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Reliance Communications: Data will be the key driver for future growth

October 15, 2014
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Like its peers, Reliance Communications (RCOM) was facing heavy financial burdens over the past three years, dealing with thin margins, stiff competition and high debts. Of late, however, the mood in the industry has been upbeat because of major players turning in positive financial results. Companies seem to be in much better shape than before.

For the quarter ended June 2014, Mumbai-based RCOM posted a 22 per cent rise in net profits, helped by higher tariffs for voice calls. It posted a consolidated net profit of Rs 1.32 billion compared to Rs 1.08 billion the previous year. It also posted a 2.1 per cent rise in sales over the previous year, which now stands at Rs. 55.23 billion.

In recent years, top mobile operators have reduced or even done away with discounts and free talktime on their networks. As a result, call rates have gone up by 20-30 per cent across operators, improving their profitability. Earlier in 2014, RCOM had raised voice call rates by about a fifth. “In the coming quarters too, tariffs will continue to harden as we take freebies away,” says Gurdeep Singh, CEO of RCOM’s consumer business.

RCOM has been losing its market share to other incumbents in the past two years and reporting a decline in profits for several quarters. Its fund-raising initiatives in the past have been unsuccessful, and hence it needs to take steps to put its business on steadier ground.

Over the past year, as part of its efforts to consolidate operations, RCOM signed major deals to share its infrastructure; initiated action to monetise its assets; revived attempts to sell stake in its subsidiaries; disconnected inactive subscribers from its network; and chalked out strategies to leverage its strength in the data segment. According to senior company officials, its focus over the next few years will be on the data segment, which will be its vehicle for strengthening business prospects.

Market position

RCOM began operations in 2003, promoted by Reliance Industries. In 2005, the Reliance Group was divided between the two brothers who controlled it. Younger brother Anil Ambani gained RCOM, now the flagship of his Reliance ADAG Group, which has a net worth of over $16.5 billion and interests in financial markets, infrastructure and energy.

At present, RCOM is an integrated telecommunications service provider, offering fixed, CDMA and GSM-based mobile, broadband and enterprise services. It also offers digital television and radio services. As of July 2014, RCOM is India’s fourth largest telecom service provider with 110.56 million customers, way behind Bharti Airtel’s 213 million, Vodafone India’s 177 million and Idea Cellular’s 140 million.

Its biggest asset is its vast infrastructure, through which it owns and operates one of the world’s largest next-generation IP-enabled connectivity infrastructure. Through Reliance Global Cloud Xchange (GCX), formerly called Globalcom, it owns the largest private cable network in the world, with over 277,000 route km of optic fibre cable (OFC) connecting the US, Europe, the Middle East and the Asia-Pacific. This includes 68,000 route km of subsea fibre. Valued as one of the world’s top 10 telecom companies, RCOM serves 39,000 Indian and multinational corporations, and 830 global, regional and domestic carriers.

Recently, as part of the company’s strategy to provide a direct subsea route to bridge gaps in the emerging markets corridor, and to bypass the current outage-prone terrestrial routes between Mumbai and Chennai, GCX announced an investment of $45 million to connect Mumbai and Singapore with a new subsea fibre cable system. “With Singapore as a regional hub and a gateway for multinational companies conducting business across India and emerging markets, the India Cloud Xchange cable will complement GCX’s global network infrastructure for direct connectivity to major business centres in Asia, the Middle East, North America and Europe,” states GCX CEO Bill Barney. The entire cost of the venture has been pegged at $200 million and revenue is likely to start coming in from the second quarter of 2016.

Originally a CDMA operator, RCOM launched GSM services across the country in 2009. This was the largest and possibly the fastest network roll-out by an Indian operator. In 2010, RCOM became the second private operator after Tata Teleservices Limited to launch 3G services. However, the aggression that had come to be associated with RCOM’s operations had begun to mellow. Competition from GSM incumbents and the huge capex on the 3G spectrum acquisition and services launch have adversely affected RCOM’s profitability and overall operations.

Challenges

The thrust on data and bettering performance parameters over the past year has seen the operator show an improvement in profit margins. RCOM’s earnings before interest, taxes, depreciation and amortisation (EBITDA) margin in the financial year 2013-14 was among the highest in the industry at 33.7 per cent.

