1QFY2012 Result Update| Telecom

August 16, 2011

Reliance Communication
Performance highlights
(` cr) Net sales^ EBITDA^ EBITDA margin (%) PAT 1QFY12 4,940 1,601 32.4 157 4QFY11* 4,929 1,190 24.1 169 % chg (qoq) 0.2 (22.2) 827bp 1QFY11 5,069 1,591 31.4 % chg (yoy) (2.5) 0.6 100bp

NEUTRAL
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Telecom 15,975 1.2 188/74 1,875,395 5 16,731 5,036 RLCM.BO RCOM@IN

`77 -

(7.1) 250 (37) Source: Company, Angel Research; Note: *Excluding one-off revenue of `2,545cr, ^Excluding other income

For 1QFY2012, Reliance Communication (RCOM) reported a mixed performance, with lower-than-expected sales and PAT, but better-than-expected OPM. During the quarter, RCOM hiked voice tariffs on both on-net and off-net calls in 19 circles on GSM; and on CDMA, tariffs on only off-net calls were raised. Due to lack of triggers except the monetisation of its Infratel business, which can cut down debt by more than half, we remain Neutral on the stock. Weak revenue growth: RCOM reported revenue of `4,940cr, up mere 0.2% qoq, primarily on the back of tumbling MOU and flat ARPM. MOU fell by 3.3% qoq to 233min. However, partial impact of the hike in ARPM and stable VAS share helped the ARPM to remain steady at `0.44/min. Management mentioned that it will take one more quarter for free minutes to be out of the system and full impact of the increase in ARPM will flow through by 3QFY2012. EBITDA margin slips: Overall EBITDA margin improved by 827bp qoq (after adjusting for one-off revenue and EBITDA in 4QFY2011) to 32.4% due to stable operational parameters such as ARPM as well as lower network expenses and SGA expense rationalisation. EPM for the quarter stood flat at `0.12/min. Outlook and valuation: Going forward, we expect RCOMs mobile segment to record a 15.0% CAGR in its subscriber base over FY201113E and ARPM to inch up to `0.46/min by FY2013. Management maintained its capex guidance of only `1,500cr for FY2012. There is a US$1bn FCCB due to be repaid in April 2012, which is expected to be refinanced. Management maintained that it is actively looking to monetise its 50,000 towers, which would help it to deleverage by more than 50% this can provide an upside risk to our fair value. At the CMP, the stock is trading at 4.8x FY2013E EBITDA, at par with its intrinsic value of `79. Thus, we maintain our Neutral view on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 67.9 9.1 8.1 14.9

Abs. (%) Sensex Reliance Comm.

3m (8.8)

1yr (7.3)

3yr 13.6 (81.8)

(13.9) (52.9)

Key financials (Consolidated, Indian GAAP)

Y/E March (` cr) Net sales % chg Net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) FY2010 21,614 (2.8) 4,704 (20.6) 33.5 23.0 3.4 0.4 10.8 4.7 1.9 5.6 FY2011 22,430 3.8 1,346 (71.4) 37.5 6.5 12.0 0.4 3.3 2.4 2.1 5.7 FY2012E 20,881 (6.9) 803 (40.3) 32.8 3.9 19.9 0.4 1.9 3.2 2.1 6.5 FY2013E 24,528 17.5 1,397 73.9 33.5 6.8 11.4 0.4 3.3 4.4 1.6 4.8

Srishti Anand
+91 22 3935 7800 Ext: 6820 srishti.anand@angelbroking.com

Ankita Somani
+91 22 3935 7800 Ext: 6819 ankita.somani@angelbroing.com

Source: Company, Angel Research; Note: *Excluding other income

Please refer to important disclosures at the end of this report

Reliance Communication | 1QFY2012 Result Update

Exhibit 1: 1QFY2012Financial (Consolidated, Indian GAAP)

(` cr) Net revenue Operating expenditure EBITDA^ Dep. and amortisation EBIT Interest charges Exceptional items Other income PBT Income tax PAT Share in profit of associate Minority interest Reported PAT EPS (`) EBITDA margin (%) EBIT margin (%) PAT margin (%)
other income

1QFY12 4,940 3,339 1,601 976 625 405 1 219 (2) 222 65 157 0.8 32.4 12.7 3.2

4QFY11* 4,929 3,739 1,190 1,020 170 223 402 349 171 178 21.2 169 0.8 24.1 3.4 3.2

% chg(qoq) 0.2 (10.7) 34.6 (4.3) 268.1 81.3

1QFY11 5,069 3,477 1,591 965 627 440 41

% chg (yoy) (2.5) (4.0) 0.6 1.2 (0.2) (7.9)

