Reliance Communications Ltd (RCOM)

HOLD Target price :Rs. 192

CMP: Rs.174.90 Market Cap: Rs.360997.09mn.
Date: 2 December,2009

Key Ratios:
Particulars FY08 FY09 FY10E FY11E SYNOPSIS
A A
OPM(%) 44 42 39 40 • Reliance Communications Limited is India’s
NPM(%) 36 28 23 24 largest integrated communications service
ROE(%) 22 12 9 9 provider in the private sector with 92 million
ROCE(%) 12 7 6 6 individual, enterprise, and carrier
P/BV(x) 5.91 0.77 0.63 0.58 customers.
P/E(x) 27.2 6.56 6.84 6.25
EV/EBDITA(x) 4.83 3.88 4.51 4.40 • The company operates pan-India across
Debt 0.82 0.60 0.60 0.60 the full spectrum of wireless, wireline, and
Equity(x) long distance, voice, data, video and
internet communication services. The
company also has an extensive
Key Data:
international presence through the
Sector Telecom
provision of long distance voice, data and
Face Value 5.00
internet services and submarine cable
52 wk. High/Low 359.00/131.35
network infrastructure globally.
(Rs.)
Volume (2 wk. 1510751
• The business of Reliance Communications is
organized into three strategic customer-
facing business units: Wireless, Global, and
V.S.R. Sastry Broadband.
Vice President
Equity Research Desk • The company has introduced two
91-22-25276077 revolutionary SMS tariff to its customers.
vsrsastry@firstcallindiaequity.com • Reliance Mobile introduces BlackBerry Tour
Smartphone in the country

• The topline of the company are expected

to grow at a CAGR of 8% over 2008A to
Dr. V.V.L.N. Sastry Ph.D. 2011E.
Chief Research Officer Share Holding Pattern:
drsastry@firstcallindia.com

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 Table of Content

Investment Highlights ................................................................................................................... 3

Peer Group Comparison ............................................................................................................. 8

Financials ....................................................................................................................................... 9

Charts ........................................................................................................................................... 11

Outlook and Conclusion ........................................................................................................... 13

Industry Overview ....................................................................................................................... 14

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Investment Highlights

• Results Updates (Q2 FY10)

The bottomline of the company for the quarter decreased 52% yoy that is
Rs.7403.00mn from Rs.15307.80mn of same period of last year. Total
revenue for the second quarter stood at Rs.54962.50mn from Rs.55355.60
which is 1% decrease than that of a year ago period. EPS for the quarter
stood at Rs.3.59 per equity share of Rs.5.00 each.

Expenditure of the company increased 10% YoY to Rs.36827.6mn from

Rs.33434.2mn of same period of last year. Interest expenses for the quarter
stood at Rs.-6551.30mn. OPM & NPM for the quarter stood at 37% and 13%
respectively.

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• RCom introduces two revolutionary SMS tariffs

RCom nation wide operator offering both GSM and CDMA mobile
services has introduced two revolutionary SMS tariff to its customers. This is
one of its kind move initiated by the company in the Indian telecom
industry by making SMS more affordable to all mobile customers in
India.The two newly introduced SMS tariff plans are namely One Paise per
SMS and Unlimited SMS @ Re 1 per day.The new SMS tariff plans are add-
on plans and are applicable for all Reliance Mobile customers irrespective
of CDMA or GSM network as well as prepaid and post-paid customers. All
Reliance mobile customers, regardless of the tariff plans they have for
voice and data services can avail of the 1p/SMS plan by subscribing to a
standard tariff voucher of Rs 11 per month; or the unlimited SMS plan can
be subscribed to by customers on daily deduction of Re 1 per day from
their prepaid balance.

• RCom to launch new variants under Simple Reliance Initiative

RCom has extended its Simply Reliance Initiative with two new tariff
variants. The company received overwhelming response for its Simply
Reliance Initiative which was launched in October. These new variants
aim to offer an all-around product portfolio under Simply Reliance
Initiative. These offers reiterate the simplicity and value benefits of Simply
Reliance Initiative through enhanced value and single rate proposition.
These two new offering, reiterate the commitment of Simply Reliance Plan
with ‘no conditions’, ‘no monthly recharge’ and ‘any network anytime’
benefits.

