Ambit: Sell Reliance Communication: Target 165

We met with management of RCom recently to understand their views on
MNP, launch of 3G services, expected capex for 3G, RCom's balance sheet
deleveraging and increasing competition. The key highlights:
3G services to be launched in 4QFY11
The company expects rollout of services during 4QFY11. The services are
expected to be launched in top cities of the country. The company believes
that incremental capex to provide 3G services will be minimal, as the existing
EDGE GSM network is 3G enabled. It also believes that as a consequence, the
incremental NOC to run the 3G network will be lower. The company,
however, believes that for the industry, the marketing and promotional
expenditure will increase post launch of 3G services.
MNP to help increase market share
According to RCom, MNP, which is likely to be implemented by Oct 31, 2010,
is expected to be beneficial. The company expects competitive intensity to
increase in the high-value post paid and corporate subscribers and expects to
be a net beneficiary of this move.
Deleveraging balance sheet on the radar
RCom maintained that it is committed to deleverage its balance sheet. After
the fallout of the deal with GTL Infra for sale of the tower business, the
company is in talks with other tower companies as well as with some of the
private equity players. The company intends to offload stake in the tower
company, which may be followed by strategic stake sale in RCom. This is
expected to lower the debt burden of the company.
Regulation
The company believes that post 3G, three different sets of players will emerge
in the industry: (1) GSM +3G, (2) GSM+CDMA+3G and (3) only GSM. This
will lead to service differentiation in the market. It also believes that, it will not
be possible for all the players to survive and remain profitable in the long term
and hence consolidation is inevitable.
Valuation and recommendation
Though we believe that the stake sale will result in deleveraging the balance
sheet, we prefer to wait until further clarity emerges on the same. We also
remain concerned about lower revenue growth and subdued profitability. We
continue to maintain our SELL rating on the stock with a TP of Rs165.