G Gr ro ou up p # # 8 8: : Anil Menon (159)| Arkaprabha Sircar (156)| Chirag Jain (121)|

Kaushik Chatterjee (106)| Karthik Iyer (119)| Nimmy Mathews (134)

2

I ndex

Reliance Industries & Reliance Communications ....................................... Pages 3 - 4

Rationale For Diversification .................................................................... Pages 5 - 10

Modalities And Effectiveness Of Diversification ..................................... Pages 10 - 15

Current Market Scenario .................................................................................. Page 16

Conclusion:

Market Forecast ....................................................................................... Pages 17 - 18

Future Of Reliance Communications ............................................................... Page 19

Annexure ................................................................................................. Pages 20 30



3
A Brief I ntroduction To The Companies

The Reliance Group Reliance I ndustries Limited
The Reliance Group, founded by Dhirubhai H. Ambani (1932-
2002) in 1966, is India's largest private sector enterprise, with
businesses in the energy and materials value chain. The Group's
operations can be classified into three segments namely:
Petroleum Refining and Marketing business
Petrochemicals business
Others (including Crude Oil and Natural Gas Exploration & Production business.
The Reliance group of companies expanded into textiles in 1975. Since its initial
public offering in 1977, the group has expanded rapidly and integrated backwards -
its major products and brands, from oil and gas to textiles are tightly integrated and
benefit from synergies across the Company.
Group's annual revenues are in excess of Rs. 1,12,500 crore. The flagship company,
Reliance Industries Limited, is a Fortune Global 500 company and is the largest
private sector company in India with market capitalization of Rs 2,39,084 crore (as on
5
th
July 2007).It has more than 25,000 employees on its rolls. Major Group
Companies are Reliance Industries Limited (including main subsidiaries Reliance
Petroleum Limited and Reliance Retail Limited), Indian Petrochemicals Corporation
Limited and Reliance Industrial Infrastructure Limited.
The group has followed a policy of timely diversification into other unrelated but
profitable industries. After its foray into telecom in 2002 (Reliance Infocomm), in
January 2006, it has now in the process of establishing a retail business through a
subsidiary Reliance Retail Limited. The groups' subsidiary Reliance Infrastructure
Ltd. is currently establishing infrastructure facilities such as roads and buildings for
the proposed Special Economic Zone (SEZ) at Jamnagar, Gujarat.
Reliance I ndustries Share @ a glance (as on 5
th
September 2007)
Snapshot Profile
Current Price (Rs.) 1957.45 Sector Energy
Face Value (Rs.) 10.00 Industry Crude Oil & Natural Gas
Incorporation Year 1966 Market Capitalisation (Rs. Crore) 274730.11
Daily High (Rs.) 1999.30 PE Ratio 23.63
Daily Low (Rs.) 1946.20 PB Ratio 4.75
52 Week High (Rs.) 1775.25 Year To Date Return (%) 120.02
52 Week Low (Rs.) 1087.65 Source: www.valuesearchonline.com


4
Reliance Communications
Reliance Infocomm was launched in 2002 as a part of the
undivided Reliance Group. Its founding philosophy was based on
Dhirubhai Ambani's vision -Make a telephone call cheaper than a
postcard. Reliance Infocomm started laying out 60,000 route
kilometers of a pan-India fibre optic backbone. The company was
soft launched on 28th December 2002, the occasion of the Late
Dhirubhais 70th birthday.
In 2005, the Reliance empire split and Anil Ambani got control of erstwhile Reliance
Infocomm , Reliance Energy and Reliance Capital whereas Mukesh Ambani got
control of Reliance Industries Limited and Indian Petrochemicals Corporation
Limited (IPCL). Anil Ambani immediately unveiled the 'Anil Dhirubhai Ambani
Group' (ADAG). Reliance Infocomm was transformed into Reliance Communications
which became the flagship company of ADAG of companies.
Reliance Communications is India's largest private sector
information and communications company, with over 35
million subscribers and market capitalization of Rs.
1,10,807 crore (as on 5
th
July 2007). It has established a
pan-India, high-capacity, integrated (wireless and wireline), convergent (voice, data
and video) digital network, to offer services. The company has a reliable, high-
capacity, integrated (both wireless and wireline) and convergent (voice, data and
video) digital network. It is capable of delivering a range of services spanning the
entire infocomm (information and communication) value chain, including
infrastructure and services - for enterprises as well as individuals, applications, and
consulting.
Reliance Communications Share @ a glance (as on 5
th
September 2007)
Snapshot Profile
Current Price (Rs.) 538.80 Sector Technology
Face Value (Rs.) 5.00 Industry Telecom. Services
Incorporation Year 2004 Market Capitalization (Rs. Crore) 110756.79
Daily High (Rs.) 545.50 PE Ratio 39.86
Daily Low (Rs.) 535.20 PB Ratio 5.18
52 Week High (Rs.) 552.35
52 Week Low (Rs.) 301.45 Source: www.valuesearchonline.com

(Please refer to Annexure 1 for Background: History Of Cellular Telephony In India
With Focus On Growth Of Reliance As A Telecom Major)
Source: www.ril.com / www.reliancecommunications.co.in