However, its single biggest concern today is its huge debt burden. Even though the company has managed to bring down its net debt from Rs 401.78 billion as of March 31, 2014 to Rs 355 billion at present, it is still more than five times its operating profit.

To reduce debt, the company has been looking at various options. In June 2014, it raised Rs 48 billion through a qualified institutional placement (QIP) of shares. The operator got total bids of about

Rs 120 billion but decided to retain about Rs 60 billion worth of bids, of which Rs 48 billion came via shares sold to institutional investors. The company’s founders also bought shares worth Rs 13 billion and the proceeds from this sale went into paring its debt. The QIP book was oversubscribed, indicating a reasonable level of investor interest.

In August, RCOM received the first of two instalments of Rs 6.5 billion from its promoter, Telecom Infrastructure Finance Private Limited, for a preferential allotment of warrants aggregating Rs 13 billion. The remaining Rs 6.5 billion will be received before March 31, 2015.

Meanwhile, RCOM also reportedly initiated the process of monetising its real estate assets across India, planning to raise Rs 50 billion through this route. An RCOM board committee recently approved the sale of these assets. According to a report, buyers are being sought for 10 properties owned by RCOM, which include the company’s 3.7 acre Delhi office near Connaught Place; property on Kolkata’s Chowringhee Road; Navi Mumbai’s 7 Towers, where it has over 388,000 square feet of space; apart from properties in Bengaluru, Chennai, Hyderabad and Gujarat. It is also reported that RCOM is likely to finalise deals with a few key real estate developers for commercial and residential projects, including an IT park, in Dhirubhai Ambani Knowledge Centre in Navi Mumbai.

Though not a confirmed development, industry sources say that Chinese firm Citic Telecom is in discussions with RCOM for buying a significant stake in the latter’s submarine cable business, GCX. If this happens, then, along with the tower sharing agreements with Reliance Jio Infocomm Limited (RJIL), the company can expect to rake in about Rs 120 billion over the next few years. “By raising funds through these initiatives, RCOM should be able to lower its net debt to a manageable amount of

Rs 250 billion, which will help the company save over Rs 10 billion in interest costs annually,” notes a senior analyst from Nomura Securities.

Infrastructure sharing deals

Through Reliance Infratel, RCOM owns 50,000 towers and 500,000 km of intra-city OFC network, which is spread over 300 cities and towns. A year ago, there were talks of selling stake in Reliance Infratel but that didn’t materialise.

In 2013, RCOM got into an infrastructure leasing pact valued at Rs 120 billion with RJIL, the telecom arm of the Mukesh Ambani-controlled Reliance Industries. The deal was for RJIL to share RCOM’s tower infrastructure for a period of 10 years. It came as a breather for RCOM as it was under financial pressure at that time.

In April 2014, RCOM signed its third contract with RJIL for sharing its OFC infrastructure within cities. Under the terms of the agreement, RJIL will utilise RCOM’s nationwide intra-city fibre network for the accelerated roll-out of its state-of-the-art 4G services across the country.

According to a senior analyst from financial services firm Anand Rathi, “These deals are significant as they help create a buzz around Reliance Infratel and will help in similar fund-raising activities in the future.”

Industry view

RCOM is a canny and unorthodox operator with an aggressive go-to-market strategy and deep pockets. As a brand, it has managed to stay relevant by innovating on its products and shown it has the mettle to survive. Therefore, market observers believe that the company will be able to resolve its current financial problems before long.

RCOM also has tremendous experience in offering data on the CDMA platform. Moreover, the kind of reach that RCOM has in villages gives it an edge over smaller operators. However, analysts still say that RCOM needs to shape up in some aspects of its strategy. As a CDMA-based operator, RCOM initially focused on offering low-cost services which attracted users in hordes, but unlike its peers, Bharti Airtel, Vodafone and Idea Cellular, it did not snag a large, high-paying post-paid customer base. These users rank higher in terms of the loyalty factor and tend to generate five to six times higher ARPUs than prepaid customers.

