCOM has managed to arrest the decline in revenue per minute (RPM) over the past seven quarters. RCOM’s RPM during the quarter under review was Re 0.45, which is one of the highest in the country. This can be attributed to the company’s increasing focus on the quality of operations. Also, the recent tariff hikes have helped the operator maintain the RPM level.

Segment review

RCOM’s business is divided into two strategic units – wireless and global enterprise. The turnover from RCOM’s wireless business was Rs 44.17 billion during the quarter under review, which is 6.15 per cent higher than the Rs 41.61 billion reported for the corresponding quarter in 2010. The contribution of the wireless segment in total revenues increased from 59 per cent to 63 per cent during the same period, while revenues from the global segment (including broadband) registered a 6 per cent decline. The operator’s revenues from the segment stood at Rs 23.35 billion during the quarter under review as against Rs 25 billion for the corresponding quarter in the previous year.

RCOM is optimistic about non-voice services (including high speed mobile internet through 3G) leading the revenue growth. According to Safawi, “Data and non-voice revenues contribute around 20 per cent to overall revenues. The company expects data and non-voice revenues to contribute 35-40 per cent of the total revenues in the next two years.”

Meanwhile, transactions for the sale of RCOM’s tower arm, Reliance Infratel, are progressing well with private equity firms such as the Blackstone Group LP and the Carlyle Group likely to acquire a major stake in the business. Moreover, RCOM is reportedly planning to lease out its telecom infrastructure to Mukesh Ambani-led Reliance Industries Limited for its foray into the wireless broadband business.