5
Rationale for Diversification
The foray of the Reliance Group into the telecom sector was based on its founders
vision Dhirubhai Ambani had ambitiously stated in 1999; Make a telephone call
cheaper than a postcard. The following lists the rationale for their diversification
into an unrelated industry such as telecom from their core businesses of textile and
petrochemicals.
1. New National Telecom Policy99
2. Growing Importance Of Service Sector In The Economy (GDP) And Increasing
Contribution Of Telecom Industry To The Service Sector
3. Growing Middle Class With Increasing Disposable Income
4. Deep Pockets
5. Sunshine Sector - Potential For Growth
1. New National Telecom Policy99:
National Telecom Policy '94
The first step towards opening the telecom services sector took place with cellular
licenses for the four metros being awarded to private companies in 1994. In the same
year, the government formulated the National Telecom Policy of 1994 (NTP 94) with the
objective of encouraging private sector participation in telecom services. As per NTP 94,
one private company per circle was to be allowed entry into basic services while two
operators were to be allowed to compete in providing cellular services in each of the
circles. Subsequently, cellular services became operational in four metros and 18 state
circles and basic services, too, commenced in a few circles. However, high license fee
bids, tariff distortions, unattractive interconnection and revenue sharing arrangements
between DOT and new private licensees resulted in most service providers finding
themselves in financially unviable situations.
New Telecom Policy '99
In an attempt to remove the defects of the old policy and provide a new direction to the
telecom sector, the government came out with NTP99. The highlights of NTP99 were::
Three types of Service Providers:
Cellular Mobile Service Providers (CMSPs) : Right to provide all types
of mobile services
Fixed Service Providers : Right to provide all types of Fixed services
Cable Service Providers
Recognizes convergence, makes licenses technology neutral but service specific
Increasing power of Regulator: Talks about strengthening TRAIs competition
management functions
6
Shift away from Monopoly/Duopoly: Assured level playing field as a promise of
the policy
Introduction of a 1 time Entry Fee (Rs. 400 Crores) + revenue share arrangement
for payment of license fees.
Extension of license period to 20 years.
Opening up of Domestic Long Distance by January 1, 2000.
Restructuring of the Department of Telecommunications.
Transparent, effective & efficient management of spectrum.
Imposition of a universal service levy on all operators to fulfill universal service
obligations.
Migration from NTP94 to NTP99: The Settlement
The Industry got:
Migration to revenue share
Six months waiver of license fee
Extension of license term
Promise of strengthened regulatory framework
The Industry accepted:
No duopoly status. Review every 2 years
Introduction of competition under NTP 99 / TRAI Act
Sharp reductions in tariffs and rentals
Withdrawal of court cases (claims of Rs.10,000 crores)
2. Growing Importance Of The Service Sector I n The Economy
Post liberalization (1991), the economy had turned the corner with an impressive growth
rate in GDP (6% and over per annum). The percentage contribution of the Tertiary Sector
(i.e. Service Sector) to the GDP increased at a much faster pace as compared to the
Secondary and Primary Sector. Reliance Group was traditionally focused on
Manufacturing (their biggest revenue generators being Petrochemicals and Textiles), i.e.
the Secondary Sector, and hence it made sound business sense for them to venture into
the Service Industries which held the promise of an ever-increasing and sustainable
return.
The contribution of the Telecom Sector to the Service Sector was also steadily increasing.
Its contribution towards GDP at factor cost was 1.2% of the Service Sector in 1993-94
and in 1999-00 it registered a growth rate of 25%, with its contribution rising to
1.6%.This was the highest growth by any industry under Tertiary Sector second to only
the Hospitality Industry. The growth rate of Total Tertiary Sector towards GDP at factor
cost in the same period was 12% (Please Refer to Annexure 1 Fig 1.1)

7
3. Growing Middle Class With I ncreasing Disposable I ncome
The disposable income of the Bourgeois i.e. the Indian Middle Class was showing an
upward trend. This can be inferred from the following two factors:
i. Increasing Gross Domestic Savings: The Gross Domestic Saving was steadily rising.
The rate at which Gross Domestic Savings had increased in 2000-01 from 1995-99 was
23.4%. The share of Household savings in GDS went up from 79% in 1985-89 to 85.1%
in 2000-01. (Please Refer to Annexure 1 Fig 1.2)
ii. Increasing Private Final Consumption Expenditure: Per Capita Private Final
Consumption Expenditure has shown a consistent upward trend from (1993-94 to 2004-
05) which indicates a growing demand for normal goods. In the year 2002-03, PFCE rose
by 3.9%; in 2003-2004 it rose by 8.3%. (Please Refer to Annexure 1 Fig 1.3)
4. Deep Pockets
In 2000-01, Reliance was the largest, fastest growing, and the most valuable business
group, in India .Reliance Groups leadership position in the Indian economy was
reflected by the following statistics:
3% of Indias GDP
5% of Indias total exports
9% of governments indirect tax revenues
2.3% of the gross capital formation in the country, in the past 5 years
The companys financials spoke for itself.
Rs. Crore $ Billion Rank
Sales 59,000 12.6 1
Exports 9,400 2.0 1
Cash Flow 6,200 1.3 1
Net Profit 4,100 0.9 1
Assets 46,400 9.9 1
Market Capitalization 63,000 13.5 1
Reliance groups pre-eminent role in the Indian corporate sector at the time was evident
from the following statistics:
30% of the total profits of the private sector
10% of the profits of the entire corporate sector
Over 12% of total market capitalization
Weightage of 24% in the Sensex (Highest of any company)
Weightage of 21% in the Nifty
1 out of every 4 investors in India was a Reliance shareholder
8
RIL and RPL were, at the time, the top 2 companies in India on all major financial
parameters. Clearly the Reliance group had deep pockets, which was just as well since
the Telecom Industry was a highly capital intensive industry. Apart from the prohibitive
entry barrier in the form of a very high license fee (Rs. 400 crore), the telecom sector also
required a large infrastructure investment and had a relatively long break-even period.
The cost intensive nature of the Indian Cellular Industry was highlighted by T V
Ramachandran, Director General, COAI in October 2002. According to him, the high
cost structure of the industry was due to the following reasons:
Indian Cellular Market had lowest tariffs, but highest costs.
Only country in world to have High cost of entry + high annual license fee.
Sub-optimal allocation of spectrum at less than half of international average, also
added to cost & affected quality of services.
High customs duties - as much as 25% on equipment, formed a significant
component of costs.
The Telecom Industry had High Recurring Costs - 35-42 % of a companys revenues
were being passed on by way License Fee, Interconnection charges, Spectrum Usage
Charges & Service Tax. This meant that the Break-even period for any player was
relatively long.
In the 2000-01 Annual Report of RIL, the Investment Plan for Reliance Infocomm was
spelt out as listed here under:
Planned investment of Rs. 25,000 crores (US$ 5 billion) envisaged over the next 3-5
years
Project was proposed to be financed with 2:1 debt equity - total equity requirement
for the project Rs. 8,000 crores (US$ 1.7 billion)
RIL would be the lead investor with 45% equity stake: 10% ESOP, and balance
equity would be by other Reliance group companies and promoters.
Reliance invested Rs 10,500 crore in the 1
st
phase in Reliance Infocomm. Thus the
Reliance group had paved the way ringing in a new wave of telecom revolution in India.
Why did Reliance choose CDMA over GSM:
The following are the 3 reasons for Reliance choosing CDMA over GSM.
Bandwidth (Spectrum) Optimization:
In GSM, the total frequency band has to be divided for the purpose of transmission,
however, CDMA uses a spread spectrum where there is no division of the frequency
band, i.e. , the same frequency band is used over and over again .

