4QFY2012 Result Update | Telecom

May 28, 2012

Reliance Communication
Performance highlights
(` cr) Net sales EBITDA EBITDA margin (%) PAT
Source: Company, Angel Research

NEUTRAL
CMP Target Price `67 4QFY11 5,331 1,592 29.9 156 % chg (yoy) (0.4) 2.5 87bp 111.3

4QFY12 5,310 1,632 30.7 330

3QFY12 5,055 1,614 31.9 186

% chg (qoq) 5.0 1.1 (119)bp 77.4

Investment Period
Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code

Telecom 13,901 35,839 1.8 110/61 2,497,572 5 16,417 4,986 RLCM.BO RCOM@IN

For 4QFY2012, Reliance Communication (RCom) reported modest revenue growth but stood weak on the operational front due to a 23% qoq increase in network-related expenses on the back of some lumpy maintenance expenses during the quarter. Despite hiking voice tariffs for GSM as well as CDMA subscribers, average revenue per user (ARPM) of the company witnessed 2.2% qoq reduction because of increased competitive intensity in the industry. Due to lack of triggers except the monetization of its Infratel business or listing of cable business in Singapore, which can cut down its debt by more than half, we remain Neutral on the stock. Quarterly performance: RCom reported revenue of `5,310cr, up 5.0% qoq. Wireless revenue came in at `4,506cr, up 1.3% qoq on the back of qoq 1.3% qoq growth in MOU to 227 min. ARPU slipped by 1.0% qoq to `99 in 4QFY2012 from `100 in 3QFY2012. Overall EBITDA margin declined by 119bp qoq to 30.7%. PAT came in at `330cr, up 77.4% qoq, primarily aided by tax write-back of `119cr in 4QFY2012 vs. tax expense of `14cr in 3QFY2012 and gain on minority interest front of `129cr in 4QFY2012 vs. expense of `55cr in 3QFY2012. Outlook and valuation: The company is trying to slash free minutes in the network to aid the overall ARPU profile of the company. Going forward, we expect RComs mobile segment to record a 7.5% CAGR in subscribers over FY201114E and ARPM to stabilize at `0.44/min in FY2013 and FY2014. Currently, the company is striving to reduce the debt level in its books and has again kept its stance of selling stake in its tower assets, which might help the company to deleverage its balance sheet and reduce debt and can be a positive trigger to the stock price. However, various other announcements of selling tower assets were made earlier as well, but none of them materialized. Also, RCom is eying to list its cable business in Singapore. We maintain our Neutral view on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 67.9 9.3 7.4 15.4

Abs. (%) Sensex RCom

3m

1yr

3yr 14.8 (77.3)

(7.4) (10.1) (28.5) (20.8)

Key financials (Consolidated, Indian GAAP)

Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

FY2010 21,614 (2.8) 4,704 (20.6) 33.5 23.0 2.9 0.3 10.8 4.7 1.8 5.3

FY2011 22,430 3.8 1,346 (71.4) 37.5 6.5 10.4 0.3 3.3 2.4 2.0 5.5

FY2012E 19,775 (11.8) 923 (31.4) 29.7 4.5 15.0 0.4 2.5 2.6 2.5 8.4

FY2013E 22,288 12.7 911 (1.4) 32.1 4.4 15.3 0.4 2.4 3.6 2.0 6.3

FY2014E 23,871 7.1 1,237 35.8 32.7 6.0 11.2 0.4 3.2 4.3 1.7 5.2

Ankita Somani
+91 22 3935 7800 Ext: 6819 ankita.somani@angelbroing.com

Please refer to important disclosures at the end of this report

Reliance Communication | 4QFY2012 Result Update

Exhibit 1: 4QFY2012 Financial performance (Consolidated, Indian GAAP)

(` cr) Net revenue Operating expenditure EBITDA Dep. and amortization EBIT Interest charges Exceptional items Other income PBT Income tax PAT Share in earnings of associate Minority interest Adj. PAT EPS (`) EBITDA margin (%) EBIT margin (%) PAT margin (%)
Source: Company, Angel Research

