2QFY2012 Result Update | Telecom

November 14, 2011

Reliance Communication
Performance highlights
(` cr) Net sales^ EBITDA^ EBITDA margin (%) PAT 2QFY12 4,792 1,357 28.3 252 1QFY12 4,849 1,510 31.1 157 % chg (qoq) (1.2) (10.2) (283)bp 60.9 2QFY11 5,023 1,564 31.1 446 % chg (yoy) (4.6) (13.3) (283)bp (43.5)

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 16,894 1.4 186/70 2,226,964 5 17,119 5,148 RLCM.BO RCOM@IN

`82 -

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

For 2QFY2012, Reliance Communication (RCom) reported a mixed performance. The companys net sales declined by 1.2% qoq, but wireless revenue grew modestly by 2.1% qoq. RCom hiked voice tariffs on both on-net and off-net calls in all the circles for GSM subscribers; and on CDMA, the company raised tariffs on only off-net calls, which aided the companys average revenue per minute (ARPM). Due to lack of triggers except the monetization of its Infratel business, which can cut down its debt by more than half, we remain Neutral on the stock. Revenue performance: RCom reported revenue of `4,792cr, down 1.2% qoq, primarily because of poor performance of the non-wireless business segments. Wireless revenue came in at `4,417cr, up 2.1% qoq, on the back of 2.3% qoq growth in ARPM to `0.45/min. The companys minutes of usage (MOU) declined by 2.6% qoq to 227min. However, improvement in VAS share arrested the decline in overall ARPU, which slipped by 1.9% qoq to `101/month. EBITDA margin slips: Overall EBITDA margin declined by 283bp qoq to 28.3% due to weak MOUs and higher SG&A expenses. EBITDA margin of the wireless and global enterprise segments declined by 49bp and 24bp qoq to 26.6% and 10.5%, respectively. EPM for the quarter stood flat at `0.12/min. Outlook and valuation: Going forward, we expect RComs mobile segment to record a 10.7% CAGR in its subscriber base over FY201013E and ARPM to stabilize at `0.46/min in FY2013. Management maintained its capex guidance of only `1,500cr for FY2012. There is a US$1.1bn FCCB due to be repaid in April 2012, which is expected to be paid partially through internal accruals and partially through debt. Management maintained that it is actively looking to monetize its 50,000 towers, which would help it to deleverage by more than 50% this can provide an upside to our fair value. At the CMP of `82, the stock is trading at 5.5x FY2013E EBITDA, almost at par with its intrinsic value of `85. We maintain our Neutral rating on the stock.

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 67.9 9.0 7.9 15.2

Abs. (%) Sensex Reliance Comm.

3m 1.7

1yr (15.1)

3yr 82.4 (62.8)

(2.9) (51.8)

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) FY2009 22,242 18.1 5,926 44.6 38.6 24.4 3.7 0.4 16.6 6.7 2.5 6.5 FY2010 21,614 (2.8) 4,704 (20.6) 33.5 23.0 3.6 0.4 10.8 4.7 1.9 5.7 FY2011 22,430 3.8 1,346 (71.4) 37.5 6.5 12.7 0.4 3.3 2.4 2.2 5.8 FY2012E 20,050 (10.6) 1,024 (23.9) 31.0 3.9 21.0 0.4 2.5 2.6 2.3 7.5 FY2013E 22,911 14.3 1,183 15.5 32.8 5.7 14.3 0.4 2.8 3.3 1.8 5.5

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 | 2QFY2012 Result Update

Exhibit 1: 2QFY2012 Financial performance (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 earnings of associate Minority interest Adj. PAT EPS (`) EBITDA margin (%) EBIT margin (%) PAT margin (%) 2QFY12 4,792 3,435 1,357 1,054 303 227 248 323 1 322 70 252 1.2 28.3 6.3 5.0 1QFY12 4,849 3,339 1,510 976 534 405 91 220 (2) 223 65.1 157 0.8 31.1 11.0 3.2 46.7 (158.3) 44.5 7.4 60.9 60.0 (283)bp (470)bp 183bp % chg(qoq) (1.2) 2.9 (10.2) 8.0 (43.3) (43.9) 2QFY11 5,023 3,459 1,564 955 609 280 95 425 (66) 491 44.7 446 2.2 31.1 12.1 8.7 (23.9) (102.1) (34.4) 56.4 (43.5) (43.4) (283)bp (580)bp (371)bp % chg (yoy) (4.6) (0.7) (13.3) 10.3 (50.3) (18.7) 1HFY12 9,641 6,774 2,867 2,030 837 632 339 543 (1) 544 135.0 408 2.0 29.7 8.7 4.1 1HFY11 10,091 6,936 3,156 1,920 1,235 719 136 652 (138) 790 93.6 697 3.4 31.3 12.2 6.8 (16.7) (99.3) (31.1) (100.0) 44.2 (41.4) (41.2) (153)bp (356)bp (272)bp % chg (yoy) (4.5) (2.3) (9.1) 5.7 (32.2) (12.1)