9
Cost of infrastructure is lower than GSM due to low equipment cost:
At that time, the custom duty of importing CDMA equipment was much lower than that
of GSM. They also had strategic tie ups with LG and Samsung as hand set manufacturers.
Assurance in NTP99 of WiLL (Wireless in Local Loop):
In 2001, Reliance gathered other basic services operators and lobbied successfully with
the Department of Telecommunications (DoT), the Union Communications Ministry,
TRAI and the apex tribunal to allow limited mobility within a short distance. Until then
WiLL was perceived only as a solution to bridge the "last mile" problem in the telecom
network. Reliance had licenses for basic telecom operations in 18 basic circles, but did
not bid for any cellular license other than the seven licenses that it had from the initial
foray in the first round of license auctions. Instead, it placed its bets rather early on the
CDMA platform. Reliance ushered in the CDMA technology and re-entered the cellular
telephony market with a license only for limited mobility service under WLL telecom
network.
However, Reliance could leverage on technology and provide competitive cellular
services at much cheaper tariff than the existing GSM players. TRAI noted that Reliance
had converted its services into an almost an all-India roaming- done by registering the
subscribers almost all over the country by using call-forwarding and multiple registration.
Thus Reliance could bend the rules to its advantage which caused an uproar from the
existing GSM players laying ground for the Unified License scheme, introduced in
November 2003. Under this, a service provider could offer both fixed and mobile
services under one license. Thus, while cellular operators could offer basic services,
WiLL operators could offer cellular services.
5. Sunshine Sector Potential For Growth
In the first fifty years of independence, India had a dismal teledensity of 0.80%. Post the
telecom sector opening up to private players, the teledensity had shown an upward trend.
The teledensity in 2001 was 3.58%. Where as average teledensity of developed
economies was around 65 to 75%. This provided ample scope for a new player to enter
the market and compete with the existing players.
Despite India having crossed the 100-million telephone mark on April 13, 2005 to
become the fifth largest telecom network in the world after China, the US, Japan and
Germany, (Teledensity in the US, Japan and Germany is 100%. China has a teledensity
of 55%) there is huge potential for growth in the telecom sector especially in the rural
market. This is because the urban teledensity has increased exponentially since 1997 and
the rural teledensity has shown a comparatively marginal growth, (Please Refer to
Annexure 1 Fig 1.4) The current teledensity is 19.80% (July07) and it is expected to
touch 22% by the end of the year.
10
In 2000, DoT projected that Mobile telephones will rule the Indian Telecom market in the
next 5 years and it would become a necessity rather than a luxury. The DOT annual
report 2005-05 also highlighted the growth of mobile telephony in India and decline of
fixed line telephony. In 2002, mobile telephony grew by an astounding 160% to 33.7
million subscribers (as compared to 13 million in 2001) where as the fixed line telephony
saw a decline of 16% with the number of subscribers falling to 35.25 million (as
compared to 41.31 million in 2001). Reliance had clearly timed their move well. The
CAGR of mobile telephony was 86% compared to only 11% in case of fixed line
telephony for the period 1996 - 2004. (Please Refer to Annexure 1 Fig 1.5)
The market scenario of the telecom sector in December 2001 is shown in Fig 1.6 in
Annexure 1.
The Growth Predictions for the telecom sector in 2001 were:
Mobile subscriber base will grow up to 200 million by 2010 (CAGR 33.7%)
Mobile market value will be $ 24 billion by 2009
Indian cellular market would account for 11% of overall Asia-Pacific and Japan
market by 2009
India would become third largest mobile user-base behind China and US, by 2007
Revenues would reach as high as $ 10 billion, by 2010
Sources: Economic Intelligence Unit Gartner | TRAI | COAI | Lehman Brothers |
Zinnov Research & Consultanting



