Rcom

Reliance Communications: Buy
K. Venkatasubramanian

An investment with a 1-2 year perspective can be considered in the stock of Reliance Communications (RCom), considering the recent correction in its valuations and strong growth prospects for the company.

With an end-to-end telecom services model spanning voice, data and international connectivity and its recent foray into IPTV, RCom appears well placed to deliver strong earnings growth over the medium term. At Rs 667, the stock trades at 28 times its FY08 earnings and 22 times its FY09 estimated earnings. RCom’s licence win, which enables it to become a national GSM operator, strong growth in the data segment and increased revenue contribution from Yipes Communications provide scope for strong earnings growth over the next 18 months.

RCom adds about one million subscribers a month in its existing operations. The company’s recent licence win to offer GSM services in 14 additional circles will give it a nationwide footprint. Contracts for setting up the network have already been awarded to Huawei Technologies. Over time, this could provide RCom with dual revenue streams from the GSM and CDMA businesses, with a presence in high revenue metros. The revenue realisation per minute, at 74 paise, has remained stable over the past year, despite the industry-wide trend of falling realisations and tariffs.

RCom’s non-voice business is also fairly substantial. The broadband business generates an average revenue per line of Rs 1,948, among the highest in the country, and is registering growth on the back of strong enterprise offtake. The buyout of US-based Yipes Communication through FLAG Telecom signals its intent to become an international player in data communications. FLAG gives the company global connectivity through its huge undersea cable network.

Yipes connects 14 key cities in the US, a very data intensive market, providing substantial high margin revenue opportunity. Yipes also has top stock exchanges and traders in its client roster. The company has also sold a 5 per cent stake in Reliance Telecom Infrastructure (the tower business) for Rs 1,400 crore.

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Any further stake sale may unlock more value for investors in the stock. RCom has also joined the IPTV (Internet protocol television) bandwagon with the announcement of a $500 million deal with Microsoft for launching this service. Pressure on tariffs, penetrating new circles where there are established players, and any regulatory pressure on offering dual technology are risks to this recommendation.

Swedish firm Wayfinder Systems, which provides GPS-based location and navigation services, is entering into an allinace with Reliance Communications to boost its spread in the Indian telecom market, sources have said.

A formal announcement of the agreement will be made by August, they said. The tieup will be for both Rcom’s CDMA and GSM subscribers.

After the deal, Wayfinder will provide services to Rcom’s CDMA subscribers to start with and them to its GSM customers.

Meanwhile, Wayfinder has also initiated talks with Tata Tele services (TTSL) for a similar tie up. Wayfinder had a pact with Bharati Airtel which it signed last year.

Reliance Communications Ltd has announced that the Reliance Infratel Ltd, (the "Company"), subsidiary of the Company proposes an initial public offering of 8,91,64,100 Equity Shares of Rs 5 each ("Equity Shares") for cash at a premium (the "issue") to be decided through the 100% book building process. The Issue will constitute 10.05% of the post-Issue paid-up
equity capital of the Company.

The Company has filed its Draft Red Herring Prospectus ("DRHP") with the Securities and Exchange Board of India ("SEBI"), on February 04, 2008.

At least 60% of the Issue to the public shall be allocated on a proportionate basis to Qualified Institutional Buyers ("QIBs"), of which 5% shall be available for allocation to Mutual Funds only and the remaining QIB Portion shall be available for allocation to all the QIB Bidders, including Mutual Funds, subject to valid Bids being received at or above the Issue Price. Further, not less than 30% of the Issue shall be available for allocation on a proportionate basis to the Retail Individual Bidders and not less than 10% of the Issue shall be available for allocation on a proportionate basis to Non-Institutional Bidders, subject to valid Bids being received at or above the Issue Price.

The Company is part of the Reliance Anil Dhirubhai Ambani group and its business is to build, own and operate telecommunication towers and related assets at designated sites and to provide these passive telecommunication infrastructure assets on a shared basis to wireless service providers and other communications service providers under long-term contracts.

These customers use the space on the Company's telecommunication towers to install their active communication-related equipment to operate their wireless communications networks.

The Issue proceeds are proposed to be utilized to finance the development of passive infrastructure sites and for general corporate purposes.

The Equity Shares of the Company are proposed to be listed on the Bombay Stock Exchange Ltd ("BSE") and the National Stock Exchange of India Ltd ("NSE").

JM Financial Consultants Pvt Ltd, J.P. Morgan India Pvt Ltd, ABN AMRO Securities (India) Pvt Ltd, Deutsche Equities India Pvt Ltd, Enam Securities Pvt Ltd, ICICI Securities Ltd, Lehman Brothers Securities Pvt Ltd, Macquire India Advisory Services Pvt Ltd and UBS Securities India Pvt Ltd are acting as the Book Running Lead Managers to the Issue whilst HSBC Securities and Capital Markets (India) Pvt Ltd, Kotak Mahindra Capital Company Ltd and SBI Capital Markets Ltd, are acting as Co-Book Running Lead Managers Amarchand & Mangaldas & Suresh A Shroff & Co. is advising the Company whilst Linklaters Allen & Gledhill Pte Ltd and Khaitan & Co are advising the BRLMs and CBRLMs in relation to the Issue.

That sounds interesting.
But what about VSNL which is also looking for its mega IPO soon. What are your views on telecom market over all will it sustain with expected profits or money will just go into building infrastructure and comption would erode some of the profits.

I am not very much exited about the high end technolgies is indian market ready to buy IP telephony or vedio calls or its just limited to specific category of consumers.

Technically i had concern over the rally RCOM made but now when it started down I am already accumulating and may be buy more tommarrow.

thanks for the valued information. Seems you already baught your share.

Yes i bought Rcom at 590 1k shares SNL ipo coming soon ... would be bigger than rpower as of now