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On a Disconnect

Reliance Communications, India’s third largest telecom company, has failed to deliver anything meaningful…

During the last decade, telecom was a happening place to be in. Subscriber additions in the millions were being added every quarter, average revenue per user (ARPU) was rising as was revenues per minute (RPM). But, those were early days for Indian telecom. Today, there are about 10 national level players all vying for the same customers’ talk-time – certainly not good for a commoditised business like telephones and certainly not for cellphone operators.

Why does RCom feature here? Heavy investments necessitating more and more debt. Debt stands at Rs 36,800 crores. It’s an overhang the company can’t seem to shake off. Operations have been lagging industry peers too.

In the December 2010 quarter, minutes of usage (MoU) growth was down at only 1 per cent (Q-o-Q), RPM’s were flat despite price hikes and ARPUs declined 1.6 per cent. Subscriber addition came in at 2 per cent. 3G spectrum related interest costs had a strong bearing on bottomline. Also, if it had not been for the change in depreciation policy which caused a write-back of excess depreciation, RCom would have incurred a net loss before tax of Rs 51 crores.

Where does it go from here? Talks of sale of its tower business have been doing the rounds since a number of quarters and are still alive, though weak market conditions can further delay its prospects. Elder brother Mukesh Ambani’s LTE rollout was rumoured to be RCom’s white knight. But with RIL building its own towers, that exit also seems to be closing.

What should you do? The stock will react to news like the listing of its Singapore arm, sale of its tower business, etc. However, so far, RCom has been unable to demonstrate any meaningful move to reduce debt. Weak markets could ensure that it stays this way. Poor operating business is another hangover. Sell.