4QFY12 5,310 3,678 1,632 970 662 580 (1) 84 (119) 203 (129) 330 1.6 30.7 12.5 6.2

3QFY12 5,055 3,441 1,614 978 636 381 255 14 241 54.6 186 0.9 31.9 12.6 3.7

% chg(qoq) 5.0 6.9 1.1 (0.8) 4.1 52.0

4QFY11 5,331 3,739 1,592 1,020 572 223 (12) -

% chg (yoy) (0.4) (1.6) 2.5 (4.9) 15.7 159.4

FY2012 19,775 13,893 5,883 3,978 1,904 1,593 0 567

FY2011 22,430 14,026 8,404 6,504 1,900 1,072 (12) 677 1,518 12 1,506 0 160.5 1,333 6.3 37.5 8.5 5.8

% chg (yoy) (11.8) (1.0) (30.0) (38.8) 0.2 48.6

(67.2) (946.1) (15.7) (335.7) 77.4 77.4 (119)bp (12)bp 256bp

361 171 190 21.2 156 0.8 29.9 10.7 3.2

(76.8) (169.7) 6.9 (707.1) 111.3 111.3 87bp 173bp 308bp

878 (106) 984 60.9 926 4.5 29.7 9.6 4.5

(42.1) (1,004.6) (34.6) (100.0) (62.1) (30.5) (28.4) (772)bp 116bp (129)bp

Exhibit 2: 4QFY2012 Actual vs. Angel estimates

(` cr) Net sales EBITDA margin (%) PAT
Source: Company, Angel Research

Actual 5,310 30.7 332

Estimate 5,083 28.0 152

% Var. 4.5 271bp 118.1

Modest revenue growth

During 4QFY2012, RCom reported revenue of `5,310cr, up 5.0% qoq. Revenue performance of all the segments was decent.

Exhibit 3: Revenue break-up (Segment wise)

Segment (` cr) Wireless Global enterprise Others Eliminations Net revenue 4QFY12 4,506 2,440 270 1,905 5,310 3QFY12 4,447 2,352 229 1,976 5,055 % chg (qoq) 1.3 3.7 17.8 (3.6) 5.0 4QFY11 4,198 2,621 364 1,852 5,331 % chg (yoy) 7.3 (6.9) (25.9) 2.8 (0.4)

Source: Company, Angel Research

Wireless segment: The wireless segment registered revenue of `4,506cr, up 1.3% qoq on the back of qoq 1.3% qoq growth in MOU to 227 min. ARPM, however, declined by 2.2% to `0.44/min, whose fall was slightly arrested by subscriber growth of 2.0% qoq. Thus, ARPU slipped by 1.0% qoq to `99 in 4QFY2012 from `100 in 3QFY2012. The segments EBITDA margin improved marginally by 10bp qoq to 26.7%.
May 28, 2012

Reliance Communication | 4QFY2012 Result Update

Exhibit 4: Trend in MOU (qoq)

350 (1.3) 1.3 (2.6) 4 0

Exhibit 5: Trend in ARPM (qoq)

0.5 0.45 2.3 0.0 0.0 0.0 0.0 4 2

300

(3.6) (7.2) (6.4)

(mins)

(4.0)

(3.3)

(%)

( `/min)

250

(9.1)

(8) (12)

0.35 0.3

(2.2)

(2) (2.2) (4)

200

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

MoU (mins)

qoq growth (%)

ARPM (`/min)

qoq growth (%)

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 6: Trend in subscriber additions (qoq)

160 140 120 9.2 8.2 5.9 5.6 4 2.7 2.0 2.0 0 8.0 12

Exhibit 7: Trend in ARPU (qoq)

150 140 (3.6) (3.7) (1.9) (1.0) (1.0) 0 (2)

(`/month)

7.1

130 120 110 100 (6.7) (8.8) (6.5) (6.3)

4QFY12

(mn)

100 80 60

(%)

(6) (8) (10)

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

90

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

Total subscribers (mn)

qoq growth (%)

ARPU (`/month)

qoq growth (%)

Source: Company, Angel Research

Source: Company, Angel Research

Global enterprise segment: RCom has combined its global and broadband business under one segment called global enterprise. During the quarter, the global enterprise segment witnessed 3.7% qoq revenue growth with revenue coming at `2,440cr. EBITDA margin of this segment remained flat qoq at 24.2%.

EBITDA margin declines

During the quarter, RComs overall EBITDA margin declined by 119bp qoq to 30.7% due to a 23% qoq increase in network-related expenses on account of lumpy maintenance expenses in 4QFY2012.

May 28, 2012

4QFY12

(%)

(4)

(%)

(4)

0.4

0.0

0.0

Reliance Communication | 4QFY2012 Result Update

Exhibit 8: Segment-wise EBITDA margin^ trend (qoq)

35 30 33.3 29.0 29.9 27.4 27.1 26.6 26.6 32.4 31.8 31.9 30.7 26.7

(%)