• RCom may launch per second billing plan

The ongoing tariff war among the domestic telecom operators is likely to
intensify further with the industry major, Reliance Communications (RCom)
reviewing its options to launch per second billing plan. The indication from
the company comes close on the hills of competitor, Bharti Airtel
launching it’s per second billing plan, ‘Freedom Plan’.The per second
billing has become the flavor of the sector since past few months, under
which the mobile user is charged only for the seconds he talks rather than
charging flat tariff per minute even if the call lasts for few seconds.

• DoT permits RCom to issue new mobile connections with 8080 series

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 The Depart of Telecommunications (DoT) has permitted the Anil Dhirubhai
Ambani Group’s (ADAG) telecom services arm – Reliance
Communications (RCom) – to issue new GSM connections with numbers
starting with ‘8080’. The move has been necessitated as the existing 9
series, which has been in use for the last 14 years, has been exhausted.

• Reliance Mobile introduces BlackBerry Tour Smartphone in the country

Reliance Mobile, the pan-India mobile service of Reliance

Communications, and Research In Motion (RIM) have announced a 3G-
enabled smartphone – BlackBerry Tour smartphone – for Reliance’s CDMA
customers in India. It has been available in the country from October 12,
2009 for a cost of Rs 27,990. As a special promotion from Reliance Mobile
for pre-booking customers, users will be able to enjoy two months of free
BlackBerry Internet Service on Reliance Mobile's CDMA network. The
CDMA network of the company has a vast reach and hence will let
customers to access their professional and personal data on their
BlackBerry Tour smartphones across the country and at fast speeds.

• RCom launches ‘Simply Reliance’ tariff plan

Reliance Communications, telecom arm of the Reliance Anil Dhirubhai

Ambani Group (R-ADAG), has unveiled a new tariff plan under which it
has slashed all call rates to 50 paise per minute. The tariff plan named as
‘Simply Reliance’ will offer local, STD and landline calls to network of any
service provider at flat 50 paise per minute which will be available for
GSM as well as CDMA users, whether postpaid or prepaid, of the
company. Apart from this, the SMS facility will also be available at 50 paise
per message to any network under this plan.

• RCom board approves IPO plan of Rel Infratel

RCom has said that the board of the company has approved the
proposal by Reliance Infratel (Rel Infratel), a subsidiary of the company, to
undertake an Initial Public Offering (IPO) of equity shares. As per the
approval, the net issue will constitute 10% of the post-issue paid-up equity
capital of the company.

• Declares Dividend

The members of Reliance Communications at the 5th Annual General

Meeting (AGM) has approval payment of interim dividend of Re. 0.80 or

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 16% per equity share of Rs 5 each, for the financial year 2008-2009 as final
dividend.

• RCom reduces debt burden

Reliance Communications (RCom), the mobile telephony services arm of

the Anil Dhirubhai Ambani Group (ADAG), has reduced its debt burden
by pre-paying loans of around Rs 5,000 crore. The loans were taken in the
past one year from a host of domestic and foreign banks for tenures of
three to five years, according to a media report. The company had
repaid the loans from its internal accruals. RCom’s loan portfolio, which
stood at over Rs 22,000 crore at the end of the first quarter of the current
fiscal, stands reduced to over Rs 17,000 crore, with the company saving
about Rs 700 crore in interest costs.

• RCom arm likely to sign telecom infrastructure sharing pact with Aircel

Reliance Infratel, the 95% subsidiary of the Anil Dhirubhai Ambani Group-
controlled Reliance Communications (RCom), is in the process of signing a
deal with Aircel for sharing its mobile infrastructure to enable the latter
reduce its operational costs. The proposed deal will cover all circles where
the latter operates and is expected to launch operations. Aircel is a joint
venture between Maxis Communications Berhad of Malaysia and Apollo
Hospital Enterprise of India, with Maxis Communications holding a majority
stake of 74%. The proposed agreement envisages sharing of towers,
providing voice carriage and bulk bandwidth and is pegged at around
$300 million.

