Reliance Communications- Maintain estimates/ target price. SELL.: Kotak Sec

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Reliance Communications (RCOM)
Telecom
Maintain estimates and target price. SELL. We maintain our revenue and EBITDA
estimates for FY2011-13E post 2QFY11 earnings report. Negative ETR for 1HFY11 leads
to a 17% increase in our FY2011E EPS estimate, while our EPS estimates for
FY2012/13E go down marginally. Our negative stance on the stock stays – we continue
to find the stock expensive despite aggressive forecasts, see downside risks to ours and
Street’s estimates. Reiterate SELL with an unchanged target price of Rs125/share.

Broadly maintain our estimates
We incorporate the in-line 2QFY11 earnings into our model, broadly maintaining our revenues and
EBITDA estimates for FY2011-13E. Our revenue estimates for FY2011E, 12E, and 13E stand
unchanged at Rs213 bn, Rs250 bn, and Rs284 bn, and EBITDA estimates also remain broadly
unchanged at Rs68 bn, Rs83 bn, and Rs100 bn for the three years, respectively. Lower-thanexpected
(in fact, negative) ETR for 1HFY11 takes EPS estimate for FY2011E up 17% to Rs7, while
EPS estimates for FY2012E and FY2013E go down marginally to Rs9.2 and Rs13.7, respectively.
We note that we build in aggressive assumptions in our model and there could be downside risks
to our estimates; the fact that we are on the lower end of the Street estimates only adds more
risks to Street forecasts. For example, we are building in a strong 19% growth in wireless revenues
in FY2012E after nearly 3 years of sedate performance for the segment. We are also building in a
strong 100 bps+ expansion in OPM in FY2012E on the back of strong revenue performance.

Conference call highlights
Some key highlights from the earnings call –
􀁠 RPM focus at the cost of volumes in the wireless segment continues – we also note the PCO
base decline impact on RPM and minutes trends for RCOM,
􀁠 qoq SG&A decline in 2QFY11 resulted from non-recurrence of one-off cost items in 1QFY11,
􀁠 FY2011E capex guidance unchanged at Rs30 bn; also, we do not know what to infer from this,
but the company mentioned that their internal capex approvals are much higher; we estimate
higher-than-guided capex for the year,
􀁠 Tower stake sale efforts continue; RCOM indicated that it is considering a few proposals,
􀁠 RCOM has merged its Globalcom and Broadband segments into one unit – to be called Global
Enterprise segment.


Balance sheet stretched, valuations expensive; reiterate SELL
Exhibit 2 looks at the company’s estimated net debt position over the next few years. We
estimate a net-debt-to-EBITDA ratio of 4.8X on FY2011E and 4.1X on FY2012E financials.
We note that the improvement in FY2012E has to be viewed in the context of aggressive
forecasts with downside risks. Also, despite aggressive assumptions, valuations at 8.4X
FY2012E EV/EBITDA (at a premium to Bharti) yield little comfort. Upside from potential
corporate action (towerco/ globalcom stake sale, parentco equity infusion) appears more
than priced in. We reiterate our SELL recommendation with an unchanged target price of
Rs125/share.