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Reliance Communications            (updated - Mar 2009)
RCom may have added five million subscribers in January after it rolled out its GSM network in 2009, but the stock hit a lifetime low on Thursday. Over the past year, RCom has underperformed market leader Bharti by a wide margin—it has lost 74 per cent while Bharti has given up just 25 per cent of its value. The Street has had come concerns about RCom including the quality of earnings and the high level of borrowings. Analysts estimate that the company’s net debt could go up from around Rs 24,000 crore currently to over Rs 40,000 crore in 2009-10 even though it plans to spend only around Rs 15,000 crore on capital expenditure. The higher interest and depreciation costs could result in the firm’s net profit coming off from close to Rs 6,000 crore this year, to Rs 4,000 crore in 2009-10.

Recent data from the regulator,TRAI, shows that at 16.7 per cent, RCom lost 50 basis points of revenue share in the December 2008 quarter. Since the subscriber market share dipped by just 10 basis points, it would mean that RCom’s incremental CDMA subscribers were not of very high quality. On the other hand, Bharti Airtel’s revenues share at 30 per cent, saw an increase of 100 basis points sequentially, while its subscriber market share, at 24.7 per cent, too was up 10 basis points q-o-q.

Since the Street will focus on profitability rather than the number of subscribers, RCom needs to get its GSM game plan right. The introductory offer saw lots of free minutes being given but ultimately subscribers need to start paying enough for the service so that ARPUs (average revenue per user) are profitable. Of course, telcos do have differing objectives behind subscriber acquisitions and it could make sense to lose out on subscriber revenues for some time so as to acquire spectrum.

RCom’s GSM launch is probably focussed on acquiring the next level of spectrum and it should be somewhere close to hitting the target base. However, over the longer run, it’s the operating margins that are going to determine the course of the stock. Analysts were puzzled that RCom’s January numbers were so strong even though most of its early stage GSM coverage would have been in the metros and bigger towns where other operators already had a presence. That no operator had reported a slowdown and that the market expanded from 10 million to nearly 16 million subscribers, was surprising.
source - BS

Telecommunications Shares - Quick Overview

               Reliance Communications

Reliance Communications            (updated - 07 Oct 2009)
With telecom operators vying with each other to offer customers lower tariffs, it’s not surprising that telecom stocks are tumbling. In the last two sessions, Bharti has lost 18 per cent, RCom has fallen 17 per cent and Idea Cellular has come down by 12 per cent. Clearly investors are anxious at the way rates are dropping; After Tata DoCoMo introduced the per second billing scheme, Idea came up with special rate of 50 paise for both local and STD calls on any network in Mumbai city. In between,Tata Teleservices offered local calls at just Re 1, irrespective of the duration.

And now Reliance Communications (RCom) says it will charge 50 paise per minute for pretty much all calls. That’s much below the industry tariff of Re 1 for an outgoing local call. RCom’s plan will mean lower rates for almost all calls except international calls and roaming.

While the scheme should help the telco gain subscriber market share, how much money it will make is another question.
A back of the envelope calculation done by Kotak Securities shows a maximum revenue per minute potential of 35 paise for RCom. That, it points out, is lower than Bharti’s cost of producing a wireless minute of 39 paise per minute in the June 2009 quarter. This is also around 29 per cent lower than the industry ARPM (average revenue per minute )for the June 2009 quarter. In fact, JP Morgan estimates that RCom’s ARPM could come off quite sharply to around 40-42 paise in the medium term.

But the average cost per minute in the last quarter was around 40 paise per minute. So, RCom’s margins can get squeezed unless it manages to reduce costs. Understandably, RCom wants to make it more difficult for new entrants to get a foothold in the market but now it appears that even incumbents like Bharti Airtel or Vodafone may be prompted to lower call rates.That cannot help RCom and although operating margins will be cushioned to some extent, thanks to an under-utilised GSM network, margins could come off to 37 per cent in the current year and 34 per cent in 2010-11, says JP Morgan.

Meanwhile Trai reportedly is toying the idea of making the one second billing mandatory, a move that would disrupt profits for all players with industry revenues coming down by about 15 per cent. That is making analysts even more cautious prompting them to trim earnings estimates across companies with the biggest cut being made for Idea Cellular.
source - BS