(37.1) (101.4) 24.9 207.1 (7.1) 0.8 827bp 921bp 1bp

228 (72) 299 0 48.9 250 1.2 31.4 12.4 4.9

(3.6) (96.7) (26.0) 33.1 (37.4) (37.2) 102bp 30bp (173)bp

Source: Company, Angel Research; Note: *Excluding one-off revenue of `2,545cr; ^Excluding

Weak revenue growth

RCOM reported revenue of `4,940cr, up mere 0.2% qoq, primarily on the back of tumbling MOU and flat ARPM. MOU fell by 3.3% qoq to 233min. However, partial impact of the hike in ARPM and stable VAS share helped the ARPM to remain steady at `0.44/min. Management mentioned that it will take one more quarter for free minutes to be out of the system and full impact of the increase in ARPM would flow through by 3QFY2012.

Exhibit 2: Revenue break-up (Segment wise)

Business segment (` cr) Wireless Global enterprise Others Eliminations Net revenue 1QFY12 4QFY11* 4,327 2,292 278 1,956 4,940 4,198 2,621 (38) 1,852 4,929 % chg (qoq) 3.1 (12.6) 5.6 0.2 1QFY11 4,153 2,490 294 1,868 5,069 % chg (yoy) 4.2 (8.0) (5.5) 4.7 (2.5)

Source: Company, Angel Research; Note: *Excluding one-off revenue of ` 2,545cr

Wireless segment: The wireless segment registered revenue growth of only 3.1% qoq to `4,327cr. This muted performance was on the back of MOU tumbling to 233min (vs. 241min in 4QFY2011), whose fall was arrested by subscriber growth of 5.6% qoq and held-up ARPM at `0.44/min. Thus, ARPU slipped by 3.7% qoq to `103 in 1QFY2012 from `107 in 4QFY2011. The segments EBITDA margin declined to 27.1% in 1QFY2012 from 27.4% in 4QFY2011.

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Reliance Communication | 1QFY2012 Result Update

Exhibit 3: Trend in MOU (qoq)

400 350 (1.9) 0 (2.9) (3.6) (7.2) (6.4) (9.1) 250 200 (4.0) (3.3) (4)

Exhibit 4: Trend in ARPM (qoq)

0.6 (3.3) 0.5 (4.3) (2.2) 0.0 0.0 0.0 0.0 0.0 0 (4) (8) (12) (16) (12) 0.3 (19.0) (20)

(mins)

(%)

( `/min)

(6.8)

(8)

0.4

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

MoU (mins)

qoq growth (%)

1QFY12

ARPM (`/min)

qoq growth (%)

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 5: Trend in subscriber additions (qoq)

160 140 120 9.5 8.2 8.9 9.2 8.2 7.1 12

Exhibit 6: Trend in ARPU (qoq)

220 (6.7) (6.5) (6.3) (8.8) 190 (7.5) (3.6) (3.7) 0 (5)

(`/month)

8.0 5.9 5.6

(6.3)

1QFY12

(%)

(mn)

100 80 60

160 130 (23.3)

(15) (20) (25)

100

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

Total subscribers (mn)

qoq growth (%)

ARPU (`/month)

qoq growth (%)

Source: Company, Angel Research

Source: Company, Angel Research

Global enterprise segment: RCOM has combined its global and broadband business under one segment called global enterprise. During the quarter, the global enterprise segment reported revenue of `2,292cr. EBITDA margin of this segment stood at 24.6%.

EBITDA margin bounces back

During the quarter, overall EBITDA margin improved by 827bp qoq (after adjusting for one-off revenue and EBITDA in 4QFY2011) to 32.4% due to stable operational parameters such as ARPM as well as lower network expenses and SGA expense rationalisation. EPM for the quarter stood flat at `0.12/min.

August 16, 2011

1QFY12

(%)

(10)

(%)

300

Reliance Communication | 1QFY2012 Result Update

Exhibit 7: Trend in EBITDA margin^ (qoq)

35 30
(%)

30.1 28.9

31.4 28.9

31.1 29.1

31.4 29.0 27.4 24.1

32.4 27.1

25 20 15 10 4QFY10 1QFY11 2QFY11 3QFY11

4QFY11*

1QFY12

Wireless

Consolidated

Source: Company, Angel Research; Note: *Excluding one-off revenue of `2,545cr, ^Excluding other income

Exhibit 8: Trend in EPM (qoq)

0.20 0.5 0.15 (9.3) (10.4) 2.4 10 0.0 (7.7) 0.0 0 (10) (20) (30.0) (30) (40)

(`/min)

