Event Update

July 8, 2013
Rating matrix
Rating Target Target Period Potential Upside : : : : Hold | 145 12 months 7%

Reliance Communication (RELCOM)

| 136
WHATS CHANGED
PRICE TARGET ....................................................................... Changed from | 113 to | 145
FY14E 22,233.6 6,942.0 1,449.8 7.0 FY15E 23,615.3 7,004.9 546.5 2.6

Key Financials
| Crore Net Sales EBITDA Net Profit EPS (|) FY12 19,677 5,785.0 928.0 4.5 FY13 20,561.4 5,943.1 672.7 3.3

EPS (FY14E) ........................................................................................................ Unchanged EPS (FY15E) ........................................................................................................ Unchanged RATING ........................................................................................Changed from Sell to Hold

Value unlocking through spin off!!!

Reliance Communication (RCom) has announced that its board has approved the demerger of its real estate into a separate company, which would be named Reliance Properties. Reliance Properties would be separately listed and the shareholding pattern would be similar to that of RCom on the record date. Each shareholder of RCom would get a share of Reliance Properties. The indicative value of Reliance Properties is | 12000 crore, which corresponds to | 60 per RCom share. Also, it would be working with global partners to develop the real estate, which includes about 135 acres with saleable area of over 15 million square feet in Navi Mumbai and about four acres in Connaught place, New Delhi. We have maintained our estimates as this demerger would have no impact on the profitability. However, it will lead to a value unlocking corresponding to the value of Reliance Properties to the shareholders. We have estimated the value of Reliance Properties at | 6624 crore or | 32 per RCom share and have added that to our previous target price to arrive at a target price of | 145 per share. We rate the stock as HOLD. No help with debt; shareholders to get value This deal would not help the company with its mounting debt as no money would be raised through the listing of Reliance Properties. However, RCom shareholders stand to receive shares of Reliance Properties free of cost, which when listed could bring in a value of | 32/share. Also, recent deals with Reliance Jio Infocomm and possible sale of stake in Reliance Globalcomm to Samena Capital are the latest steps taken by RCom to bring down its debt. RCom recently repaid $1 billion debt and an additional $207 million in other currency. Value unlocking!!! We have maintained our estimates as this deal does not have any impact on the profitability. The valuation of Reliance Properties would be directly adding to the fundamental value of the core telecom business of RCom. We have estimated Reliance Properties will bring in a value of | 32/share, which when added to our previous target price of | 113/share yields a target price of | 145/share. We rate the stock as HOLD.
Exhibit 1: Key financials
(Year-end March) Net Sales (| crore) EBITDA (| crore) Net Profit (| crore) EPS (|) P/E (x) Price / Book (x) EV/EBITDA (x) RoCE (%) RoE (%) FY11 22,430.4 8,404.3 1,345.7 6.5 20.9 0.7 7.4 2.4 3.3 FY12 19,677.0 5,785.0 928.0 4.5 30.2 0.8 11.1 2.4 2.5 FY13 20,561.4 5,943.1 672.7 3.3 41.7 1.0 11.2 3.0 2.3 FY14E 22,233.6 6,942.0 1,449.8 7.0 19.4 0.9 8.9 4.3 4.8 FY15E 23,615.3 7,004.9 546.5 2.6 51.4 0.9 8.3 4.4 1.8

Valuation summary
P/E Target P/E EV / EBITDA Price /BV RoNW (%) RoCE (%) FY12 30.2 32.2 11.1 0.8 2.5 2.4 FY13 41.7 44.5 11.2 1.0 2.3 3.0 FY14E 19.4 20.6 8.9 0.9 4.8 4.3 FY15E 51.4 54.7 8.3 0.9 1.8 4.4

Stock data
Market Capitalization (| Crore) Total Debt (FY13) (| Crore) Cash and Investments (FY13) (| Crore) EV (| Crore) 52 week H/L Equity capital Face value MF Holding (%) FII Holding (%) 28,070.7 40,145.8 1,392.9 66,823.6 147 / 48 1,032.0 |5 9.4 8.0

Price movement
7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Jul-12 Oct-12 Jan-13 Apr-13 Nifty (L.H.S) Price (R.H.S) 160 140 120 100 80 60 40 20 0 Jul-13

Analysts name
Karan Mittal karan.mittal@icicisecurities.com Anil Shenoy anil.shenoy@icicisecurities.com

