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Krishnan Thiagarajan

EVEN as the finer details of the Ambani settlement are being hammered out, the crucial question is: How much is the telecom business under Reliance Infocomm worth? It could be anything in the region of Rs 25,000-30,000 crore, depending on the assumptions employed. This is the key number that would determine the value that shareholders in Reliance Industries would derive for Reliance Infocomm in the event of a demerger.

How we've arrived at the valuations

Considering that Reliance Infocomm is an unlisted venture of the Reliance group, the financial details on its operations are sketchy. As Bharti Tele-Ventures is the only listed peer of Reliance Infocomm and its closest competitor, it is a good benchmark for arriving at the valuation of the latter.

As the mobile telephony business is the biggest money-spinner for both Bharti and Reliance Infocomm, the valuation has been worked out on the basis of the mobile telephony business alone.

The assumption is that long distance and other businesses of the two companies will be identical in revenues, profitability and capital employed. Bharti Tele-Ventures had a mobile subscriber base of 11.8 million in May and enjoys a market capitalisation of Rs 44,000 crore.

If we apply the same to Reliance Infocomm's subscriber base of 11.2 million (9.96 million CDMA and 1.24 million GSM subscribers), its market capitalisation should be in the region of Rs 42,000 crore.

Compared with Bharti's business, however, Reliance Infocomm faces several challenges that could act as a drag on its valuation.

The elements that have to be factored into Reliance Infocomm's valuation are:

* The quality of mobile subscribers of Reliance Infocomm is not known. In March 2005, the company initiated a one-time churn by shedding 0.98 million subscribers due to issues related to "credit-worthiness" and "error in subscriber data".

The average revenue per user (ARPU) data too is not available. As the company migrated some of its subscribers from the post-paid to pre-paid schemes, it may have affected the ARPU.

* Reliance Industries (RIL) currently holds a 43 per cent equity stake in Reliance Infocomm. But the big factor that will decide RIL's final equity stake will be the conversion terms for the preference shares issued a couple of years ago by Reliance Infocomm. The task of determining the pricing of the conversion has been assigned by RIL to a committee of six independent directors in January 2005. Assuming these preference shares are converted at par, the equity stake of RIL in Reliance Infocomm could go up to 75 per cent. If the conversion happens at a premium, the stake would be much lower.

* The uncertainty over financing plans for Infocomm's expansion may also weigh on the stock. Its initial public offering plans may not be a smooth process. It hinges on the disclosures it may be called upon to make by the regulator regarding controversies surrounding its telecom business.

* Until it becomes a listed entity, its valuation will also suffer a liquidity discount.

Based on these elements, the discount factor that can be applied to its valuation of Rs 42,000 crore can vary between 30 and 40 per cent.

This would value Reliance Infocomm at between Rs 25,000 crore and Rs 30,000 crore.

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