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

Exhibit 2: 2QFY2012 Actual vs. Angel estimates

(` cr) Net sales^ EBITDA margin (%)^ PAT Actual 4,792 28.3 252 Estimate 4,911 32.2 145 % var (2.4) (389)bp 74.2

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

Weak revenue growth

During 2QFY2012, RCom reported revenue of `4,792cr, down 1.2% qoq. Revenue performance of the wireless segment was modest, while the non-wireless segments posted poor results.

Exhibit 3: Revenue break-up (Segment wise)

Segment (` cr) Wireless Global enterprise Others Eliminations Net revenue^ 2QFY12 4,417 2,335 35 1,995 4,792 1QFY12 4,327 2,292 187 1,956 4,849 % chg (qoq) 2.1 1.9 (81.4) 2.0 (1.2) 2QFY11 4,161 2,501 303 1,942 5,023 % chg (yoy) 6.1 (6.6) (88.6) 2.7 (4.6)

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

Wireless segment: The wireless segment registered revenue of `4,417cr, up 2.1% qoq, aided by 2.3% qoq growth in ARPM to `0.45/min. MOU, however, posted a 2.6% qoq decline to 227min, whose fall was arrested by subscriber growth of 2.7% qoq. Thus, ARPU slipped by 1.9% qoq to `101 in 2QFY2012 from `103 in 1QFY2012. The segments EBITDA margin declined to 26.6% in 2QFY2012 from 27.1% in 1QFY2012.

November 14, 2011

Reliance Communication | 2QFY2012 Result Update

Exhibit 4: Trend in MOU (qoq)

350 (2.9) 300 (3.6) (6.4) (6.8) (7.2) (9.1) (4.0) (3.3) (2.6) 0

Exhibit 5: Trend in ARPM (qoq)

0.5 (4.3) (2.2) 0.0 0.0 0.0 0.0 0.0 2.3 4 0 (4) (12) (19.0) 0.3 (16) (20) (24) (8)

(4)

(mins)

(%)

( `/min)

250

(8)

200

(12)

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY12

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

MoU (mins)

qoq growth (%)

ARPM (`/min)

qoq growth (%)

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 6: Trend in subscriber additions (qoq)

160 140 120 8.2 8.9 9.2 8.2 12

Exhibit 7: Trend in ARPU (qoq)

190 (7.5)(6.7) (6.5) (6.3) (8.8) (3.6) (3.7) (1.9) 0 (5)

(`/month)

(mn)

5.6 2.7 4

100 80 60

(%)

130

(15) (20)

100

(23.3)

(25)

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

2QFY10

3QFY10

4QFY10

1QFY11

2QFY11

3QFY11

4QFY11

1QFY12

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 witnessed 1.9% qoq revenue growth with revenue coming at `2,335cr. EBITDA margin of this segment also declined to 10.5% in 2QFY2012 from 11.1% in 1QFY2012.

EBITDA margin declines

During the quarter, RComs overall EBITDA margin declined by 283bp qoq to 28.3% due to poor MOUs and weak subscriber growth. EBITDA margin was also negatively impacted due to higher SG&A expenses due to three advertisement campaigns launched. EBITDA margin declined across all business segments. EPM for the quarter stood flat qoq at `0.12/min.

