India's most integrated telecom service provider, Reliance Communication will
continue to ride the fast growth in Indian telecom industry. Value-unlocking
initiatives in the form of hive off of tower business and listing of the Flag
Telecom will also help the scrip to outperform the market.
Actual
consolidated
EPS for March
2006
Rs 2.3
Projected
consolidated
EPS for March
2008
Rs 23.3
Actual
consolidated
EPS for March
2007
Rs 15.6
The right number
The company will continue to ride the fast growth in Indian telecom industry, besides unlocking value through various initiatives
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| Buy | Reliance Communication |
| BSE Code | 532712 |
| NSE Code | RCOM |
| Bloomberg | RCOM@IN |
| Reuter | RLCM.BO |
| 52-week High/Low | Rs 535 / Rs 215 |
| Current Price | Rs 517 (as on 29th June 2007) |
Reliance Communication (RComm) is India's largest integrated communications service provider in the private sector with over 30 million individual consumer, enterprise, and carrier customers. It has pan-Indian operations and provides wireless, wireline and long distance (domestic as well as international) voice, data, and internet communication services.
The wireless network of the company covers over 6,000 towns across India, providing coverage of over 54% of the population. This is the largest wireless network in India in terms of coverage and capacity.
RComm has a reliable, high-capacity, integrated (both wireless and wireline) and convergent (voice, data and video) digital network. It is capable of delivering a range of services spanning the entire infocomm (information and communication) value chain, including infrastructure and services — for enterprises as well as individuals, applications, and consulting.
Impressive results
Total consolidated revenue for the quarter ended March 2007 increased by 3% on q-o-q to Rs 3873.57 crore. Operating profit margins (OPM) was almost flat around 40.6%. PAT expanded by 11% to Rs 1024.41 crore.
On y-o-y basis, it has recorded a 33% growth in revenue to Rs 3873.57 crore. On the back of substantial decrease in access charges & license fee to 25.8% from 35.4% (as a % of total revenue), OPM improved significantly by 690 bps to 40.6%. OP increased by 60% to Rs 1571.87 crore. With interest income of Rs 39.15 crore against interest cost of Rs 42.47 crore and 17% increase in depreciation cost to Rs 637.76 crore and with EO income of Rs 2.75 crore against EO expense of Rs 37.40 crore, PBT after EO stood at Rs 1039.35 crore, up 149% y-o-y. After providing for Rs 14.94 crore for tax (Rs 13.80 crore), PAT stood at Rs 1024.41 crore against Rs 402.85 crore up 154% y-o-y.
For FY 2007, RComm recorded a 34% growth in revenue to Rs 14262.47 crore. On the back of substantial decrease in access charges & license fee, network cost and staff cost (as a % of total revenue), OPM improved significantly by 1610 bps to 38.7%. The access charges & license fee, network expenses and staff cost as a % of revenue declined by 1150 bps, 270 bps and 150 bps respectively to 26.5%, 11.7% and 6.4%. Thus OP increased by 130% to Rs 5514.81 crore. With other income of Rs 205.82 crore (up 48%), 100% decrease in interest cost to Rs 0.37 crore and 45% increase in depreciation cost to Rs 2465.30 crore and with EO loss/expense of Rs 30.24 crore (against Rs 37.43 crore), PBT after EO stood at Rs 3224.72 crore, up 575%. After providing for Rs 61.55 crore for tax (Rs 33.73 crore) PAT stood at Rs 3163.17 crore, up 613%.
Wireless services-wired to strong growth
This business accounts for the largest share of RCL's revenues.
As at 31st March 2007, the company had 28 million wireless customers in aggregate, representing a 17.4% market share of the All-India wireless market. In Q4 FY07 the company has lost 19.73 lakh customers against addition of 40 lakh customers in Q3 FY07. However in Q4 FY07, the company has deactivated 55.80 lakh customers due to re-verification process.
For Q4 FY07, the revenues of the wireless business contributing 75% of the total revenue, increased to Rs 2968.61 crore, up 40% on Y-o-Y basis. The PBIT increased by 68% to Rs 698.81 crore with PBIT margin of 23.5%.
For FY07 the revenue from this segment increased by 46% to Rs 10727.61 crore with PBIT margin of 14.5%.
Global Services-performanc
RCcomm offers national and international long distance calling services through this business unit. This business is primarily wholesale, offering carriage and termination to other carriers as well as on an inter-segment basis to other business units of RCcomm. RCcomm entered the long distance market in India in mid-2003, and has become the largest carrier of international voice minutes, with a market share of over 40%. RCcomm owns and operates through FLAG, the largest private submarine cable system in the world, connecting 28 countries from the East coast of the US to Europe, the Middle East, India, South and East Asia, through to Japan. Through its global submarine cable systems, FLAG and FALCON, RCcomm is the largest provider of international bandwidth in Asia and the Middle East.