• RCom enters into an agreement with STel

Reliance Communications’ tower unit, Reliance Infratel, has entered into

an end-to-end to telecom infrastructure agreement with STel for telecom
towers, transmission for BTS sites and fibre backbone for intercity
connectivity. Reliance Communications will execute this agreement
through its tower subsidiary Reliance Infratel. STel’s agreement with Rcom
covers six circles -- Orissa, Bihar, Himachal Pradesh, North East, Assam and
J&K where the telecom operator plans to roll out its GSM services soon.
The agreement will give STel access to Reliance Infratel’s wide network
coverage of over 10,000 sites across these six circles and the extensive
optic cable fibre backbone of Reliance Communications pan-India
telecom network.

• RCom bets big on rural initiatives

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 Reliance Communications,sees a huge potential for its products in the
rural market. The company has announced a slew of initiatives like
BharatNet, Grameen VAS and M2M to increase its presence in the rural
segment.

• RCom,Etisalat DB Telecom sign pact for telecom infrastructure sharing

RCom has entered into a long-term strategic telecom infrastructure

sharing agreement with Etisalat DB Telecom. The agreeement will
accelerate Etisalat DB’s forthcoming launch of telecom services in India.
Under the terms of the agreement, Etisalat DB Telecom and its subsidiary
would outsource their telecom infrastructure requirements for 15 circles,
encompassing end-to-end tower and transmission infrastructure to
Reliance Infratel and Reliance Communications. This agreement will offer
large cost optimisation benefits with an asset light model, improvement in
capital productivity and enhances RCom’s revenues by Rs 10,000 crore.
This agreement is first of its kind that includes Towers and Transmission
agreement in the Indian telecom landscape and strongly complements
Etisalat DB Telecom’s plans for India.

Peer Group Comparison

CMP
Market
Name of the (As on 2 EPS P/E P/BV
Cap. Dividend(%)
company Dec, (Rs.) (x) (x)
(Rs. Mn.)
2009)
Reliance
Communications 174.90 360997.09 29.29 5.97 0.77 16
Ltd

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Idea Cellular 53.35 165390.1 3.78 14.11 3.30 -

Tata
383.25 109226.3 14.94 25.65
Communications 1.61 45

Bharti Airtel Ltd 304.75 1157087.7 23.91 12.75

4.20 20

Key Concerns

• Aggressive competitors.

• Declining tariff rate due to tough competition.

• Fastest change in technology.

• Technical failures, natural disasters or terrorism damages their networks.

Financials
12 Months Ended Profit & Loss Account (Consolidated)

Particulars FY 08 A FY 09 A FY 10 E FY11 E

(Rs.Mn) 12m 12m 12m 12m

Net Sales 188,273.90 222,505.50 227400.62 238770.65

Other Income 2,403.70 6,979.00 9421.65 10552.25

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 Total Income 190,677.60 229,484.50 236822.27 249322.90

Expenditure -108686.9 -136435 -148720.0 -154962.15

Operating Profit 81,990.70 93,049.50 88102.26 94360.75

Interest 3,997.00 5,069.50 2821.50 3103.65

Exceptional
Items 12,827.80 -74.8 -199.45 -159.56

Gross Profit 98,815.50 98,044.20 90724.31 97304.84

Depreciation -28,052.60 -36,077.00 -37159.3 -38645.7

Profit before Tax 70,762.90 61,967.20 53565.00 58659.15

Tax -2,836.20 517.9 -803.5 -879.9

Profit after Tax 67,926.70 62,485.10 52761.53 57779.27

Minority Interest -13915.3 -2035.8 - -

Net Profit 54,011.40 60,449.30 52761.53 57779.27

Equity Capital 10,320.10 10,320.10 10,320.10 10,320.10

Reserves 238,080.20 506,582.30 559,343.83 617,123.10

EPS 26.17 29.29 25.56 27.99

*A=Actual, E=Estimated

Quarterly Ended Profit & Loss Account (Consolidated)

Particulars Mar 09 A June 09 A Sep 09 A Dec 09 E

(Rs.Mn) 3m 3m 3m 3m

Net Sales 57,977.70 58,429.60 54,962.50 56061.75

Other Income 3,259.00 3,022.20 2,063.10 2166.26

Total Income 61,236.70 61,451.80 57,025.60 58228.01

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 Expenditure -37404.7 -36926.9 -36827.6 -37561.37

