Without investing more on data RCom can't expect future growth

Reliance Communications needs to invest more in data infrastructure and grow data revenues faster if it wants to show healthy growth over the next few quarters.

It is losing revenue market share in most telecom circles which means its position in the voice market is weakening, say analysts. And this is compounded by very little balance sheet headroom for matching investments in infrastructure which the company's peers are putting in, they add. Since future growth anyway is expected to be strong in the data market for all telcos, this is where RCom should be channeling investments.

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For the September quarter, RCom said in a statement that its total data traffic more than doubled, rising by 116 percent year on year at 37,570 million MB. "The traffic has increased due to increase in data subscribers and higher data usage per customer. The total data customer base has grown 30.8% year on year to 34 million, including 9.1 million 3G customers in Q2."

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Ankur Rudra and Utsav Mehta from Ambit Finance pointed out after RCom surpassed analysts' expectations on profitablity in the September quarter that RCom's position in data market may be strong but remains weak in the voice market.

"Although RCom is steadily losing revenue market share in most circles, it has a strong presence in the data market through its dongles and 3G services. The company claims the stake as the largest 3G operator in India, with 9.1million subscribers and higher data usage per subscriber at 385MB (versus Bharti's 31MB and Idea's 178MB). Hence, the company is likely to be one of the primary beneficiaries of data growth in India. However, its position in the voice segment remains weak. The company may need a drastic upheaval to materially compete with the incumbents, given its struggling brand image and voice franchise," they say in their analysis.

On Tuesday, RCom reported robust increase in profitability in the second quarter ended September 30th with net profit surging to Rs 234 crore, beating analysts' estimates of Rs 146 crore net profit. Including a write-back, net profit jumped to Rs 675 crore and it was the company's first profit rise in five quarters. But as some analysts and a story in Mint newspaper pointed out, RCom changed reporting norms in the September quarter, breaking up its India business between voice and non-voice instead of speaking about the India wireless business. This confused analysts and made comparisons with previous quarter or year-on-year near impossible.

Meanwhile, Rohit Chordia and Shyam M of Kotak Institutional Equities also warned against optimism on wireless business growth for RCom. In a note to clients yesterday evening, the two analysts said "Wireless business optimism shared in the analyst meet was a dj vu for us - RCom had shared similar optimism in its first analyst meet post pan-India GSM expansion. Optimism then and optimism now share a common thread - the company hoping to garner a larger pie of the incremental market - on the back of GSM voice then, on the back of data now.

While the company's strategy makes immense sense, we need more - we need to see the company making investments to participate in the data story...... we need to see the data story showing up in reported data revenues. The company's reported India non-voice revenues were flat year on year. Now, we do not know how fast the 'pure wireless' data within this revenue pie is growing; these numbers would be better if RCom's pure wireless data were growing anywhere close to the rate at which wireless data is growing for the GSM incumbents."

Chordia and Shyam had said in another report yesterday morning that "there is very little balance sheet headroom to keep pace with the leaders on investments in network expansion and quality."