November 14, 2011

2QFY12

(%)

5.9

7.1

8.0

160

2QFY12

(10)

(%)

0.4

Reliance Communication | 2QFY2012 Result Update

Exhibit 8: Segment-wise EBITDA margin^ trend (qoq)

35 30
(%)

30.1 28.9

31.4 29.1

31.1 29.0

31.4 27.4 27.1 24.1

31.1 26.6

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

1QFY12

2QFY12

Wireless

Consolidated

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

Exhibit 9: Trend in EPM (qoq)

0.15 0.5
(`/min)

10 2.4 0.0 (7.7) (10) 0.0 0.0

0
(%)

0.10

(9.3)

(10.4)

0.05
3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12

(20)

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

qoq growth (%)

November 14, 2011

Reliance Communication | 2QFY2012 Result Update

Exhibit 10: Opex break-up

100 80 60
(%)

31.1 7.2 15.1

6.0

31.4 7.3 16.1

5.8

24.1 8.3 18.0

5.3

31.1 7.2 14.8

5.5

28.3 6.9 16.7

5.8

40 20 0

27.5 13.1 2QFY11

25.7 13.6 3QFY11

License fee

31.1 13.5 4QFY11

S,G&A cost

27.5 13.8 1QFY12

Employee cost

28.7 13.6 2QFY12

EBITDA margin

Access charges

Network costs

Source: Company, Angel Research

PAT came in at `252cr, up 60.9% qoq, aided by 1) lower interest cost of `227.4cr in 2QFY2012 vs. `405cr in 1QFY2012 because of lower interest cost debt taken from China Development Bank, 2) lower tax outgo of merely `1.4cr and 3) higher other income of `248cr in 2QFY2012 vs. `91cr in 1QFY2012.

Outlook and valuation

RCom hiked voice tariffs on both on-net and off-net calls for GSM subscribers; and on CDMA, the company raised tariffs on only off-net calls. Since the hike has been undertaken largely on the GSM subscriber 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 10.7% CAGR in subscribers over FY201013E and ARPM to stabilize at `0.46/min in FY2013. Management maintained its capex guidance of only `1,500cr for FY2012. There is a US$1.1bn FCCB due to be repaid in April 2012, which is expected to be paid partially through internal accruals and partially through debt. Currently, the company is striving to reduce the debt level in its books and has again made the announcement to sell stake in its tower assets, which might help the company to deleverage its balance sheet and reduce debt and can be a positive trigger to the stock price. However, various other announcements of selling tower assets were made earlier as well, but none of them materialized. We maintain our Neutral view on the stock, valuing it at 5.6x FY2013E EBITDA, which gives us a target price of `85.

November 14, 2011

Reliance Communication | 2QFY2012 Result Update

Exhibit 11: One-year forward EV/EBITDA

250,000 200,000

EV (`cr)

150,000 100,000 50,000 0 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 EV 25 20 15 10 5

Source: Company, Angel Research

Exhibit 12: Valuation

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

FY2013E 7,525 5.6 42,330 29,200 4,486 17,617 85

Exhibit 13: Key assumptions

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

FY2011 0.44 241 135.7

FY2012E 0.45 227 153.7

FY2013E 0.46 219 166.3

CAGR (%) 1.8 (4.7) 10.7

0.49 318 102.4

Exhibit 14: Recommendation summary

Company Bharti Airtel Idea Cellular RCom Reco. Neutral Neutral Neutral CMP (`) 405 97 82 Tgt. price (`) Upside (%) FY2013E P/BV (x) 2.4 2.2 0.4 FY2013E P/E (x) 16.4 27.5 14.3 FY2011-13E EPS CAGR 24.8 13.9 (5.8) FY2013E RoCE (%) 12.7 10.7 3.3 FY2013E RoE (%) 14.9 8.2 2.8

Source: Company, Angel Research

November 14, 2011

Reliance Communication | 2QFY2012 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 Dep. and amortisation EBIT* Interest charges Other income, net Exceptional items Profit before tax Provision for tax % of PBT PAT Share in profits of associate Minority interest Adj. PAT Diluted EPS (`)
Note: *Excluding other income

FY2009 22,242 4,364 19.6 1,187 5.3 2,382 10.7 5,718 13,650 61.4 8,592 38.6 3,931 4,661 (787) 706 6,154 (12) (0.2) 6,166 2 242 5,926 24.4

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 1,506 161 1,346 6.5

FY2012E 20,050 5,558 27.7 1,114 5.6 2,744 13.7 4,426 13,844 69.0 6,206 31.0 4,280 1,926 1,216 639 1,349 120 8.9 1,229 205 1,024 3.9

