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 A A OPM(%) 44 42 39 40 NPM(%) 36 28 23 24 ROE(%) 22 12 9 9 ROCE(%) 12 7 6 6 P/BV(x) 5.91 0.77 0.63 0.58 P/E(x) 27.2 6.56 6.84 6.25 EV/EBDITA(x) 4.83 3.88 4.51 4.40 Debt Equity(x) 0.82 0.60 0.60 0.60 Key Data: Sector Telecom Face Value 5.00 52 wk. High/Low 359.00/131.35 (Rs.) Volume (2 wk. 1510751 V.S.R. Sastry Vice President Equity Research Desk 91-22-25276077 vsrsastry@firstcallindiaequity.com Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com SYNOPSIS Reliance Communications Limited is India s largest integrated communications service provider in the private sector with 92 million individual, enterprise, and carrier customers. The company operates pan-india across the full spectrum of wireless, wireline, and long distance, voice, data, video and internet communication services. The company also has an extensive international presence through the provision of long distance voice, data and internet services and submarine cable network infrastructure globally. The business of Reliance Communications is organized into three strategic customerfacing business units: Wireless, Global, and Broadband. The company has introduced two revolutionary SMS tariff to its customers. 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 2011E. Share Holding Pattern:
Table of Content Investment Highlights... 3 Peer Group Comparison... 8 Financials... 9 Charts... 11 Outlook and Conclusion... 13 Industry Overview... 14
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.
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 addon 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
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 3Genabled 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
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 Groupcontrolled 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
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 Name of the company CMP (As on 2 Dec, 2009) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend(%) Reliance Communications Ltd 174.90 360997.09 29.29 5.97 0.77 16
Idea Cellular 53.35 165390.1 3.78 14.11 3.30 - Tata Communications 383.25 109226.3 14.94 25.65 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
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
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
Comparative Graph
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.
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.
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.
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,
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 B. Harikrishna Banking & Financial Services B. Prathap IT C.V.S.L.Kameswari Pharma U. Janaki Firstcall Rao India Equity Advisors Pvt Ltd Capital Goods; Real & Infra D.Asha Kiran Kumar Auto E. Swethalatha Oil & Gas A.Rajesh FMCG Rachna Twari Diversified