11
Modalities and the Effectiveness of Diversification
The Reliance Communication Story can be narrated in four parts:
Phase One The Big Bang Theory
Phase Two A Bigger Bang
Phase Three A New Star Is Born
Phase Four The Shooting Star
Phase One The Big Bang Theory
On December 18
th
2002, on the late Dhirubhai Ambanis 70
th
birth anniversary, Reliance
Infocomm was soft launched and was later commercially launched in May 2003 as a
Pan India effort across 1,100 cities and towns. It had Optical Fibre Cable network
backbone of 60,000 route kilometers. Value added Services was launched through R-
World mobile portals that provided 70 applications (including news, TV guides, movie
clips).An aggressive expansion plan was formulated to cover an additional 3,800 towns
within FY08 to cater to 140 million customers.
The company followed an aggressive marketing strategy through a Multi Channel Pan
India distribution and Customer Care network. The network included 230 WebWorlds
(Retail Broadband centers), 7,100 Point of Sales Outlets,1,000 Direct Sales Agents, 4,800
Independent Sales Agents,195 Distributors covering 50,000 merchants, Enterprise Sales
Team (300 + 1,000 FoS),and 4,800 Customer Care executives. Initially only Post Paid
Schemes which were high risk and high gain were introduced; with innovative pricing to
drive penetration and a 3 year lock in period for guaranteeing customer loyalty.
Reliance Infocomm carved out a niche for itself by starting operations with the
Dhirubhai Ambani Pioneer Offer the companys flagship offer with STD call rates
as low as 40p/min. (Mobile Handset partners were Samsung and LG) (Please Refer to
Annexure 2 Fig 2.1).. In July 2003, the Monsoon Hungama Scheme launched .It
created history by lowering the entry barrier of going mobile to Rs. 501 as a result of
which one million customers applied for subscription within 10 days of its launch. At the
end of March04 a subscriber base of almost 7 million customers had been acquired. The
Reliance India Mobile brand emerged as the Most Trusted Telecom Brand in the
country (Source: A.C. Nielson, ORG MARG). Also on offer for the 1st time in India
was high speed mobile data services through R-World mobile portal.
The overall capex was estimated to be around Rs. 18,000 crores compared to initially
announced Rs. 25,000 crores due to sharp fall in telecom equipment cost (especially
CDMA) as a result of the slowdown in the global telecom industry leading to lower
equipment and fibre costs. RILs exposure to Infocomm was US$ 1,043 million,
comprising of US$ 508 million in equity and US$ 535 million in debt. Additional
exposure was estimated to be at US$ 500 million in debt. However, Reliance Infocomm
had sufficient positive cash flows to prepay RIL debt ahead of maturity in the very first
year.
12
At this point, Reliances GSM cellular service was not faring as well as its CDMA
division. Subscriber base had touched only 600,000 by the end of August 2003.Services
were operational in 7 telecom circles comprising 118 cities in 15 states. The cellular
operations spanned 1/3rd of Indias geographical area and covered an area of nearly 400
million people. Its pre-paid services accounted for 95% of cellular revenues this was a
low risk strategy. The GSM Network was successfully established only in the central and
eastern parts of the country.
Phase Two A Bigger Bang
This Phase was sparked by the strategic acquisition of 100% of FLAG Telecom on
January 2004 for US $ 211 million through Reliance Gateway Net Ltd. ( a wholly owned
subsidiary of Reliance Infocomm).FLAG Telecom was a leading global telecom
company having 180 customers ,including a number of the worlds leading international
carriers. FLAG connected 16 of the worlds top 20 business centers and 75% of the world
population through its 55,000 Km Fibre Optic Network. (Please Refer to Annexure 2
Fig 2.2).FLAG also had project FALCON underway which was a new high capacity
resilient loop cable system providing multiple landings through out the Gulf region with
submarine link stretching to Egypt in the west and Hong Kong in the east. This
acquisition provided the company with an international gateway to global markets;
Reliance Infocomm now became a carriers carriers. The company now owned 112,000
Route Km internationally and started an 100 Mbps Ethernet link for broadband
connectivity (a 1st for any Indian Company). The Enterprise Broadband Service was
rolled out in 30 towns which was then extended to 200 towns and it garnered 50,00,000
Corporate Customers.
This phase was also marked by the introduction of Pre-paid schemes in February
2004.Services offered included FWP (Fixed Wireless Phones) using WiLL technology
and Lease Lines. Services like International Private Lease Circuits, Virtual Pvt.
Networks, Video Phones, Audio and Video Conferencing and Netway were planned to
be introduced. Subscribers were given greater choice for handsets as Reliance partnered
with Motorola and Nokia(the Indian market favorite).These mobile sets were of light and
sleek design and offered enhanced services like Java enabled utilities, Polyphonic
ringtones, three-way conferencing, multimedia messaging and special lifestyle features
like organizers, calendars, etc. They also overcame the product deficiency of battery
overheating with Lithium Ion batteries that were more reliable.
Phase Three A New Star I s Born
On June 18 2005, after seven months of intense and bitter power struggle, the Ambani
brothers resolved the "ownership dispute" amicably. This was marked by an
announcement regarding the settlement by their mother, Kokilaben through a statement,
making the separation official. The board of directors approved the RIL demerger plan.
According to this, Reliance Industries shareholding in Reliance Energy, Reliance Capital
and Reliance Infocomm would be put into a new holding company a kind of a special
13
purpose vehicle (SPV). The demerger ensures that both brothers will have a clear line of
ownership and control.
Mukesh Ambani got RIL and IPCL and Anil was awarded Reliance Infocomm, Reliance
Energy and Reliance Capital. (Please Refer to Annexure 2 Fig 2.3).In terms of market
capitalization, Mukesh seemingly had the edge. The combined market capitalization of
IPCL and RIL is close to Rs 88,000 crore, compared to the nearly Rs 15,000 crore of
Reliance Energy and Capital. However, Anil's prized catch and as some referred to it as
the jewel in the crown, Reliance Infocomm could turnaround the younger Ambani's
fortunes. The big cash cow, which is not yet listed on the bourses was believed to be
valued anywhere from Rs 25,000 crore to Rs 45,000 crore by various market analysts.
Anil Ambani immediately unveiled 'Anil Dhirubhai Ambani Group' and committed an
investment of Rs 3,000 crores of his personal funds in Reliance Energy and Reliance
Capital. Thus Reliance Communication (previously Reliance Infocomm), India s leading
integrated telecom company was formed. It became the flagship company of the Anil
Dhirubhai Ambani Group (ADAG) of companies and was subsequently was listed on the
National Stock Exchange and the Bombay Stock Exchange.
Phase Four The Shooting Star
Reliance Communications is now a strategic presence in all growth segments and is
uniquely positioned across the voice and data spectrum:
Wireless: CDMA+GSM voice, mobility, fixed wireless, internet access, multimedia,
data VPNs, PCO, payphone 65% Q1 FY07 Revenue
Global: National and international voice, virtual calling card, international capacity,
internet bandwidth, managed data services 28% Q1 FY07 Revenue
Broadband: Enterprise centrex, conferencing, leased lines, MPLS-VPN, data centers,
consumer access lines, broadband internet 7% Q1 FY07 Revenue
Reliance Communication: Dominant position across multiple segments
Wireless traffic 350 million minutes/day
Public Call Office (PCO) lines 48% market share
International Long Distance (ILD) voice 45% market share
US-India retail voice carrier 40% market share
Internet Data Center (IDC) services 62% market share
Primary International bandwidth provider in Middle East and Asia
Internet bandwidth in India 35% market share
The customers include-
Over 32 million subscribers in India
Over 7,00,000 global consumers
Over 200 major global carriers
14
Over 250 MNCs