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Real estate valuation The company would be working with global partners to develop the real estate, which includes about 135 acres with saleable area of over 15 million square feet in Navi Mumbai and about four acres in Connaught place, New Delhi. We discuss the valuation of each property separately. Overall, we have valued Reliance Property at | 6624 crore or | 32/share. We also highlight that we do not have details about the debt for Reliance Property, which can drag our rough cut valuation and will remain the key to risk to our valuation. Dhirubhai Ambani Knowledge City: In order to value Dhirubhai Ambani Knowledge City, we have assumed the lease rate of | 50 per month/sq ft and cap rate of 10%. Based on these assumptions, we have arrived at a value of | 8100 crore for Dhirubhai Ambani Knowledge City. Connaught Place: We have valued this four acre land parcel based on our back of the envelope calculation. To do this calculation, we have considered the lease rate of | 300 per month/sq ft, cap rate of 10%, developers margin of ~40%, construction and other SG&A expenses of | 4000 psf and FSI of 3x. Based on these assumptions, we have arrived at land cost per acre of | 183/acre valuing this land parcel at | 732 crore.
Exhibit 2: RCom - land valuation
Dhirubhai Ambai Knowledge City (A) Developable Area (in mn sq ft) Lease rate per month per sq ft (|) Annual Lease income @ 90% occupancy (| crore) Cap rate assumption (%) Value of Asset (| crore) - A Connaught Place land parcel - B Total Real Estate NAV Valuation Discount to NAV Real Estate Target Valuation Number of Rcom shares Valuation per share 15 50 810 10% 8100 732 8832 25% 6624 206.4 32.1

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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Financial summary
Profit and loss statement
(Year-end March) Total operating Income Growth (%) Employee Expenses Administrative Expenses Access Charges License Fee Network Expenses Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income Extraordinary Expense PBT MI/PAT from associates Total Tax PAT Growth (%) EPS (|) FY12 19,677.0 -12.3 1,283.0 2,957.0 9,652.0 0.0 0.0 13,892.0 5,785.0 -31.2 3,978.0 1,630.0 705.0 882.0 60.0 -106.0 928.0 -31.0 4.5 FY13 20,561.4 4.5 1,188.8 3,061.1 2,676.0 1,115.3 6,577.1 14,618.3 5,943.1 2.7 3,845.2 2,499.2 1,217.0 815.7 71.8 71.2 672.7 -27.5 3.3 FY14E 22,233.6 8.1 874.1 3,549.4 2,913.8 1,179.1 6,775.2 15,291.6 6,942.0 16.8 4,052.5 2,530.2 1,457.4 1,816.7 76.3 290.7 1,449.8 115.5 7.0 (| Crore) FY15E 23,615.3 6.2 921.5 3,709.7 3,145.7 1,271.0 7,562.5 16,610.4 7,004.9 0.9 4,144.1 2,320.2 200.0 740.6 60.7 133.3 546.5 -62.3 2.6

Cash flow statement

(Year-end March) Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Others CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Sec. premium Others CF from financing activities Net Cash flow Opening Cash Closing Cash FY12 928.0 3,978.0 -396.6 238.2 0.0 4,747.6 436.8 -2,513.8 -125.8 -2,202.8 0.0 -2,153.6 -60.0 -534.5 -4,111.4 -6,859.5 -4,314.7 4,866.2 551.5 FY13 672.7 3,845.2 -2,417.5 1,262.6 0.0 3,363.0 133.0 -1,620.6 4,407.1 2,919.5 0.0 3,228.0 0.0 0.0 -8,669.2 -5,441.2 841.4 551.5 1,392.9 FY14E 1,449.8 4,052.5 1,212.7 -525.4 0.0 6,189.5 0.0 -1,500.0 76.3 -1,423.7 0.0 -4,000.0 -60.4 0.0 0.0 -4,060.4 705.5 1,281.4 1,986.9 (| Crore) FY15E 546.5 4,144.1 -331.0 2,414.5 0.0 6,774.2 0.0 -2,500.0 60.7 -2,439.3 0.0 -3,000.0 -60.4 0.0 0.0 -3,060.4 1,274.5 1,986.9 3,261.4

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Balance sheet
(Year-end March) Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Minority Interest Other Non Current Liabilities Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets Creditors Provisions Other Current Liabilities Total Current Liabilities Net Current Assets Goodwill Application of Funds FY12 1,032.0 35,689.2 36,721.2 36,917.8 1,018.0 860.0 2,974.2 78,491.2 FY13 1,032.0 27,692.7 28,724.7 40,145.8 0.0 725.3 69,595.8 FY14E 1,032.0 29,082.1 30,114.1 36,145.8 0.0 801.6 67,061.5 (| Crore) FY15E 1,032.0 29,568.3 30,600.3 33,145.8 0.0 862.3 64,608.4

