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Reliance Comm.: What lies ahead? - Views on News from Equitymaster
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Reliance Comm.: What lies ahead?
Mar 22, 2007

Telecom stocks have received some battering in the past month, not only due to the weak broader market sentiment (on the back of both global and domestic factors), but also due to the fact that these were already trading at valuations that factored in growth for the next 2-3 years. The stock of Reliance Communications (RCom) has been an underperformer during these times. Two key reasons of this underperformance have been – first, earlier uncertainty regarding the Hutch-Essar deal, where RCom was one of the bidders. Second, post the acquisition of Hutch-Essar by Vodafone, there have been questions raised on the company’s ability to execute its aggressive GSM plans. All that goes up must come down!
The run-up witnessed in the stock price of RCom during the earlier part of this year (January 2007) was mainly in anticipation of the largest telecom deal in the history of India. (see adjacent graph) The company on sale (Hutch-Essar) had been a perfect case for RCom as it would have given it a quantum leap into the GSM space, a move that it has been mulling for long and would have made it the undisputed market leader in the Indian telecom space.

However, as it turned out, RCom could not match the (high) price offered by Vodafone (which finally won the bid by quoting US$ 11.8 bn for the 63% stake in Hutch). And this had an effect on the company’s stock price, as there were apprehensions raised about the company’s execution capabilities with respect to large-scale GSM plans. Also, around this time, the Indian stock markets also began to loose steam which was a fall out a series of global and domestic events like the raising of interest rates in Japan, the meltdown in Chinese markets, fears about the US slowdown and the not so corporate friendly union budget.

Have things changed fundamentally?
It is true that RCom was unable to outbid Vodafone in acquiring the stake of Hutch Essar and while this could have been good for the former, but one must also bear in mind that the company had all along been conservative on the valuations front. This obviously makes sense when you already have proven your capability of acquiring customers and have a ready infrastructure in place (in terms of telecom infrastructure). However, we do acknowledge the fact that the company, when it ventures out more aggressively into the GSM space on its own, will be fraught with execution risks and the risk of not being able to avail the spectrum in a timely manner.

However, if one were to take along term call on the company’s performance, we believe that things have not really changed for the worse. The company is still expanding its CDMA base aggressively (see adjacent graph), and continues to do well in its global, personal and broadband businesses. Also, RCom has already floated a tender for 100 m GSM lines (including 25 m 3G lines). We believe that the ‘non-acquisition’ of the Hutch-Essar stake will have no material bearing on any of the company’s existent revenue streams.

The way we see it
RCom’s stock has reacted to the generally subdued tone underlying the Indian equity markets and the inability to acquire the Hutch stake. At the current price of Rs 420, the stock is trading at a multiple of 12.5 times our estimated FY09 earnings. Compared to this, at the current levels, Bharti Airtel is trading at a multiple of 21 times our estimated FY09 earnings.

RCom has been focusing on its growth as is evident form the strong subscriber additions, the recent de-merger of its telecom infrastructure business from its core operations to allow for improved financials and the recent tie up made with InterCall, (a leading American conference call company) in view of the anticipated demand for the same in India in the near future. All these factors actually garner well for the company’s long-term prospects. As a consequence, we maintain our positive rating on the stock from a long-term perspective.

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