Over 700/1000 Top Indian Large Enterprises
Over 10,000 Indian SMEs
The company offers a comprehensive international portfolio through a submarine cable
network that spans 4 continents and 40 countries. Its Domestic wireless network
currently spans more than 10,000 towns and 300,000 villages across the country,
providing coverage to over 60 per cent of Indias population. Reliance Infocomm
operates the largest, next generation long-distance network in the country, comprising
1,00,000 route Kilometers of OFC. In the current fiscal year, RCom will spend Rs
16,000 crore for further expansion and strengthening their network coverage, across
India and rest of the world. There are embedded opportunities for value creation by
leveraging assets within RComs integrated platform from the following: the 6000 seat
multi-location, multi lingual contact centre,1650 exclusive Reliance World outlets in 700
towns, largest distribution network in the industry, and passive infrastructure like
nationwide single occupied radio towers and fibre ducts, and Project FALCON.
The financial restructuring of Reliance Communications is the biggest turnaround story
in the history of corporate India and in the shortest time. It was the first Indian telecom
services company in the private sector to recommend a dividend payout to its
shareowners. Market capitalization is up from Rs. 37,000 crore (us$9.5 billion) to over
Rs. 1,17,000 crore (US$ 29.3 billion).RCom crossed the Rs 1,000-crore mark in Net
Profit in one quarter in the last reported quarter of FY 2007 the fifth Indian company to
do so, and by far the youngest.
FY 06-07 Financial Results
Revenue: Rs. 17,440 Crores
Operating Expenses: Rs. 10,812 Crores
Net Profit (PAT): Rs. 3,526 Crores
Net Profit attributable to equity shareholder: 2,408 Crores (after more than Rs. 1000
crores written off due to de-merger)
EBDITA: Rs. 6,693 Crores | EBDITA margin: 38.38%
ROI: 5.23% ((EBIT-TAX)/Total Assets)
ROI: 6.84% (EBIT/Net Assets)
ROE: 11.73% (PBT/NW)
Return on net worth: 30%
EPS: 11.98
Reaches BEP in Dec05 with quarterly profit of Rs. 5 Crores.
Time taken to reach BEP: 36 months (least time taken by any telecom player in India)
Net Debt: Rs. 1,824 Crores
Shareholders equity: Rs. 22,931 Crores
Debt-equity ratio: 0.09 (standard 2:1)
Net Cash flow: Rs. 6,231 Crores
Current ratio: 1.87 (Standard: 1.5 2)
Total Assets: Rs. 35,093 Crores
15
Reliance Communications is the largest CDMA player in India and has been the CDMA
market leader from the first full year of operations. It has been registering growth every
year. (Please Refer to Annexure 2 Fig 2.4)Also from the first full year of operations, it
has out-performed its nearest competitor, Tata Tele Services Limited, and currently is
double its size in terms of subscriber base. The table shows the year on year growth of the
subscriber base of Reliance Communications and compares it with the total CDMA
subscribers. (Please Refer to Annexure 2 Fig 2.5)
16
Current Market Scenario
There currently 14 players in the market. The Total Wireless Subscriber Base is 185.13
million out of which Total GSM Subscribers are 121.43 million and Total CDMA
Subscribers are 63.7 million. (Please Refer to Annexure 3 Fig 3.1).Reliance
Communications is in 2
nd
position in the Indian Cellular Market with a total (GSM +
CDMA) subscriber base of 32,077,442 as on 30
th
July 2007. (Please Refer to Annexure 3
Fig 3.2)
In the current market scenario, most circles show Oligopolistic nature. This can be
substantiated by using the HH1 index and CR3 ratio , which indicate the level of
computation computed for each circle(total number of players is 11).
An HHI (Herfindahl Hirschman)index of greater than 1,800 is considered oligopolistic in
nature by US DoJ while TRAI is more lenient and considers HHI index of greater than
2400 as oligopolistic market structure. Most of the circles (especially the C category
circles) show signs of oligopoly.( HHI index: 1650).
If CR3(concentration) ratio is used then almost all of the circles falls under tight
oligopoly. In the absence of any real differentiation, this means that each and every action
of single player, irrespective of its size, has bearing on all other players resulting in either
cut throat competition or tendency to cartelize making role of regulator important,
difficult and risky.( CR3 Ratio: 60.1).(Please Refer to Annexure 3 Fig 3.3)
I n terms of profitability, I ndian telecom operators are world-leaders enjoying better
EBI DTA margin
1
than their counterparts in developed countries.
A report by Merrill Lynch says that the Indian telecom industrys EBIDTA margin stands
at 37.5 per cent, ahead of countries like the US (32), the UK (25.6) and Japan (26).This
is true for the last few years due to economies of scale, better pricing and lower
manpower deployment, better cost management, higher usage and rapid growth.
Moreover, unlike global companies like France Telecom and Vodafone, Indian
companies have not gone in for acquisitions which take time to register returns
The operating costs in India are much lower compared with that in developed nations.
For example, cost levels and overheads in the UK and the US are much higher , as
companies there are also not adequately compensated by way of subscriber additions.
The growth in revenues and profitability in India is due to the increase in volume, and
this is in spite of a fall in average revenue per user. The fall in tariffs was more than
offset by a growth in the subscriber base, with Indian service providers adding over 6
million users every month. (Please refer to annexure 3-Fig 3.4) India also has the worlds
second-highest usage statistics at around 400 minutes per month. Bharti Airtel, Reliance
Communications and Hutchison Essar lead the pack with EBITDA margins of more than
40 per cent. A UBS report predicts that both Bharti and Reliance Communications will
have 41.5 per cent EBIDTA margin when they announce their quarterly numbers this
month..
17
Conclusion
Market Forecast
In January 2007, study by the Center for Knowledge Societies (CKS) and commissioned
by Nokia reported that mobile communication was revolutionizing economic and social
life in rural India. With mobile phone ownership in I ndia growing rapidly, the report
noted that one in five Indians would have a mobile phone service by the end of 2007;
and by the end of 2008, three quarters of Indias population would be covered by the
mobile network. Many of these new mobile citizens live in poorer and rural areas with
limited infrastructure and facilities, high illiteracy levels, low PC and Internet
penetrations.
Pricing Forecast
As per the Sector Report - Batlivala & Karani Securities Research, Price Wars in the
cellular industry may end soon: (Please Refer to Annexure 4 Fig 4.1) Once the MoU
reaches a level of 550 to 600 minutes and ARPM falls to 45 to 55 paisa level, then a
further reduction in call rates may not result in corresponding increase in the usage. But
operators may be tempted to use free minutes as bundling strategy or in a stand alone way
to attract/poach subscriber in the future.
Market Share Forecast
According to the Sector Report - Batlivala & Karani Securities Research, several players
are seeking to improve the market share by 2012 time frame. Vodafone has based its
business case (while acquiring Hutch) at 20-25% market share by 2012. Similarly, Bharti
is targeting upwards of 25% market share by 2010-12 time-frame. Reliance
Communications would be re-launching GSM operation to improve its share. They
believe that given the structure and dynamics of industry, achieving this kind of
market share might be very challenging. B & K Securities Research expect that
Vodafone will improve market share the most in next six years (from 15.9% in December
2006 to 18.4% by December 2012). If MNP (mobile number portability) is not
implemented, then none of the operators subscriber base is expected to shrink in any of
the year (on y-o-y basis) till 2012. Implementation of MNP may significantly alter this
forecast.
However, in light of the Telecom Regulatory Authority of India's recommendations on
licensing and M&A conditions being likely to be accepted then Reliance
Communications remains the biggest gainer of the exercise (as pointed out by DNA
Money on J uly 31 and August 15.)

