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Jan 24, 2013, 07.15 PM IST | Source: CNBC-TV18

Expect tariff hikes in next 1 yr to sustain profit: RComm

India’s third largest mobile phone carrier in terms of customer base, Reliance Communications, reported a marginal rise in its consolidated net profit to Rs 105 crore in the third quarter of financial year 2012-13 from Rs 102 crore in the previous quarter.

India's third largest mobile phone carrier in terms of customer base, Reliance Communications , reported a marginal rise in its consolidated net profit to Rs 105 crore in the third quarter of financial year 2012-13 from Rs 102 crore in the previous quarter. Its consolidated income from operations grew 2 percent quarter-on-quarter to Rs 5,136 crore in the October-December quarter.

Also read: RCom down 3.5% on weak Q3; JP Morgan stays underweight
 
Gurdeep Singh, President & CEO of Wireless Business, Reliance Communications told CNBC-TV18 that Q3 has been operationally satisfying as its consolidated revenue grew by 2 percent. Going forward, he expects network costs to reduce.
 
As far as tariff hikes are concerned, Singh clarified that it will be an ongoing and continuous exercise. He also spoke about the possibility of two to three tariff increases in the next one year with an aim to sustain profitability. 
 
Singh also believes that a rise in tariffs does not necessarily result in lower volumes and said, “When we implemented the hike in September, and now that we have 3 months of this implementation, we have seen there is no linear inverse relationship between tariff hike and the traffic or usage. So net-net when you undertake such tariff hikes, you gain on the top-line.”

Here is the edited transcript of the interview on CNBC-TV18.

Q: Your margins disappointed the street because they came off a bit. What led to that dip and do you expect more pressure going forward?

A: It has been an operationally satisfying performance during the last quarter because we have now arrested the decline of many quarters in the past. With this, we have now entered into a growth phase and our consolidated revenue has grown over 2 percent.

We have taken many key initiatives in the past. We have moved away from a pan India one size fits all to a circle as a country approach. And our go to market is now aligned to our spectrum strength. By rationalising tariffs across and removing free minutes, we have been able to improve revenue per minute (RPM) sharply. We have significantly improved our quality of distribution and channel engagement.
 
We have integrated end-to-end managed services of network and other initiatives which will help us reduce network costs going forward. Outsourcing for network and right sizing of our organization has resulted in reducing manpower count by over 9000 so far. In the coming quarters, our focus will be to gain incremental revenue market share and sustain profitability.
 
Q: But network cost and selling, general and administrative (SG&A) cost have gone up this quarter and that has put a bit more pressure on your margins, do you see this cost lingering into the next few quarters that would continue to put pressure on the margin performance?

A: As I said, during the last 6 months, we have invested into SG&A because we were expanding our distribution and the reach of our products and services. With the integrated and end-to-end managed network outsourcing and the other efforts we are taking, we see the network costs reducing as we go forward.
 
Q: Some of your peers have increased tariffs and in specific pockets it could be deeper, will Reliance Communications be looking at increasing tariffs as well or reducing discounts?

A: RCOM took the lead in tariff hike in the month of September when we moved the base rate tariff from 1.20 paisa to 1.50 paisa and we again followed up the same in the early part of January when we corrected some of our promotional tariffs under the special tariff vouchers across on-net, off-net and subscriber trunk dialing (STD). The tariff increase, as we said earlier, will happen at least on 2-3 occasions in the coming one year with an aim to sustain profitability.

Q: When could we see the first of the base tariff hikes now that you have started cutting down on the discounts?

A: As I said earlier also, there is an increased cost push in the sector due to inflationary pressures and going forward due to the increase in the spectrum pricing. So when the cost of input material rises, naturally the tariff is the only way to offset and sustain profitability.
I would say that going forward, this will be an ongoing, continuous exercise, rather than having a pre-defined period as to when the tariff hikes will take place.

Q: As tariffs go up, do you expect to see the usage traffic coming off, any impact on volumes at all?

A: When we implemented the hike in September, and now that we have 3 months of this implementation, we have seen there is no linear inverse relationship between tariff hike and the traffic or usage. So net-net when you undertake such tariff hikes, you gain on the top-line.

Q: The positive for this quarter is your RPM performance and the upping over there, do you see it improving even in the quarters ahead?

A: When we did the last tariff hike, we did mention that our complete exercise to transfer all our customers, existing or new, into the new tariff will be an exercise of 3 to 6 months. We have already gone through half stage of the same. Going forward, it will take another 3 to 4 months before the entire subscriber base moves to the new tariff regime. And that will certainly have an impact on RPM moving up.

Q: The plant tariff for the Barmer plant has not come in yet. How soon do you expect that tariff order and any losses that you are facing till such time as you get clarity on that?

A: I am happy to announce to you that as far as the Barmer unit is concerned, it has started to contribute a little towards the equity returns in this quarter. In this quarter Barmer has made a small profit and it’s a happy situation. We are able to recover our entire fixed cost, interest, depreciation and a little bit for the equity return. So that’s a good situation because recently the interim tariff has been increased by the regulator.

However, the final tariff determination may take a little more time. The regulator has promised us that they will have a final hearing in the month of February and thereafter we expect the judgement to be announced by him. So, when the final tariff will come, the entire return on the equity which is there would be available to the company. However, from this quarter, we have stopped making losses as far as Barmer is concerned. Hopefully, we feel that the year maybe closed without any losses from the Barmer unit and next year it will generate return to the equity.

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