Reliance Communications (Q4 FY11) India Infoline Research Team / 11:00 , May 31, 2011 CMP Rs88, Target

Rs96, Upside 9.1% Adjusted for Rs25.5bn of IRU-related upfront revenue recognition, revenues grew 6.9% qoq, ahead of our estimate and highest in past 7 Qs Accordingly, underlying margin adjusted for IRU EBIDTA worth ~Rs25bn at ~30%, below our estimate Wireless revs grew 3.3%-in line driven by steady 44p RPM and 3.2% jump in total MOUs; ARPU drop to Rs107 also in line PAT misses forecast on higher than expected net interest charges Incurred Rs43bn capex in FY11 (Rs30bn ex-3G); guides for Rs15bn capex in current fiscal Cut FY12/13 EPS estimates and do not foresee any near-term triggers for the stock; retain Market Performer with a revised 9-mth TP of Rs96

Result table

(Rs m)

Net sales Access & license fees (9,261)

Q4 FY11 Q3 FY11 % qoq Comments Adjusted for Rs25.5bn of upfront IRU fees, revs grew 6.9% qoq, ahead of our 2.4% est and highest in 7 Qs 78,760 50,041 57.4 (9,470) (2.2) 2G expansion, higher fuel & power charges and increased DTH content costs led to higher N/W opex

Network opex Staff Other expenses Operating profit OPM (%) Depreciation Interest Other income PBT Tax Effective tax rate (%) Minority/ Associates Adjusted PAT Adj. PAT margin (%) Extra ordinary items

(15,331) (4,067) (8,881) 41,220 52.3

(12,493) (3,558) (7,840) 16,680 33.3

22.7 14.3 13.3 147.1 1,900 bps

(35,500) (10,338) 243.4 (2,234) (1,296) 72.4 3,486 (1,711) 49.1 (212) 1,563 2.0 123 5,046 214 (457) 4,803 9.6 (30.9)

Adjusted for Rs25bn of IRU-related EBIDTA, underlying margin @30% Depreciation higher due to change in a/c policy wrt treatment of IRUs

(53.6) (67.5) -761 bps

Reported PAT

1,686

4,803

(64.9)

Higher than est interest cost led to PAT miss

Source: Company, India Infoline Research Wireless revenues in-line; ex-IRU adj, revenues grew 6.9% Rcom reported Q4 wireless revenue growth of 3.3% qoq, largely in line and highest in past 7 Qs; if equalized for number of days in the Q, wireless rev growth at an impressive 5.5% qoq. The company continues to cut free minutes from system and focus on profitable MOU growth with rev/min now steady at 44p for 5 consecutive Qs. A 4% decline in MOU/sub led to 3.6% drop in ARPUs which came in line with our estimate of Rs107. MNP has failed to make sizable impact with a negligible 0.08% post-paid churn. Company now has 9,000 3G sites in 330 towns. Changes in IRU recognition policy inflates Global revenues & EBIDTA Rcom has changed the way it recognizes license income from exclusive and IRU contracts from straight line basis on assured period of IRU contracts to upfront bookings; this led to increased global revenues by Rs25.5bn sans which growth would have been at 3.8% qoq, ahead of our 1.5% est. Broadband revenues surged 11.7% qoq, also much ahead of our forecast but EBIDTA margin fell ~400bps as demand environment remains challenging and need for upfront N/W opex without commensurate revenues relating to govt contracts in APDRP. Higher than expected interest cost along with lower margin led to a PAT miss. Stock lacks near-term catalysts but valuation may offer support Rcom net rev/min has held up well in the past several quarters even as Bharti has shown moderate erosion over the same period. However, Rcom FY12 profit may still be under pressure as ARPU decline continues, albeit at a steady pace. As 3G roll out gathers momentum, we do expect incremental ARPU support to kick in especially in FY13. We believe the stock lacks near-term catalysts and based on FY11 actual performance, we cut our FY12/13 EPS estimates and retain to Market Performer with a revised 9-mth TP of Rs96. Financial summary

Y/e 31 March (Rs m) Revenues yoy growth (%) Operating profit OPM (%) Pre-exceptional PAT Reported PAT yoy growth (%) EPS (Rs) P/E (x) P/BV (x) EV/EBITDA (x) Debt/Equity (x) ROE (%) ROCE (%)

FY10 214,964 (3.4) 71,846 33.4 18,380 46,550 (23.0) 22.6 3.9 0.4 6.6 0.7 4.3 5.0

FY11E 224,304 4.3 84,110 37.5 13,403 13,457 (71.1) 6.5 13.5 0.4 5.8 0.8 3.1 3.4

FY12E 245,148 9.3 89,969 36.7 13,118 13,118 (2.5) 6.4 13.8 0.4 4.6 0.6 2.9 3.5

FY13E 270,529 10.4 102,260 37.8 20,814 20,814 58.7 10.1 8.7 0.4 3.2 0.5 4.5 4.7

Source: Company, India Infoline Research