RCOM, therefore, faces fierce competition. A third of its revenues come from CDMA services, while its major competitors offer services based on the more popular GSM technology. In terms of ARPU, for instance, RCOM’s Rs 136 is well behind Airtel’s Rs 202, Vodafone India’s Rs 193 and Idea Cellular’s Rs 181. According to analysts, these are increasingly the parameters that will go towards determining operator profitability rather than the overall subscriber base.

“RCOM’s disadvantage is its higher share of low-income subscribers compared to its competitors. Consequently, despite the higher number of subscribers, the ARPU is lower,” observes Dr Mahesh Uppal, director, ComFirst.

Bharti Airtel, for instance, has a much higher component of high usage, premium subscribers in metros and Category A circles who can easily switch to 3G and 4G data services, thus contributing higher revenues to the company. In comparison, RCOM’s subscribers are mostly voice-based users belonging to Category B and C circles. As a result, RCOM has fewer opportunities to get its users to scale up to 3G and 4G data usage. “RCOM should, therefore, focus on one network technology and drive its operations successfully, like its peers,” says Uppal.

Despite this, RCOM plans to straddle both technologies. It has been shifting the majority of its voice subscribers to GSM networks and is using CDMA spectrum to provide high speed data services. Analysts say that there is an opportunity for the operator to offer high speed data services through its 800 MHz network, taking into account the weakening spectrum position of its CDMA competitors. “The data experience on a CDMA network is far superior to a 3G network. In many cases, Reliance’s NetConnect provides much better data services than that given by some GSM operators,” says Harit Shah, senior research analyst, Nirmal Bang.

In addition, RCOM is taking several CDMA-oriented initiatives like launching GSM+CDMA smartphones, introducing a dedicated CDMA team within its mobility business, and upgrading its evolution-data optimised network to Rev. B in non-3G circles. The company is also streamlining the go-to-market strategy of its CDMA business, creating a structure specific to its CDMA operations since the characteristics of its sales and distribution are entirely different from GSM.

Thrust areas

RCOM is betting big on data services. In the future, it will be the company’s key growth vehicle.

The proportion of high-end 3G users in the country has risen significantly. From being a relatively minor part of the operator business, 3G subscribers now account for 6-7 per cent of the user base of mobile operators. By pricing data and voice at moderate levels, RCOM and its peers have doubled their 3G subscriber base, with the company witnessing a jump of about 70 per cent in these figures from the previous year.

Data revenues for operators, too, have steadily increased over the past year. From accounting for 6-9 per cent of the overall revenues, data, as a proportion, is now 10-13 per cent of the total revenues.

With the increasing penetration of low-cost smartphones, data usage is expected to explode in the years to come. RCOM’s future performance will depend on how it is able to augment its position in the data space and towards that end, it increased its 3G footprint to five more telecom circles in June 2014 – Karnataka, Andhra Pradesh, Tamil Nadu, Kerala and Uttar Pradesh (East). Its 3G services will be based on intra-circle roaming arrangements with other operators.

RCOM claims to have the largest 3G footprint in the country with a presence in 13 circles. “With a presence in 18 service areas in India, our services will be available in all the major metros in the country, enabling us to target a fast growing data market in these circles. Together, these circles account for 80 per cent of incremental smartphone sales in the country,” noted Singh in a statement. As of June 2014, RCOM has 28.6 million data users, including 13 million 3G customers.

The road ahead

Apart from data, RCOM is focused on pushing its enterprise business, which will emerge as a key focus area for the company. It is expected to contribute 30 per cent to its annual revenue growth over the next five years. RCOM currently serves 45,000 large, medium and small enterprises, including 880 of the top 1,000 corporates, and is aiming to increase its reach in the future.

The company is also in the process of streamlining its operations by restructuring and exiting non-core businesses and cutting costs to boost profitability. In a bold move, it plans to slash 37 per cent of its 15,000-strong workforce by October 2014. It will do so by outsourcing its call centre and shared services operations. It is reported that RCOM is likely to sign deals worth Rs 7 billion with two third-party service providers to outsource its BPO and shared services operations, which will result in the exit of about 6,000 employees. Of these, nearly 4,500 are involved in RCOM’s call centre operations while the rest make up its shared services teams.

In all, RCOM has a strong chance of monetising all its assets. This will unlock substantial value for the company.  Meanwhile, it can continue tightening its core operations and driving its data business to deal with the competition.

 
 
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