Reliance Communication Ltd.

Reliance Communication Ltd. Result Update Q3FY08 Industry : Telecom

CMP : Rs 613.00

Price Target : Rs 774

Buy Result Analysis :

Analyst: Brijesh Rajvanshi +91 22 30286400 [email protected]

Current Recommendation CMP (INR) Target Price (INR)

Buy 613.00 774.00

Key Data

Rcom reported numbers for Q3FY08 which were below our expectations. Total revenues grew by 6.5% q-o-q and 29.8% y-o-y basis driven by a moderate growth of 6.3% q-o-q in wireless revenues, 4% q-o-q growth in enterprise business and flat growth of 1% in global revenues. EBITDA margins improved by 50 bps to 43.2% q-o-q backed by lower network operating costs and SG&A expenses during the quarter. PAT margins stood strong at 28.6% due to the negative finance charges on account of forex gains.

Segment-wise Performance: ➚

Wireless business: During the quarter Rcom added over 4.64mn subscribers comprising both CDMA & GSM. ARPU has slipped sharply by 6.1% q-o-q as the company continues to expand its coverage deeper in rural areas. MOU has also dropped by 8.4% to 449 minutes due to the initiative of the company to rationalize its tariff plans. We believe the pressure on ARPU will continue to be there but economies of scale and cost efficiencies would help it to offset the impact of decreasing ARPU.

➚

Global Business: Stiff competition on ILD & Global cards business and increasing pressure on RPM in NLD segments have impacted the volume growth on both segments. While the ILD volume has just grown by 3.5% q-o-q, NLD traffic has registered a negative growth of 1% q-o-q during the quarter ending Dec’2007.

➚

Enterprise Business: During the quarter Rcom added 109000 lines to its Enterprise segment. ARPL (Average revenue per line) declined drastically to Rs 1,797, a drop of 7.8% q-o-q. EBITDA margins continue to be steady at 48.7%.

Bloomberg code RCOMIN@IN Reuters code RLCM.BO BSE code 532712 NSE code RCOM Face Value (INR) 5.00 Market Cap. (INR Mn.) 1265248.00 52 Week High (INR) 844.00 52 Week low (INR) 371.25 Average Monthly Volume (No.) 8909181 Scrip Scan Equity (Rs mn) FY09 EPS (INR) FY010 EPS (INR)

10320.00 252.00 352.00

Shareholding as on 31.12.07

(%)

Promoter FIIs FIs Corporate Holdings Public Government Total

66.16 13.39 8.53 2.29 9.58 0.05 100

Key Developments : ➚

Rcom received license and spectrum to provide GSM service in 14 circles on a payment of Rs 1651 cr. Rcom expects to launch its GSM service on pan India level with in a period of one year. Apart from it, Rcom is also exploring the possibility of listing Flag after the completion of Yipes with it.

➚

Capex Guidance: The Company has revised its capex guidance for FY08 to $ 5.2bn from earlier guidance of $ 4.5bn due to license fees paid for GSM in 14 circles and Yipes acquisition. For the year FY09, it has given a capex guidance of around $ 6bn.

Returns (%) 1M Absolute (%) Rel. to Sensex (%)

February 1, 2008

3M

-17.9 -23.4 -4.1 -11.7

6M 1YR 9.9 27.1 -6.6

3.4

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Reliance Communication Ltd.

Outlook & Valuation We expect Rcom to benefit from its dual offerings on pan India level as it would help it to increase its market share of net additions and further improve its market share. Rcom is also in process of exploring all possibilities to unlock the value in its subsidiaries. We expect apart from its core business growth, listing of Reliance Infratel and Flag Telecom would help it to unlock the value. At current market price, stock trades at 24.3x and 15.9x of its FY09E and FY10E earnings of Rs 25.2 and Rs 35.2 respectively. We recommend “BUY” with a 12 months price target of Rs 774.

Financials Summary Particulars

(Rs.Mn) Q3FY08

Q2FY08A

Q3FY07A

FY07A

FY08E

FY09E

FY10E

Total Revenues

58974

55849

44785

174360

230721

306050

397536

Intersegment charges

10232

10064

7232

29677

39457

49274

64003

Net Revenues

48742

45785

37553

144683

191265

256776

333532

% Change YoY

29.8

34.4

32.2

34.3

29.9

% Change QoQ

6.5

Total Operating Expenditures

27677

26167

22281

87474

109348

146362

188446

EBITDA

21065

19618

15272

57209

81916

110414

145087

131.3

43.2

34.8

31.4

39.5

42.8

43.0

43.5

% Change YoY % Change QoQ EBITDA Margin (%) Interest & Finance Cost Dep. & Amortisation PBT & Extraordinary Items Tax Ad. Net Profit

37.9 7.4 43.2

42.8

-1518

-1125

-657

4

425

2273

2273

7252

6754

6524

24653

35781

47334

56506

15331

13989

9405

32552

45710

60806

86307

1379

698

130

611

6399

6889

11220

13729

13046

9244

31362

40381

53766

74937

606.3

28.8

33.1

39.4

% Change YoY

48.5

% Change QoQ

5.2

Net Profit Margin (%)

40.7

28.2

28.5

24.6

21.7

21.1

20.9

22.5

2064.0

2044.6

2044.6

2044.6

2064.0

2130.7

2130.7

EPS

6.8

12.5

4.5

15.6

24.9

25.2

35.2

Adj. EPS

6.7

6.4

4.5

15.3

19.6

25.2

35.2

Equity -No. of shares(mn)

Disclaimer: The information contained in this report is obtained from reliable sources and is directed at market professionals and institutional investors. In no circumstances should it be considered as an offer to sell/buy or, a solicitation of any offer to, buy or sell the securities or commodities mentioned in this report. Networth, and/or its affiliates, may or may not have position in securities mentioned in this report. No representation is made that the transactions undertaken based on the information contained in this report will be profitable, or that they will not result in losses. Networth Stock Broking Ltd. and/ or its representatives will not be liable for the recipients’ investment decision based on this report.

Networth Stock Broking Ltd., 63-B, Mittal Court, 224, Nariman Point, Mumbai – 400021. February 1, 2008

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Result Update