The Telecom Regulatory Authority of India (TRAI) has recommended tightening in
the existing mergers and acquisition laws governing telecom service providers. It
has said that a minimum of four operators should be left per circle post any merger.
At present, a minimum of only three operators per circle is required. It has also said that
18
the combined market power of the merged entity should not be more than 40 per
cent. This is considerably lower that the present definition of dominant market share
which is pegged at 67 per cent.

If this proposal is accepted, then any two large operators such as Bharti Airtel and
Vodafone Essar may not be able to merge as both have more than 20 per cent market
share each in some of the circles such as Delhi. However, TRAI has allowed the
merged entity to keep the spectrum which they jointly have. At present there is a cap
of 15 Mhz .The regulator has also suggested an increase in the existing cap of 10 per
cent on equity that one telecom player can acquire in another player in the same
service area. While the existing ceiling of 10 per cent can be acquired through the
automatic route, acquisition of anything beyond that and up to 20 per cent equity would
have to get approval on a case by case basis, subject to conforming to the M&A
guidelines recommended by the regulator.

Citigroup said Reliance Communications benefits the maximum though it will have to
have to pay an additional entry fee, referring to the TRAI recommendation on use of
combination technologies. The Anil Ambani firm, which has applied for GSM license
across the country, can now get spectrum for the remaining 15 circles where it does not
have GSM service but it has to pay an entry price equivalent to that paid by any universal
access player in a particular circle.