Operating Profit 23,832.00 24,524.90 20,198.00 20666.63

Interest 1,678.10 6,205.10 -6,551.30 1556.26

Exceptional Items 1,569.60 -111.1 -28.5 -29.93

Gross Profit 27,079.70 30,618.90 13,618.20 22192.96

Depreciation -11,425.60 -11,144.30 -7,143.70 -7715.20

Profit before Tax 15,654.10 19,474.60 6,474.50 14477.77

Tax -485.5 -2,267.30 1,739.30 -144.78

Profit after Tax 15,168.60 17,207.30 8,213.80 14332.99

Minority Interest -625.5 -841.2 -810.8 -648.64

Net Profit 14,543.10 16,366.10 7,403.00 13684.35

Equity Capital 10,320.10 10,320.10 10,320.10 10320.10

EPS 7.05 7.93 3.59 6.63

Charts

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Comparative Graph

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 RCOM BSE SENSEX

Outlook and Conclusion

• At the current market price of Rs.174.90, the stock trades at a P/E of 6.84x and
6.25x for FY10E and FY11E respectively.

• On the basis of EV/EBDITA, the stock trades at 4.51x and 4.40x for FY10E and
FY11E respectively.

• Price to Book Value of the stock is expected to be at 0.63 and 0.58

respectively for FY10E and FY11E.

• The Net sales of the company are expected to grow at a CAGR of 8% over
2008 to 2011E.
• RCom has introduced two revolutionary SMS tariff to its customers. The two
newly introduced SMS tariff plans are namely One Paise per SMS and
Unlimited SMS @ Re 1 per day. The new SMS tariff plans are add-on plans and
are applicable for all Reliance Mobile customers irrespective of CDMA or
GSM network as well as prepaid and post-paid customers.

• The ongoing tariff war among the domestic telecom operators is likely to
intensify further with the industry major, Reliance Communications (RCom)
reviewing its options to launch per second billing plan.

• RCom intie-up with Microsoft has entered the cloud computing space in
India.

• We recommend ‘HOLD’ in this particular scrip with a target price of Rs.192.00.

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Industry Overview

The Indian telecommunications industry is one of the fastest growing in the world
and India is projected to become the second largest telecom market globally
by 2010.

India added 113.26 million new customers in 2008, the largest globally. The
country’s cellular base witnessed close to 50 per cent growth in 2008, with an
average 9.5 million customers added every month.

According to the Telecom Regulatory Authority of India (TRAI), approximately

14.25 million telephone connections, including wireline and wireless, were
added during July 2009, taking the total number of telecom subscriber base at
the end of July 2009 to 479.07 million from 464.82 million a month before.

According to Business Monitor International, India is currently adding 8-10 million

mobile subscribers every month. It is estimated that by mid 2012, around half the
country's population will own a mobile phone. This would translate into 612
million mobile subscribers, accounting for a tele-density of around 51 per cent
by 2012.

It is projected that the industry will generate revenues worth US$ 43 billion in
2009-10.

Moreover, according to a study conducted by Nokia, the communications

sector is expected to emerge as the single largest component of the country’s
GDP with 15.4 per cent by 2014.

The Indian equipment market is estimated at US$ 24 billion in FY09. Finnish giant
Nokia is the market leader, with over US$ 3.4 billion revenues last fiscal, followed
by Ericsson at US$ 2.11 billion.

Growth

According to a Frost & Sullivan industry analyst, by 2012, fixed line revenues are
expected to touch US$ 12.2 billion while mobile revenues will reach US$ 39.8
billion in India.

India has become the second country in the world to have more than 100
million CDMA-based (code division multiple access) mobile phone subscribers
after the US, which has 157 million CDMA users.

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Telecom operators on the popular GSM-based platform added 9.3 million
subscribers in August 2009. India continues to be the world’s fastest-growing
mobile market and the total number of GSM users in the country has risen to
335.4 million as of August-end as per data released by the Cellular Operators’
Association of India (COAI).

Value-Added Services Market

Currently, mobile value-added services (MVAS) in India accounts for 10 per cent
of the operator's revenue, which is expected to reach 18 per cent by 2010.
According to a study by Stanford University and consulting firm BDA, the Indian
MVAS is poised to touch US$ 2.74 billion by 2010.

