WOW - Broker Rap - Kotak - Reliance Communication

In its Report Dated 8th January, 2007 Kotak Securities (Kotak) initiates a coverage on Reliance Communications as an Underperform with CMP of Rs.435 and a 12-months Target Price of Rs. 375.

Kotak Securities (Kotak) mentions that Reliance Communications limited (RCL), a part of the Reliance Anil Dhirubhai Ambani Enterprises Group, is India''s second largest wireless operator in terms of subscribers. Its also has a strong positions in the long distance (ILD) and broadband segments. RCL has grown its subscriber base and earnings strongly over the past few quarters led by its strong management and solid execution. Kotak informs that RCL''s strategy to grow revenues and earnings is to expand the reach of its wireless and broadband services and exploit its extant long distance (both national and International) infrastructure.

Kotak anticipates that pricing will deteriorate in all key segments of the India telecom sector-wireless, LD and data. In the critical wireless segment, kotak views increased price competition as a result of the proliferation of new players in new circles, RCL''s GSM expansion, a potential industry slowdown and the eventual introduction of mobile number portability (MNP).

Kotak points out that two areas of positive surprise could sustain RCL''s stock price above kotak''s fair value.
(1) Benign price competition in the key wireless segment may result in higher than expected prices (revenue per minute or RPM) and hence, higher-than-expected profitability.
(2) Continued high liquidity in the Indian market may result in the street continuing to focus on relative valuation of RCL versus its key comparable, Bharti Airtel, rather than on the validity of absolute valuations of either stock.

Kotak model''s that RCL''s EPS to grow to Rs32.5 in FY2010E from Rs12.5 in FY2007E led by
(1) strong growth in wireless subs (70 mn at end-FY2009 from 28.6 mn at end-November 2006) and
(2) moderately strong growth in long distance (LD) and broadband segments. RCL''s GSM expansion strategy is a big variable for the Indian wireless market and its financials.

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