Credit Suisse co-heads of Asian telecoms research, Jeff Kahng and Colim McCallum also
said Reliance Communications will be the biggest beneficiary with its "clear
framework for launching GSM services". According to them, if the defense ministry
releases 20 mega hertz of spectrum to the telecom sector by the end of this year, it would
allow three to four new operators to come into play.
Our group feels that over the next 3-5 years, the market will become a near perfect
Oligopoly with major players being Bharti, Reliance, Vodafone and Tata (These
players would not be able to able to merge together as no player will be allowed to have
more than 40% market share as per latest TRAI regulations.) BSNL with its latest
infrastructure expansion move could also become a major player. Aircel, BPL, Spice
are likely to be taken over by the major players I dea may or may not be taken over
(depending on the will of their promoters The Birlas).Tariffs will fall but not
significantly. Despite this profitability will increase as all players will be optimally
utilizing their created idle capacity. Market offerings will increase which will benefit
the customers. The spectrum vacated by the Defense Dept. will help the GSM players to
consolidate market position and become market leaders. This will prompt Reliance
Communications to focus back on the GSM market and make significant
infrastructure investment.
19
The Future Of Reliance Communications
The present total GSM Subscriber Base is 121.43 Million of which Reliance has only 4
Million (a dismal 3.3%!) Reliance Communications seems to be shifting focus to the
GSM business and has approached DoT for permission to offer GSM services in 21
circles. According to the market buzz, the company planned to start GSM operations in
Delhi and Mumbai with an estimated investment of over Rs. 1500 crore. Also, that
Reliance was already in talks with major equipment vendors like Nokia, ZTE, and
Motorola for rolling out GSM service.
The rationale behind their move can be attributed to the following reasons:

GSM would catalyze subscriber growth.
Can leverage its existing infrastructure.
Can leverage the scale offered by the technology, which is used by more than 70 per
cent of the global mobile operators.
Cheaper CDMA handsets not being made available in the market, which is hindering
its growth.
CDMA to miss the additional spectrum released by the Defense Dept. - if their GSM
license application is approved, RCom gets access an additional 5 Mhz of spectrum
GSM is an open standard, so that the company would not have to pay any sort of
royalty to Qualcomm. Currently, there has been a lot of heated debate on the royalty
charged by Qualcomm for CDMA. According to estimates, the average royalty per
CDMA handset turns out to be around $13. In fact, a few industry insiders hint at the
possibility of that Reliance is pressurizing Qualcomm by this move.
Mobile additions to reach 10 million a month by Dec07

With Mobile additions to reach 10 million a month by Dec07 as per latest COAI
predictions, Reliance Communications is expected to gain market share from GSM
launch. (Please Refer to Annexure 4 Fig 4.2)

However the following could be the possible threats to the company in the near future:

Entry of Vodafone
Money Muscle of Vodafone could lead to fresh price wars.
Cordial relationship of Vodafone with Bharti could lead to a mutually beneficially
deal (infrastructure sharing; mutually agreed upon tariff) between them.
BSNL recent announcement of expanding GSM business could make it a major
player in the market.
Implementation of Mobile Number Portability - will lead to greater customer churn.
Growing importance of GSM over CDMA a worldwide phenomenon
Implementation of Carrier Access Code would enable subscriber to choose their
NLD/ILD carrier.
New entrants in NLD/ILD segment


20
Annexure 1

Background: History Of Cellular Telephony I n I ndia With Focus On Growth Of
Reliance As A Telecom Major

Year Event
Till Mid
80s
Indian Telecom Market was a wholly Government owned public utility.
1986 MTNL (Mahanagar Telephone Nigam Limited) formed to take out
telecommunication services from the control of the Government in the cities
of Delhi and Mumbai.VSNL (Videsh Sanchar Nigam Limited) was created in
the ILD segment. At this point the market was a Government Monopoly.
(Bharat Sanchar Nigam Limited (BSNL) was formed on October 1, 2000 as a
telecom service provider in all other places.)
1992 Telecommunication sector in India liberalized to bridge the gap through
government spending & to provide additional resources for the nations
telecom target. Private sector allowed participating.
1994 National Telecom Policy (NTP94) announced. License for providing
cellular mobile services granted by the government of India for the
Metropolitan cites of Delhi, Mumbai, Kolkata & Chennai. Cellular mobile
service was to be Duopoly (i.e. not more than two cellular mobile operators
could be licensed in each telecom circle), under a fixed license fee regime for
10 years. The Eight operators issued licenses to operate cellular mobile
services in the 4 metros were:
Delhi: Bharti Cellular Limited & Sterling Cellular Limited.
Mumbai: BPL Mobile Communications Limited & Hutchison Max
Telecom Limited
Calcutta: Modi Telstra & Usha Martin Telekom.
Chennai: RPG Cellular & SkyCell Communications
1995 20 more telecom circles got mobile licenses. The circles were roughly
analogous to the states of India and were divided into "A", "B" and "C"
categories based on their perceived business potential.
Cellular Operators Association of I ndia (COAI) was set up to look after
the collective interests of the GSM players.
Modi Telstra launched the first cellular operation in the country in
Kolkata under the brand name "Modi Telstra".
1996 Reliance enters the Indian Cellular Telephony Market with Reliance
Telecom offering GSM services.
1997 Association of Unified Service Providers of India (AUSPI) constituted
as a body for CDMA players.
Telecom Regulatory Authority (TRAI) of India was set up
The entry of private service providers in 1992 brought with it the
inevitable need for independent regulation. The Telecom Regulatory
Authority of India (TRAI) was thus established with effect from 20
21
February 1997 by an Act of Parliament, called the Telecom Regulatory
Authority of India Act, 1997, to regulate telecom services, including
fixation/revision of tariffs for telecom services, which were earlier vested
in the Central Government.
1999 New National Telecom Policy (NTP99) was announced.(NTP99 described
in detail under Rationale For Diversification)
2000 National Long Distance (NLD) Sector opened up.
2002 Reliance introduced its CDMA services in the Indian Cellular Telephony
Market with the soft-launch of Reliance I nfocomm.
International Long Distance (ILD) Sector opened up.
2005 Reliance Group split Anil Ambani got control of the cellular telephony
business formed Reliance Communications as flagship company of his
new Anil Dhirubhai Ambani Group
Figure 1.1: Growing I mportance Of The Service Sector I n The Economy