During Q4 FY07 the revenue from this segment declined by 9% to Rs 1293.98 crore while the PBIT surged by 124% Y-o-Y to Rs 188.29 crore with PBIT margin of 14.6%. For FY07 the revenue from this segment remained almost same to Rs 5176.98 crore with PBIT margin of 10.5%.
Broadband services-all round broadening up
Through this business unit, RCL offers a range of enterprise voice, data, video, internet and IT infrastructure services, including national and international private leased circuits, broadband internet access, audio and video conferencing, MPLS-VPN, Centrex and managed internet data centre (IDC) services. The company's enterprise customer base includes 750 of the top 1,000 Indian enterprises and MNCs. In the consumer segment, RCL offers fixed line phone services and broadband internet access services.
The number of access lines increased to 620,000 in Q4 FY2007 and the number of buildings directly connected to the Reliance network increased to 488,600. The company is the market leader in IDC services (Reliance Data Center) with over 50% market share and is also the leading provider of MPLS-VPN and Centrex solutions.
In Q4 FY07, the Broadband achieved revenue growth of 69% to Rs 329.14 crore and PBIT stood at Rs 109.74 crore (Rs 8.74 crore in Q3 FY07) with PBIT margin of 33.3%. For FY07 the revenue from this segment increased by 123% to Rs 1144.14 crore with PBIT margin of 21.4%.
Cheap CDMA handsets to benefit significantly
RComm can continue to grow impressively its CDMA business going forward, while making a transition towards a GSM-centric network strategy in the long run. Handset pricing is the key factor shaping the addressable market for wireless in developing countries like India. The key obstacle to CDMA growth in developing markets had been the high cost of handsets.
The recent drop in CDMA handset pricing dramatically expands the addressable market for RComm’s CDMA business substantially. RCOM launched Rs 777 (US $ 18 handset) RComm-branded, ZTE produced sets in early May and has signed up one million customers in a month. RComm is also trying to blur the line between GSM and CDMA by offering SIM-based CDMA phones and setting the price of a new CDMA handset in line with used GSM handsets.
The development of low-end CDMA models and the repositioning of CDMA towards more data-centric, wireless-access-
Flagging off Flag telecom
RComm owns the world's largest submarine fibre optic cable system, FLAG Telecom, connecting countries across the globe. The company now plans to unlock value of its global business FLAG Telecom in the next six months through a listing on London’s AIM.
Flag is well positioned to capture current demand in Europe, the Middle East and South East Asia. These markets will be key drivers for both voice and data over the next few years. The recent opening of the Middle Eastern and African markets will further aid demand for data and voice. RCOM enjoys a head start in the Middle East, others (like VSNL) are unlikely to catch up before soon.
Listing of FLAG telecom will unlock significant value for the company.
RCOM has turned around the performance of FLAG Telecom over the past year and aligned it with the Indian franchise. FLAG Telecom sees enormous growth potential in bridging the digital divide and had announced nearly Rs 7,000 crore (US$1.5 billion) Next Generation Network project which on completion will make the company the largest fully IP-enabled global undersea cable system operator touching 80% of the world population.
To also unlock tower business
In the past wireless tower was merely a support infrastructure for wireless companies. Now the wireless tower business is coming to the fore as a legitimate and lucrative business model on its own. Standalone tower business is likely to be very successful in India, with high-quality annuity revenues and cash flows. The strong growth bias will be led by massive rise in subscribers and minutes of use forecast in next five years and new use for towers like 3G/WiMax.
RComm’s board has approved a scheme of transfer under which its wireless towers and related infrastructure will be transferred to a subsidiary. To put the quantum of potential savings into perspective, as per RCOM’s estimates, sharing of new cell sites could result in capex savings of 30% and opex savings of 30-36%, while the sharing of existing cell sites could result in capex savings of 10% and opex savings of 15-18%.
It took the first step in this direction with the appointment of a merchant banker. As reported by the press, a wide number of potential strategic investors, including the Carlyle Group and American Tower (AMT), are among potential bidders.
The Indian telecom tower business is one of the most attractive infrastructure stories in Asia. RCOM will be the first operator to monetise tower assets via a strategic investment by private equity players/tower operators.
Strong subscriber additions continue
Reliance Communications, added a record 1.4 million net subscriber additions on its mobile network during the month of May 2007. With a slew of attractive offers launched for during the month of May, Reliance Communications registered a 40% growth in net subscriber additions over previous month.
The sew of new initiatives include zero roaming tariffs, most affordable lifetime validity recharge and ILD call rates at par with domestic calling. These value propositions were supported by segmented offerings like Rs. 1888 colour FM radio, Rs. 1234 color and Rs. 777 monochrome handsets.
Valuation
In FY 2008 we expect RComm to register sales and net profit of Rs 19454.01 crore and Rs 4766.12 crore. EPS works out to Rs 23.3. The share price trades at Rs 517, giving a P/E of 22.2 times FY 2008 projected EPS. Indian telecom sector is likely to continue to grow at a fast rate going forward and the RComm scrip will continue to outperform the market indices.
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