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Reliance Communication Equity Research

HomeCompanyReliance Communication Equity Research

Date of Research – 20 January 2016

Price – Rs. 68.50

About the Company

Reliance Communication Limited (“RCOM” or the “Company”) is a Reliance Anil Dhirubhai Ambani Group Company, set up in 2004 for providing telecommunication services. The Reliance Group currently has a net worth in excess of Rs. 89,600 crore (US$ 16.5 billion), cash flows of Rs. 9,100 crore (US$ 1.7 billion), net profit of Rs. 4,300 crore (US$ 0.8 billion). Its business encompasses a complete range of telecom services covering mobile and fixed line telephony including broadband, national and international long distance services and data services along with an exhaustive range of value-added services and applications.

RCOM is India’s foremost and truly integrated telecommunications service provider. The Company, with a customer base of about 126 million including over 2.5 million individual overseas retail customers, ranks among the Top 7 Telecom companies in the world by number of customers in a single country. Reliance Communications corporate clientele includes over 39,000 Indian and multinational corporations including small and medium enterprises and over 830 global, regional and domestic carriers.

Reliance Communications has established a pan-India, next generation, integrated (wireless and wireline), convergent (voice, data and video) digital network that is capable of supporting best-of-class services spanning the entire communications value chain, covering over 24,000 towns and 600,000 villages. Reliance Communications owns and operates the world’s largest next generation IP enabled connectivity infrastructure, comprising over 277,000 kilometers of fibre optic cable systems in India, USA, Europe, Middle East and the Asia Pacific region.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 20,561.00 21,238.00 21,770.00 21,711.00  19,493.00 
Expenses 14,619.00 14,595.00 14,580.00 14,694.00  14,557.00  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 5,942.00 6,643.00 7,190.00 7,017.00  4,936.00  
Depreciation 3,845.00 4,535.00 3,817.00 4,046.00  4,221.00  
Finance Costs 2,499.00 3,019.00 2,755.00 2,869.00  3,561.00
Other income 1,217.00 1,083.00 328.00 402.00  456.00  
Exceptional items 56.00 –  (3.00) 
PBT 815.00 116.00 946.00 504.00  (2,387.00) 
Tax 71.00 (1,021.00) 326.00 (199.00)  (1,104.00) 
PAT (before Minority Interest and share of Associates) 744.00 1,137.00 620.00 703.00  (1,283.00) 
Profit/ (loss) attributable to Minority Interest 73.00 92.00 (91.00) 24.00  – 
Share of profit / (loss) of Associates (1.00) (2.00) (3.00) (2.00) 
Consolidated Profit / (Loss) for the year 672.00 1,047.00 714.00 681.00  (1,283.00) 

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 28.90 31.28 33.03 32.32  25.32 
Net Profit Margin Ratio 3.62 5.35 2.85 3.24  (6.58) 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
Share Capital 1,032.00 1,032 1,021.00 1,244.00 1,244.00 
Reserves & Surplus 35,689.00 32,818 31,388.00 36,692.00 35,622.00 
Net worth (shareholders funds) 36,721.00 33,850 32,409.00 37,936.00 36,866.00 
Minority Interest 860 725 743.00 512.00 520.00 
Long term borrowings 29,646.00 28,678 27,913.00 30,356.00 32,795.00 
Current liabilities 22,404.00 23,439 25,538.00 20,923.00 26,188.00 
Other long term liabilities and provisions 2,041.00 2,118.00 1,946.00 1,028.00 5,020.00 
Deferred Tax Liabilities 1,018 1,372 1,803.00 529.00 677.00 
Total Liabilities 92,690.00 90,182 90,352.00 91,284.00 1,02,066.00 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
Fixed Assets 71,478.00 69,252 66,443.00 62,302.00 71,230.00 
Noncurrent Investments 133.00 111 118.00 125.00 134.00 
Current assets 12,545 12,261 13,377.00 18,790.00 14,468.00 
Long term advances and other noncurrent assets 3,525.00 3,433 3,626.00 4,644.00 10,319.00 
Goodwill on consolidation (net) 5,009.00 5,125 5,300.00 5,423.00 5,604.00 
Total assets 92,690.00 90,182 90,352.00 91,284.00 1,02,066.00 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
ROCE 8.61 9.39 10.88 10.45 10.00 
ROE / RONW 2.69 1.99 3.23 1.88 1.91 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 20,561.00 21,238.00 21,770.00 21,711.00  19,493.00 
Growth (%) 4.49 % 3.29 % 2.50 % (0.27 %)  (10.22 %)
PAT (Rs. Cr.) 744.00 1,137.00 620.00 703.00  (1,283.00) 
Growth (%) (24.70 %) 52.82 % (45.47 %) 13.39 %  (282.50 %) 
Earnings Per Share – Basic (Rs. ) 3.25 5.07 3.05 2.74  (5.69) 
Earning Per Share – Diluted (Rs. ) 3.25 5.07 3.05 2.74  (5.69)  
Price to Earnings 16.98 23.17 22.23 18.25 

Dividend History

The RCOM has maintained an average dividend yield of 0.41 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. RCOM’s average current ratio over the last 5 financial years has been 0.60 times.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

ROM’s average long term debt to equity ratio over the last 5 financial years has been 0.74 times which indicates that the Company is operating with a considerable level of debt and may face some difficulty to meet its obligations.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

RCOM’s average interest coverage ratio over the last 5 financial years has been 3.72 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Reliance Communications reported a promoter holding of 59.08 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 29.58 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

One Response to “Reliance Communication Equity Research”

By vinod tripathi - 28 June 2017

good.can you please do the same for empee disterly ltd

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