0.10

0.05

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

EPM (`/min)
Source: Company, Angel Research

qoq growth (%)

Exhibit 9: Opex break-up

100 80 60 31.4 7.0 16.7
6.1

31.1 7.2 15.1

6.0

31.4 7.3 16.1

5.8

24.1 8.3 18.0

5.3

1QFY12

32.4 7.1 14.6

5.4

(%)

40 20 0

25.8 13.0 1QFY11

27.5 13.1 2QFY11

License fee

25.7 13.6 3QFY11

S,G&A cost

31.1 13.5 4QFY11

Employee cost

27.0 13.5 1QFY12

EBITDA margin

Access charges

Network costs

Source: Company, Angel Research

August 16, 2011

(%)

Reliance Communication | 1QFY2012 Result Update

Outlook and valuation

During the quarter, RCOM hiked voice tariffs on both on-net and off-net calls in 19 circles on GSM; and on CDMA, the company raised tariffs on only off-net calls. Since the hike has been undertaken largely on the GSM base, the impact of the same will be less as compared to its peers as the company is primarily CDMA based. Going forward, we expect RCOMs mobile segment to record a 15.0% CAGR in subscribers over FY201113E and ARPM to inch up to `0.46/min by FY2013 at a 2% CAGR. Management maintained its capex guidance of only `1,500cr for FY2012. There is a US$1bn FCCB due to be repaid in April 2012, which is expected to be refinanced. Management maintained that it is actively looking to monetise its 50,000 towers, which would help it to deleverage by more than 50% this can provide an upside risk to our fair value. However, various other announcements of selling tower assets were made earlier as well but none of them materialised. The companys EBITDA CAGR over FY201113E is disappointing at 1.1%. At the CMP of `77, the stock is trading at 4.8x FY2013E EBITDA, almost at par with its intrinsic value of `79. Thus, we maintain our Neutral view on the stock.

Exhibit 10: One-year forward EV/EBITDA

250,000 200,000

EV (`cr)

150,000 100,000 50,000 0 Apr-07 EV Nov-07 Jun-08 25 Jan-09 20 Aug-09 15 Mar-10 Oct-10 10 May-11 5

Source: Company, Angel Research

Exhibit 11: Valuation

(` cr) EBITDA* Target EV/EBITDA (x) Target EV Debt Cash Target Mcap Target price (`)
Source: Company, Angel Research; Note: *Excluding other income

FY2013E

8,214 5 39,429 27,908 4,699 16,220 79

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Reliance Communication | 1QFY2012 Result Update

Exhibit 12: Key assumptions

FY2010 ARPM (`/min) MOU (min) EOP Subscriber base (mn) EOP
Source: Company, Angel Research

FY2011 0.44 241 135.7

FY2012E 0.45 225 160.8

FY2013E 0.46 217 179.4

CAGR (%) 1.9 (5.1) 15.0

0.49 318 102.4

Exhibit 13: Recommendation summary

Company Bharti Airtel RCOM Reco. Accumulate Neutral CMP Tgt. price Upside (`) 396 92 77 Idea Cellular Neutral (`) 351 13.9 FY2013E 7.5 7.2 5.0 FY2013E 6.8 7.2 4.8 FY2011-13E FY2011-13E FY2013E FY2013E EPS CAGR RoCE (%) 20.4 9.5 2.4 12.3 9.6 4.4 RoE (%) 14.0 7.6 3.3 19.5 22.8 (1.1) (%) Target EV/EBITDA (x) EV/EBITDA (x) EBITDA CAGR

Source: Company, Angel Research

August 16, 2011

Reliance Communication | 1QFY2012 Result Update

Profit and loss statement (Consolidated, Indian GAAP)

Y/E March (` cr) Net sales Network expenditure % of net sales License fee % of net sales Access charges % of net sales Other expenses Total expenditure % of net sales EBITDA % of net sales Depreciation and amortisation EBIT Interest charges Other income, net Exceptional items Profit before tax Provision for tax % of PBT PAT Share in earnings of associate Minority interest Profit after minority interest Fully diluted EPS (`) FY2010 21,614 6,173 28.6 1,145 5.3 2,138 9.9 4,907 14,363 66.5 7,251 33.5 3,747 3,504 (1,186) 636 38 5,289 445 8.4 4,843 (2) 137 4,704 23.0 FY2011 22,430 5,472 24.4 1,157 5.2 2,648 11.8 4,750 14,026 62.5 8,404 37.5 6,504 1,900 1,072 677 (12) 1,518 12 0.8 1,506 0 161 1,346 6.5 FY2012E 20,881 5,603 26.8 1,119 5.4 2,803 13.4 4,498 14,022 67.2 6,859 32.8 4,500 2,359 1,256 1,104 130 11.8 974 170 803 3.9 FY2013E 24,528 6,339 25.8 1,278 5.2 3,149 12.8 5,548 16,314 66.5 8,214 33.5 5,100 3,114 1,191 1,923 346 18.0 1,577 180 1,397 6.8

