The Hindu Business Line : Reliance Communications: Buy

An investment with a 1-2 year perspective can be considered in the stock of Reliance Communications (RCom), considering the recent correction in its valuations and strong growth prospects for the company. With an end-to-end telecom services model spanning voice, data and international connectivity and its recent foray into IPTV, RCom appears well placed to deliver strong earnings growth over the medium term. At Rs 667, the stock trades at 28 times its FY08 earnings and 22 times its FY09 estimated earnings. RCom’s licence win, which enables it to become a national GSM operator, strong growth in the data segment and increased revenue contribution from Yipes Communications provide scope for strong earnings growth over the next 18 months.

RCom adds about one million subscribers a month in its existing operations. The company’s recent licence win to offer GSM services in 14 additional circles will give it a nationwide footprint. Contracts for setting up the network have already been awarded to Huawei Technologies. Over time, this could provide RCom with dual revenue streams from the GSM and CDMA businesses, with a presence in high revenue metros. The revenue realisation per minute, at 74 paise, has remained stable over the past year, despite the industry-wide trend of falling realisations and tariffs.

RCom’s non-voice business is also fairly substantial. The broadband business generates an average revenue per line of Rs 1,948, among the highest in the country, and is registering growth on the back of strong enterprise offtake. The buyout of US-based Yipes Communication through FLAG Telecom signals its intent to become an international player in data communications. FLAG gives the company global connectivity through its huge undersea cable network.

Yipes connects 14 key cities in the US, a very data intensive market, providing substantial high margin revenue opportunity. Yipes also has top stock exchanges and traders in its client roster. The company has also sold a 5 per cent stake in Reliance Telecom Infrastructure (the tower business) for Rs 1,400 crore.

Any further stake sale may unlock more value for investors in the stock. RCom has also joined the IPTV (Internet protocol television) bandwagon with the announcement of a $500 million deal with Microsoft for launching this service. Pressure on tariffs, penetrating new circles where there are established players, and any regulatory pressure on offering dual technology are risks to this recommendation.

K. Venkatasubramanian

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