25 20 15 10 3QFY11 4QFY11* 1QFY12 2QFY12 Consolidated 3QFY12 4QFY12

Wireless

Source: Company, Angel Research; Note: ^Excluding other income

Exhibit 9: Opex break-up

100 80 60 29.9 7.6 16.7
4.9

32.4 7.1 14.6

5.4

31.8 6.5 15.9

5.5

31.9 5.8 14.8

6.0

30.7 5.8 13.0

5.4

(%)
40 20 0

28.8 12.5 4QFY11

27.0 13.5 1QFY12

27.3 12.9 2QFY12

29.6 11.9 3QFY12

34.6 10.4 4QFY12

Access charges Network costs License fee S,G&A cost

Source: Company, Angel Research

Employee cost EBITDA margin

PAT for the quarter came in at `330cr, up 77.4% qoq, primarily aided by tax writeback of `119cr in 4QFY2012 vs. tax expense of `14cr in 3QFY2012 and gain on minority interest front of `129cr in 4QFY2012 vs. expense of `55cr in 3QFY2012. However, PAT was aided by lower depreciation expenses (`970cr in 4QFY2012 vs. `1,054cr in 2QFY2012) due to change in depreciation policy (to SLM) in its subsidiary Reliance Telecom.

Outlook and valuation

RCom hiked voice tariffs on both on-net and off-net calls for GSM subscribers; and on CDMA, the company raised tariffs on only off-net calls. Since the hike has been undertaken largely on the GSM subscriber base, the impact of the same was less as compared to its peers, as the company is primarily CDMA based and, thus, tariff hike has not showed any signs of improvement in RComs APRU. The company is trying to slash free minutes in the network to aid the overall ARPU profile of the company. Going forward, we expect RComs mobile segment to record a 7.5% CAGR in subscribers over FY201114E and ARPM to stabilize at `0.44/min in FY2013 and FY2014.

May 28, 2012

Reliance Communication | 4QFY2012 Result Update

Currently, the company is striving to reduce the debt level in its books and has again kept its stance of selling stake in its tower assets, which might help the company to deleverage its balance sheet and reduce debt and can be a positive trigger to the stock price. However, various other announcements of selling tower assets were made earlier as well, but none of them materialized. Also, RCom is eying to list its cable business in Singapore. We maintain our Neutral view on the stock.

Exhibit 10: One-year forward EV/EBITDA

250,000 200,000

EV (`cr)

150,000 100,000 50,000 0 Apr-07 EV

Apr-08 25

Apr-09 20

Apr-10 15

Apr-11 10

Apr-12 5

Source: Company, Angel Research

Exhibit 11: Recommendation summary

Company Bharti Airtel Idea Cellular RCom Reco. Neutral Neutral Neutral CMP (`) 302 93 67 Tgt. price (`) Upside (%) FY2014E P/BV (x) 1.8 1.7 0.4 FY2014E P/E (x) 14.5 16.7 11.2 FY2011-14E EPS CAGR 9.4 20.3 (2.5) FY2014E RoCE (%) 12.4 11.8 4.3 FY2014E RoE (%) 12.3 10.0 3.2 FY2014E EV/Sales 1.8 1.4 1.7

Source: Company, Angel Research

Company background
Reliance Communications (RCom), part of the Anil Dhirubhai Ambani Group, is India's fourth largest telecommunication service provider (TSP). The company offers GSM and CDMA wireless services in the country, with a subscriber base of 153mn. Other than mobile services, RCom offers broadband, wire line, DTH and passive infrastructure services. The company owns 50,000 towers to provide passive infrastructure services.

May 28, 2012

Reliance Communication | 4QFY2012 Result Update

Profit and loss statement (Consolidated, Indian GAAP)

Y/E March (` cr) Net sales Network expenditure % of net sales License fee % of net sales Access charges % of net sales Other expenses Total expenditure % of net sales EBITDA % of net sales Dep. and amortization EBIT Interest charges Other income, net Exceptional items Profit before tax Provision for tax % of PBT PAT Share in profits of associate Minority interest Adj. PAT Diluted EPS (`) FY2010 21,614 6,173 28.6 1,145 5.3 2,138 9.9 4,907 14,363 66.5 7,251 33.5 3,747 3,504 (1,186) 636 38 5,289 445 8.4 4,843 (2) 137 4,704 23.0 FY2011 22,430 5,472 24.4 1,157 5.2 2,648 11.8 4,750 14,026 62.5 8,404 37.5 6,504 1,900 1,072 677 (12) 1,518 12 0.8 1,506 0 161 1,346 6.5 FY2012 19,775 6,043 30.6 1,133 5.7 2,477 12.5 4,241 13,893 70.3 5,883 29.7 3,978 1,904 1,593 567 0 878 (106) -12.1 984 61 923 4.5 FY2013E 22,288 6,969 31.3 1,284 5.8 2,568 11.5 4,915 15,736 70.6 7,153 32.1 4,525 2,628 1,969 600 1,260 189 15.0 1,071 160 911 4.4 FY2014E 23,871 7,232 30.3 1,332 5.6 2,664 11.2 5,309 16,537 69.3 7,814 32.7 4,774 3,040 1,816 480 1,704 307 18.0 1,397 160 1,237 6.0