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Reliance Communication | 1QFY2012 Result Update

Balance sheet (Consolidated, Indian GAAP)

Y/E March (` cr) Liabilities Share Capital Reserves & Surplus Total Shareholders funds Minority Interest Total Debt Deferred Tax liability Total Liabilities Assets Gross Block - Fixed Assets Accumulated Depreciation Net Block Capital Work-in-Progress Goodwill Investments Current Assets Inventories Sundry debtors Cash and cash equivalents Other Current Assets Loans & Advances Total Current Assets Less:- Current Liab Less:-Provisions Net Current Assets Total Assets 545 3,312 819 2,073 5,410 12,157 14,708 4,027 (6,578) 73,834 517 4,002 5,327 1,146 5,086 16,078 12,686 2,490 902 78,950 592 3,433 2,302 2,667 4,803 13,796 13,638 1,858 (1,701) 73,156 647 4,032 4,699 2,857 5,642 17,876 15,822 1,962 92 71,348 78,665 19,067 59,598 11,656 4,998 4,160 82,090 27,341 54,750 18,191 4,998 109 83,590 31,840 51,750 18,000 4,998 109 85,090 36,940 48,150 18,000 4,998 109 1,032 42,329 43,361 658 29,715 99 73,834 1,032 39,717 40,749 825 37,376 78,950 1,032 40,316 41,348 900 30,908 73,156 1,032 41,509 42,541 900 27,908 71,348 FY2010 FY2011 FY2012E FY2013E

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Reliance Communication | 1QFY2012 Result Update

Cash flow statement (Consolidated, Indian GAAP)

Y/E March (` cr) Pre tax profit from operations Depreciation Pre tax cash from operations Minority interest Other income/prior period ad Net cash from operations Tax Cash profits (Inc)/Dec in Current assets Inc/(Dec) in Current liabilties Net trade working capital Cashflow from operating activities (Inc)/Dec in fixed assets (Inc)/Dec in intangibles (Inc)/Dec in deferred tax liability (Inc)/Dec in investments Cashflow from investing activities Inc/(Dec) in debt Inc/(Dec) in minority interest Inc/(Dec) in equity/premium Dividends Cashflow from financing activities Cash generated/(utilised) Cash at start of the year Cash at end of the year FY2010 4,653 3,747 8,399 139 636 8,896 (445) 8,451 1,693 (1,346) 347 8,797 (2,295) 224 71 5,406 3,406 (9,447) 3 (3,419) 205 (13,067) (864) 1,683 819 FY2011 840 6,504 7,344 160 677 7,861 (12) 7,850 588 (3,559) (2,971) 4,878 (8,191) (99) 4,051 (4,239) 7,660 166 (3,836) 121 3,869 4,509 819 5,327 FY2012E 1,104 4,500 5,603 170 5,433 (130) 5,303 (743) 321 (422) 4,880 (1,309) (1,309) (6,468) 76 205 (6,597) (3,025) 5,327 2,302 FY2013E 1,923 5,100 7,023 180 6,843 (346) 6,497 (1,683) 2,288 605 7,101 (1,500) (1,500) (3,000) 205 (3,205) 2,397 2,302 4,699

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Reliance Communication | 1QFY2012 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value Dupont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days 0.3 61 390 0.3 60 356 0.3 65 343 0.3 56 330 4.7 6.7 10.8 2.4 3.8 3.3 3.2 4.9 1.9 4.4 7.2 3.3 0.9 1.5 0.2 0.3 1.7 10.8 0.9 0.8 0.1 0.3 1.9 3.3 0.7 0.5 0.1 0.3 1.8 1.9 0.7 0.6 0.1 0.3 1.7 3.3 23.0 40.9 1.0 210 6.5 38.0 0.6 197 3.9 25.7 1.0 200 6.8 31.5 1.0 206 3.4 1.9 0.4 1.3 1.9 5.6 0.6 12.0 2.0 0.4 0.8 2.1 5.7 0.6 19.9 3.0 0.4 1.3 2.1 6.5 0.6 11.4 2.5 0.4 1.3 1.6 4.8 0.5 FY2010 FY2011 FY2012E FY2013E

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Reliance Communication | 1QFY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

RCOM No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

August 16, 2011

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