Key ratios
(Year-end March) Per share data (|) EPS Cash EPS BV DPS Cash Per Share Operating Ratios EBITDA Margin (%) PBT Margin (%) PAT Margin (%) Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio FY12 4.5 23.8 177.9 0.3 2.7 29.4 4.5 4.7 10.0 66.5 213.9 2.5 2.4 2.6 30.2 11.1 3.3 1.4 0.8 6.4 1.0 0.9 0.8 FY13 3.3 21.9 139.2 0.0 6.2 28.9 4.0 3.3 9.4 69.4 225.5 2.3 3.0 3.1 41.7 11.2 3.2 1.4 1.0 6.8 1.4 1.0 0.9 FY14E 7.0 26.7 145.9 0.3 9.6 31.2 8.2 6.5 10.0 67.0 205.0 4.8 4.3 4.4 19.4 8.9 2.8 1.3 0.9 5.2 1.2 1.0 0.9 FY15E 2.6 22.7 148.3 0.3 15.8 29.7 3.1 2.3 10.0 67.0 205.0 1.8 4.4 4.7 51.4 8.3 2.4 1.2 0.9 4.7 1.1 1.0 0.8

99,561.2 33,110.6 66,450.6 5,026.0 71,476.6 133.0 566.0 3,584.0 4,988.0 2,857.0 551.5 12,546.5 11,533.0 2,666.0 14,199.0 -1,652.5 8,534.0 78,491.2

104,592.4 39,204.1 65,388.3 3,863.7 69,252.0 111.5 496.7 3,910.5 7,791.8 2,213.5 1,281.4 15,693.9 12,703.2 2,758.4 15,461.6 232.3 0.0 69,595.8

107,956.1 43,256.6 64,699.5 2,000.0 66,699.5 111.5 721.6 4,252.0 5,548.4 2,677.9 1,986.9 15,186.7 12,271.6 2,664.7 14,936.2 250.5 0.0 67,061.5

110,456.1 47,400.7 63,055.4 2,000.0 65,055.4 111.5 572.4 4,417.8 5,787.0 2,753.6 3,261.4 16,792.2 14,255.3 3,095.4 17,350.7 -558.5 0.0 64,608.4

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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Company Description
Reliance Communication is a pan-India telecom service provider providing voice and data service in GSM as well as CDMA platform. The company also offers data services via 3G in 13 circles. Apart from the traditional voice and data services, the company is also a strong player in the enterprise data segment and offers national long distance (NLD) and international long distance (ILD) services for voice, data and internet to enterprises and other carriers. The company has over 14 crore individual, enterprise and carrier customers. RCom holds spectrum in both 1800 MHz and 900 MHz band in the GSM space, 800 MHz band in the CDMA space and 2100 MHz band in the 3G space.
Exhibit 3: Recommendation History
160 140 120 100 80 60 40 20 0 Jul-12 Aug-12 Oct-12 Nov-12 Price Jan-13 Feb-13 Apr-13 May-13 Jul-13

Target Price

Source: Reuters, ICICIdirect.com Research

Exhibit 4: Recent Releases

Date 5-Jul-12 14-Aug-12 8-Oct-12 9-Nov-12 8-Jan-13 24-Jan-13 3-Apr-13 8-Apr-13 7-Jun-13 5-Jul-13 Event Q1FY13 Result Preview Q1FY13 Result Update Q2FY13 Result Preview Q2FY13 Result Update Q3FY13 Result Preview Q3FY13 Result Update Company Update Q4FY13 Result Preview Q4FY13 Result Update Q1FY14 Result Preview CMP 67 56 62 57 81 80 63 63 118 134 Target Price 67 50 55 55 55 69 75 75 103 113 Rating HOLD SELL SELL HOLD SELL SELL BUY BUY SELL SELL

Source: ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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ICICIdirect.com coverage universe (Telecom)

Sector / Company Bharti Airtel (BHATE) Idea Cellular (IDECEL) OnMobile (ONMGLO) RCom (RELCOM)
* - STRONG BUY

CMP M Cap (|) TP(|) Rating (| Cr) 296 385 SB* 118,263 138 135 Hold 45,524 29 26 Hold 329 136 145 Hold 28,009

EPS (|) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E 11.2 6.0 11.0 26.4 49.4 26.8 7.8 7.4 6.0 8.4 7.3 9.0 8.4 4.5 7.2 2.2 3.2 4.6 62.9 43.0 29.6 11.2 9.1 7.5 8.5 10.8 13.4 5.5 7.6 10.0 7.2 4.1 2.8 4.0 7.0 10.3 1.5 1.4 0.5 5.8 5.3 4.5 9.4 5.2 3.5 4.5 3.3 7.0 30.2 41.6 19.3 11.1 11.2 8.9 2.4 3.0 4.3 2.5 2.3 4.8

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey

Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com

pankaj.pandey@icicisecurities.com

ANALYST CERTIFICATION
We /I, Karan Mittal MBA, Anil Shenoy MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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