May 28, 2012

Reliance Communication | 4QFY2012 Result Update

Balance sheet (Consolidated, Indian GAAP)

Y/E March (` cr) Liabilities Share capital Reserves and surplus Total shareholders funds Minority interest Total debt Deferred tax liability Total liabilities Assets Gross block - fixed assets Accumulated dep. Net block Capital WIP Goodwill Investments Current assets Inventories Sundry debtors Cash and cash equivalents Other current assets Loans and advances Total current assets Less:- current liabilities Less:- provisions Total assets 545 3,312 819 2,073 5,410 12,157 14,708 4,027 73,834 517 4,002 5,327 1,146 5,086 16,078 12,686 2,490 78,950 566 3,584 1,079 2,957 7,895 16,081 14,700 3,491 74,488 580 3,969 2,414 2,359 7,801 17,122 16,382 3,343 72,194 670 4,251 4,925 2,017 8,355 20,218 16,990 2,865 70,826 78,665 19,067 59,598 11,656 4,998 4,160 82,090 27,341 54,750 18,191 4,998 109 99,564 33,109 66,455 5,023 4,998 123 101,064 37,634 63,430 6,246 4,998 123 102,264 42,408 59,856 5,487 4,998 123 1,032 42,329 43,361 658 29,715 99 73,834 1,032 39,717 40,749 825 37,376 78,950 1,032 35,678 36,710 860 36,918 74,488 1,032 36,384 37,416 860 33,918 72,194 1,032 37,416 38,448 860 31,518 70,826 FY2010 FY2011 FY2012E FY2013E FY2014E

May 28, 2012

Reliance Communication | 4QFY2012 Result Update

Cash flow statement (Consolidated, Indian GAAP)

Y/E March (` cr) Pre tax profit from oper. Depreciation Pre tax cash from oper. Minority interest Other income Net cash from operations Tax Cash profits (Inc)/dec in Current assets Current liabilities Net trade WC Cashflow from oper. actv. (Inc)/dec in fixed assets (Inc)/dec in intangibles (Inc)/dec in deferred tax liab. (Inc)/dec in investments Cashflow frm investing actv. Inc/(dec) in debt Inc/(dec) in minority interest Inc/(dec) in equity/premium Dividends Cashflow frm financing actv. Cash generated/(utilized) Cash at start of the year Cash at end of the year 1,693 (1,346) 347 8,797 (2,295) 224 71 5,406 3,406 (9,447) 3 (3,419) 205 (13,067) (864) 1,683 819 588 (3,559) (2,971) 4,878 (8,191) (99) 4,051 (4,239) 7,660 166 (3,836) 121 3,869 4,509 819 5,327 (4,251) 3,015 (1,236) 3,666 (2,515) (14) (2,529) (458) 36 (4,758) 205 (5,385) (4,249) 5,327 1,079 293 1,534 1,828 7,263 (2,723) (2,723) (3,000) 205 (3,205) 1,335 1,079 2,414 (584) 129 (454) 5,557 (441) (441) (2,400) (0) 205 (2,605) 2,511 2,414 4,925 FY2010 4,653 3,747 8,399 139 636 8,896 (445) 8,451 FY2011 FY2012E 840 6,504 7,344 160 677 7,861 (12) 7,850 311 3,978 4,289 61 567 4,795 106 4,902 FY2013E 660 4,525 5,184 160 600 5,624 (189) 5,435 FY2014E 1,224 4,774 5,998 160 480 6,318 (307) 6,011

May 28, 2012

Reliance Communication | 4QFY2012 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value Dupont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days 0.3 56 374 0.3 65 330 0.3 66 386 0.3 65 380 0.3 65 375 4.7 6.7 10.8 2.4 3.8 3.3 2.6 3.0 2.5 3.6 4.5 2.4 4.3 5.5 3.2 0.9 1.5 0.2 0.3 1.7 10.8 0.9 0.8 0.1 0.3 1.9 3.3 1.1 0.5 0.1 0.3 2.0 2.5 0.7 0.5 0.1 0.3 1.9 2.4 0.7 0.6 0.1 0.3 1.8 3.2 23.0 40.9 1.0 210 6.5 38.0 0.6 197 4.5 23.7 1.0 178 4.4 26.3 1.0 181 6.0 29.1 1.0 186 2.9 1.6 0.3 1.5 1.8 5.3 0.5 10.4 1.8 0.3 0.9 2.0 5.5 0.6 15.0 2.8 0.4 1.5 2.5 8.4 0.7 15.3 2.6 0.4 1.5 2.0 6.3 0.6 11.2 2.3 0.4 1.5 1.7 5.2 0.6 FY2010 FY2011 FY2012E FY2013E FY2014E

May 28, 2012

Reliance Communication | 4QFY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

RCOM No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

May 28, 2012

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