Shares in Reliance Communications, India’s No. 2 mobile operator, fell as much as 18 percent on Friday morning after its quarterly results disappointed and some brokerages downgraded the stock.Reliance Communications, whose tie-up talks with South Africa’s MTN to create a global top-10 telecoms firm failed last month, reported a 23.8 percent rise in June quarter net profit to 15.12 billion rupees ($357 million), almost in line with a Reuters poll forecast of 15.16 billion.
But analysts said it was boosted by a change in accounting methods, and quarterly revenue of 53.22 billion rupees missed a Reuters poll forecast of 57.61 billion rupees.
Credit Suisse analysts said a change in accounting of foreign exchange-related losses helped net profit by 14.6 billion rupees, adjusting for which it would have been only 499 million rupees.
Citigroup and Morgan Stanley downgraded the stock, while Credit Suisse maintained its "underperform" rating and cut its target price. Citigroup cut its target price to 530 rupees, Morgan Stanley to 509 rupees and Credit Suisse to 425 rupees.
Reliance Communications said tariff cuts and lower revenues from its public phones had put pressure on margins in its wireless business, which generates about ¾ of total revenue.
At 0540 GMT, shares in Reliance Communications were down 12.4 percent at 438 rupees, having fallen as much as 18 percent, in a Mumbai market that was down 1.5 percent.
Bharti Airtel, India’s No. 1 mobile operator, last week reported a forecast-beating 34 percent rise in profit. Its shares were down 2.2 percent at 782 rupees at 0540 GMT
GSM ROLLOUT
The majority of Reliance Communications’ 51 million customers are on the CDMA platform. It is expanding its GSM services to all the 23 of India’s service areas from eight currently, with plans to spend $6 billion in the year to March 2009.
"We believe that the company’s profit growth in the next two quarters will be relatively lower than the industry’s as RCOM gears up for its nationwide GSM launch," Morgan Stanley said in a report.
Still, Morgan Stanley, which has an "equal-weight" rating on the stock, did not advise selling the stock, as it expected annual operating profit growth of 30 percent in 3 years and a planned listing of the telecom’s tower unit would unlock value for investors.
Chairman Anil Ambani told analysts on Thursday that Reliance Communications had approval to take its tower unit public, but was waiting for the capital markets to stabilise.
Citigroup said there was no trigger for the stock in the near term, with a re-rating based on the shift toward GSM some time away.
Reliance Communications has said it would start rolling out the new GSM networks by the end of 2008, and expects the project to be completed in the middle of next year.
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