FY2013E 22,911 6,008 26.2 1,211 5.3 2,984 13.0 5,183 15,386 67.2 7,525 32.8 5,100 2,425 1,243 480 1,662 299 18.0 1,363 180 1,183 5.7

November 14, 2011

Reliance Communication | 2QFY2012 Result Update

Balance sheet (Consolidated, Indian GAAP)

Y/E March (` cr) Liabilities Share capital Reserves and surplus Total shareholders funds Minority interest Total debt Deferred tax liability Total liabilities Assets Gross block - fixed assets Accumulated dep. Net block Capital WIP Goodwill Investments Current assets Inventories Sundry debtors Cash and cash equivalents Other current assets Loans and advances Total current assets Less:- current liabilities Less:- provisions Total assets 543 3,962 1,683 1,771 6,756 14,714 15,972 4,110 82,126 545 3,312 819 2,073 5,410 12,157 14,708 4,027 73,834 517 4,002 5,327 1,146 5,086 16,078 12,686 2,490 78,950 594 3,296 2,303 2,467 4,611 13,271 13,464 1,784 74,719 640 3,766 4,486 2,657 5,155 16,704 14,922 1,833 72,897 75,510 14,114 61,396 11,310 5,222 9,566 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 31,621 51,970 19,629 4,998 100 85,090 36,721 48,370 19,481 4,998 100 1,032 41,248 42,280 655 39,162 28 82,126 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 40,537 41,569 950 32,200 74,719 1,032 41,516 42,548 1,150 29,200 72,897 FY2009 FY2010 FY2011 FY2012E FY2013E

November 14, 2011

Reliance Communication | 2QFY2012 Result Update

Cash flow statement (Consolidated, Indian GAAP)

Y/E March (` cr) Pre tax profit from oper. Depreciation Pre tax cash from oper. Minority interest Other income Net cash from operations Tax Cash profits (Inc)/dec in Current assets Current liabilities Net trade WC Cashflow from oper. actv. (Inc)/dec in fixed assets (Inc)/dec in intangibles (Inc)/dec in deferred tax liab. (Inc)/dec in investments Cashflow frm investing actv. Inc/(dec) in debt Inc/(dec) in minority interest Inc/(dec) in equity/premium Dividends Cashflow frm financing actv. Cash generated/(utilised) Cash at start of the year Cash at end of the year (3,328) 4 (3,324) 6,533 (24,324) (1,656) (75) 1,434 (24,621) 13,341 (1,776) 7,521 193 18,892 805 878 1,683 1,693 (1,346) 347 8,797 (2,295) 224 71 5,406 3,406 (9,447) 3 (3,419) 205 (13,067) (864) 1,683 819 588 (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 (217) 73 (144) 5,160 (2,938) 9 (2,929) (5,176) 126 (0) 205 (5,255) (3,024) 5,327 2,303 (1,250) 1,506 256 6,539 (1,352) (1,352) (3,000) 200 (0) 205 (3,005) 2,183 2,303 4,486 FY2009 5,447 3,931 9,379 240 706 9,845 12 9,858 FY2010 4,653 3,747 8,399 139 636 8,896 (445) 8,451 FY2011 840 6,504 7,344 160 677 7,861 (12) 7,850 FY2012E 710 4,280 4,990 205 639 5,424 (120) 5,304 FY2013E 1,182 5,100 6,282 180 480 6,582 (299) 6,283

November 14, 2011

Reliance Communication | 2QFY2012 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 66 345 0.3 56 337 4.7 6.7 10.8 2.4 3.8 3.3 2.6 4.0 2.5 3.3 5.5 2.8 0.9 1.5 0.2 0.3 1.7 10.8 0.9 0.8 0.1 0.3 1.9 3.3 0.8 0.7 0.1 0.3 1.8 2.5 0.7 0.7 0.1 0.3 1.7 2.8 23.0 40.9 1.0 210 6.5 38.0 0.6 197 3.9 25.7 1.0 201 5.7 30.4 1.0 206 3.6 2.0 0.4 1.2 1.9 5.7 0.6 12.7 2.2 0.4 0.7 2.2 5.8 0.6 21.0 3.2 0.4 1.2 2.3 7.5 0.6 14.3 2.7 0.4 1.2 1.8 5.5 0.6 FY2010 FY2011 FY2012E FY2013E

November 14, 2011

10

Reliance Communication | 2QFY2012 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%)

November 14, 2011

11