Reliance Communications: Buy

Investors with a two-three year horizon can consider buying the share of Reliance Communications (RCom), going by its pan-India dual-technology mobile play and the strength in its enterprise division, both of which offer long-term growth prospects.

At Rs 155, the stock is available at a reasonable seven times its likely 2008-09 per share earnings.

RCom has been in a heavy capex phase for the last one year, leading to its pan-India GSM launch in December 2008. The company has indicated that capex for 2008-09 is roughly Rs 25,000 crore (much of it already capitalised), while for the next fiscal it could be around Rs 15,000 crore. Given the fact there is heavy foreign currency borrowings in RCom’s balance sheet, servicing this debt will mean that margins are likely to remain under pressure for the next 12-18 months. However, this is probably the last significant capex phase for the company.

In the meanwhile, with a burgeoning subscriber base aided by its GSM launch in 14 new circles, strength in its other divisions — broadband and enterprise data (domestic and international) — is gaining momentum to provide broad-based growth for the company.
SYNERGIES FROM GSM launch

RCom has a pan-India CDMA presence with about 50 million subscribers. In addition, in eight circles where it currently operates, there are 10 million subscribers. In late December last year, RCom launched GSM services in the other 14 circles as well. The total subscriber additions in January alone stood at 5 million, bulk of which is expected to have come from new GSM subscribers.

It remains to be seen if this success does not cannibalise its CDMA offering. Despite being a CDMA player, where ARPUs are lower, RCom’s realisations per minute are around 61 paise , which compares favourably with most GSM operators. This may improve a wee bit after the GSM launch, especially because there are no serious discounts in tariffs that is being offered to customers.

RCom has built a nationwide and international network to carry its own national and international traffic. This would also help it garner countrywide roaming revenues and incoming international roaming on both its networks which went to other GSM operators.

With its pan-India CDMA towers, the GSM arm also gains by co-locating tower facilities, resulting in lower capex and opex for RCom, apart from improving tenancy.

In a related development, new licence winner Swan Telecom has reportedly signed up for a tower sharing pact. This should provide an added source of revenue for the company.
Other Contributions

RCom derives over 33 per cent of its revenues from its global and enterprise data businesses.

In its global business, the company provides domestic long distance connectivity to operators such as Vodafone Essar, Idea Cellular, Tata Teleservices and Aircel and derives 40 per cent of its NLD revenues from these operators. This could grow as new operators step in to offer services, but there is competition from BSNL and Bharti Airtel as well. But as the market is largely dominated by these three players, RCom could still end up with a substantial pie.

The company’s international connectivity division is also seeing considerable growth both in organic (through Flag) and inorganic modes through acquisition of Vanco Group in Europe and Yipes in the US. This division has 1,400 customers for data connectivity as well as 750 carriers.

Through Vanco, the company has had large multi-year deal wins with several retail majors in Europe, such as the Oxylane Group and Illy Caffe. Being transaction-intensive, these are likely to provide revenue visibility over the long-term.

The Yipes division is also witnessing traction and has added 25 customers in the last quarter, including names such as Facebook, Troutman Sanders and NASDAQ OMX Europe.

In the domestic enterprise segment, the company is the second largest player, according to a recent study by Frost & Sullivan. This is an 18.7 percent share of a Rs 7,400 crore market, expected to go up to over Rs 13,000 crore by 2013. Client wins are happening here too. This segment serves 900 corporate customers across India and enjoys an EBITDA margin of 42.2 per cent.

The company has network connectivity to 8,92,000 buildings across the country that would allow it to deliver connectivity through a variety of wired and wireless modes.

With the global economy slowing down and with clamping down on travel budgets, corporates, it is expected, will transact and communicate more through communication modes such as virtual private network. This means greater business opportunity for companies such as RCom.