Major Investments

The booming domestic telecom market has been attracting huge amounts of
investment which is likely to accelerate with the entry of new players and launch
of new services.

• Norway-based telecom operator Telenor has bought a 60 per cent stake

in Unitech Wireless for US$ 1.23 billion.
• BSNL, India's leading telecom company in revenue terms, will put in about
US$ 1.16 billion in its WiMax project.
• Vodafone Essar will invest US$ 6 billion over the next three years in a bid to
increase its mobile subscriber base from 40 million at present to over 100
million.
• Telecom operator Aircel, which launched GSM mobile services in
Bangalore in February 2009, plans to invest US$ 220.58 million over the next
year to set up base stations across the state.
• The American Tower Corporation (ATC) has made an offer to acquire
Aircel’s tower business, which has about 12,000 towers.
• Reliance Communications has signed a telecom infrastructure sharing
agreement with S Tel, a new telecom operator. The deal, which covers
telecom towers, transmission and fibre backbone, will be executed by
RCom through its tower subsidiary, Reliance Infratel.
• Bharti Airtel will invest US$ 126.5 million to ramp up its networks in the
Assam and Northeast circles in 2009-10.
• Etisalat DB Telecom India (erstwhile Swan Telecom) and Reliance
Communications have entered into a long-term passive infrastructure
sharing agreement worth over US$ 2.1 billion, spread over a period of ten
years.
• Loop Mobile, formerly known as BPL Mobile plans to invest around US$ 75
million in its Mumbai operations.

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Manufacturing

India's telecom equipment manufacturing sector is set to become one of the

largest globally by 2010.

Mobile phone production is estimated to grow at a CAGR of 28.3 per cent from
2006 to 2011, totalling 107 million handsets by 2010. Revenues are estimated to
grow at a CAGR of 26.6 per cent from 2006 to 2011, touching US$ 13.6 billion.

Rural Telephony

Rural India had 76.65 million fixed and Wireless in Local Loop (WLL) connections
and 551,064 Village Public Telephones (VPT) as on September 2008. Therefore,
92 per cent of the villages in India have been covered by the VPTs. Universal
Service Obligation (USO) subsidy support scheme is also being used for sharing
wireless infrastructure in rural areas with around 18,000 towers by 2010.

Policy Initiatives

The government has taken many proactive initiatives to facilitate the rapid
growth of the Indian telecom industry.

• 100 per cent foreign direct investment (FDI) is permitted through the
automatic route in telecom equipment manufacturing.
• FDI ceiling in telecom services has been raised to 74 per cent.
• Introduction of a unified access licensing regime for telecom services on a
pan-India basis.
• Introduction of mobile number portability in a phased manner, starting in
the fourth quarter of 2008.
• The government is implementing a program of connecting 66,822
uncovered villages under the Bharat Nirman programme. The government
will invest US$ 2 billion to set up 112,000 community service centres in rural
India to provide broadband connectivity in 2008-09.
• The Department of Telecommunications (DoT) has stated that foreign
telecom companies can bid for 3G spectrum without partnering with
Indian companies. Only after winning a bid, would they need to apply for
unified access service licence (UASL) and partner with an Indian
company in accordance with the FDI regulations.

The Road Ahead

The target for the 11th Plan period (2007-12) is 600 million phone connections
with an investment of US$ 73 billion. Apart from the basic telephone service,

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there is an enormous potential for various value-added services. In fact, the real
potential for telecom service growth is still lying untapped.

According to the CII Ernst & Young report titled 'India 2012: Telecom growth
continues', revenue from India's telecom services industry is projected to reach
US$ 54 billion in 2012, as against US$ 31 billion in 2008.

____________________________________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation
for the purchase or sale of any financial instrument or as an official confirmation of any
transaction. The information contained herein is from publicly available data or other
sources believed to be reliable but we do not represent that it is accurate or complete and it
should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s
affiliates shall not be in any way responsible for any loss or damage that may arise to any
person from any inadvertent error in the information contained in this report. This document
is provide for assistance only and is not intended to be and must not alone be taken as the
basis for an investment decision.

Firstcall India Equity Research: Email – info@firstcallindia.com

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