RCom deserves to trade at 5-10% discount to Bharti: Anand Rathi
Anand Rathi Securities has recommended `Sell` on Reliance Communications with a price target of Rs 140 as against the market price (CMP) of Rs 142 in its report dated May 18, 2010.
We have slashed our consolidated EBITDA estimates by 11-14%, on back of RCOM`s significantly weak 4QFY10 results. Our new TP is 7% (Rs10) lower than our revised SOTP of Rs 150 (Jun-11 DCF, incl. Rs 30 from towers), because of 3G-risks and poor growth visibility. Reiterate Sell.
QFY10 marked the 8th consecutive quarter of below-expectations performance from RCOM, as consol. EBITDA came in 13% below our estimates, because of both lower revenues and lower margins. Incredibly, 4Q EBITDA of Rs16bn was 35% below 1Q EBITDA. Furthermore, full year EBITDA was down 16% y-o-y- in FY10, after growing at 13.5% in FY09.
Assuming 4Q EBITDA weakness was partly due to one-off expenses in the Global segment (as indicated by mgmt), we forecast EBITDA to grow at 5% CQGR in FY11. Yet, our forecasts imply full-year EBITDA in FY11 would decline by 7.4% on a yoy basis. We forecast EBITDA growth to resume from FY12, post stabilization of wireless ARPU/ARPM we forecast these metrics to plateau at Rs 115 and 39p, respectively.
We have also reduced capex forecasts (ex-3G) by Rs 5-10 billion, on back of lower-than-expected capex incurred in FY10. Our adj. PAT forecasts are down 30-35%. Although, our forecasts do not consolidate tower earnings, our TP captures tower NPV of Rs 30 per share (previously Rs 40) from external tenants.
At FY11 adjusted P/E of 15.9x and EV/EBITDA of 7.2x on our revised forecasts, RCOM shares are trading at 12% and 28% premium, respectively to the market leader Bharti, which is not justified in our view. We believe the stock deserves to trade at a minimum 5-10% discount to Bharti,“ the broking house said.
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