Figure 1.2: I ncreasing Gross Domestic Savings












Gross domestic savings as % of GNI
0
5
10
15
20
25
30
35
1960-79 1970-79 1980-84 1985-89 1990-94 1995-99 2000-01
Year
%

o
f

G
N
I
Gross domestic saving
Household Savings


Sectoral Distribution of GDP in India
0
10
20
30
40
50
60
70
1950-
52
1960-
62
1970-
72
1980-
82
1990-
92
1998-
00
2000-
01
2001-
02
2002-
03
Year
%

c
o
n
t
r
i
b
u
t
i
o
n
Primary
Secondary
Tertiary


22
Figure 1.3: I ncreasing Private Final Consumption Expenditure






















Figure 1.4: Growth Of Teledensity I n I ndia Urban Vs. Rural




Private Final Consumption Expenditure (in Rs.)
0
2000
4000
6000
8000
10000
12000
1993-
94
1994-
95
1995-
96
1996-
97
1997-
98
1998-
99
1999-
00
2000-
01
2001-
02
2002-
03
2003-
04
2004-
05
Year
P
F
C
E

(
i
n

R
s
.
)

0
5
10
15
20
25
30
35
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Urban Rural Total
T
e
l
e
d
e
n
s
i
t
y

(
%
)
Growth of Teledensity in India - Urban Vs. Rural
0
5
10
15
20
25
30
35
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Urban Rural Total
T
e
l
e
d
e
n
s
i
t
y

(
%
)
Growth of Teledensity in India - Urban Vs. Rural

23
Figure 1.5: Share of Mobile Telephony Vs Fixed Line Telephony


















Figure 1.6: Market Scenario Dec01



























14.54
0.34
17.8
0.88
21.61
1.2
26.65
1.88
32.7
3.58
38.59
6.43
41.31
13
35.29
33.7
34.27
48.01
0
10
20
30
40
50
60
70
80
90
Subscribers in
millions
1996 1997 1998 1999 2000 2001 2002 2003 2004
Year
Share of Mobile Telephony vs Fixed Line Telephony
Mobile Phones
Fixed Phones

Market Share - Dec'01
4%
21%
11%
16%
1%
8%
5%
1%
7%
1%
2%
6%
2%
7%
6%
2%
Aircel Limited Bharti Telenet Birla Tata AT&T BPL Mobile
BTA Cellcom Escotel Fascel Hexacom
Hutchison Max Koshika MTNL Reliance Telecom
RPG Cellular Spice Comm. Sterling Cellular Usha Martin
24
Annexure 2:

Figure 2.1: Dhirubhai Ambani Pioneer Offer





25

Figure 2.2: FLAG Telecom Network



Figure 2.3: The Reliance Split



Figure 2.3: Project Falcon Network
26
Figure 2.4: Reliance CDMA Subscriber Growth



(Note: Figures include Wireless, Wireline and Digitial Mobile Subscribers)
Source: www.auspi.com

Figure 2.5: Reliance Vs TTSL Subscriber Growth



Year RCOM
YoY
Growth
Growth
Rate
Total
CDMA
Growth Rate
RCOM/Total
CDMA
Jul-02 1,000 - - 731,015 - 0%
Jul-03 2,914,522 2,913,522 291352% 4,400,732 502% 66%
Jul-04 8,334,570 5,420,048 186% 11,535,704 162% 72%
Jul-05 12,502,486 4,167,916 50% 18,777,693 63% 67%
Jul-06 21,432,268 8,929,782 71% 34,869,209 86% 61%
Jul-07 29,568,154 8,135,886 38% 50,823,643 46% 58%

Subscriber Growth - RCom Vs TTSL
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
2002 2003 2004 2005 2006 2007
Year
S
u
b
s
c
r
i
b
e
r
s
RCOM TTSL
27
Annexure 3:

Figure 3.1: Current Market Scenario (Figures as on 30/06/2007)

Group Company Total Subscribers
Airtel (GSM) 42,703,938
Reliance (CDMA +GSM) 32,077,442
BSNL(GSM) 28,423,283
Vodafone Essar (GSM) 24,934,570
Tata (CDMA) 17,326,249
IDEA(GSM) 16,126,396
Aircel (GSM) 6,775,238
Spice (GSM) 3,170,424
Hutchison Telecom (GSM) 3,151,256
Hutchison Essar (GSM) 2,665,691
MTNL(GSM) 2,608,811
BPL(GSM) 1,087,992
HFCL (CDMA) 150,347
Shyam (CDMA) 98,012
Others 3,830,351
Total 185,130,000
* CDMA figures include WLL services



(Source: www.indian-cellular.com)
GSM
66%
CDMA
34%

28
Fig 3.2: I ndian Cellular I ndustry Growth in Subscriber Base

Year
Subscriber Base
Annual
Growth GSM CDMA Total
2002 10,480,400 750,000 11,230,400 105%
2003 21,991,700 6,450,000 28,441,700 153%
2004 37,378,900 10,876,000 48,254,900 70%
2005 58,503,100 19,130,800 77,633,900 58%
2006 105,430,000 44,190,000 149,620,000 93%
2007 121,430,000 63,700,000 185,130,000 124%
(Source: www.trai.gov.in)

Fig 3.3: I ndian Cellular I ndustry Circle Wise Market Share and Market Structure

Circle wise market share (in %) Market structure
Bharti RCom
BSNL
MTNL
Hutch Idea Aircel BPL Spice Tata
No of
Players
HHI CR3
Delhi 24 17 10 19 12 17 6 1799 61
Mumbai 18 22 13 25 11 11 6 1834 65
Chennai 21 16 17 15 24 7 6 1846 62
Kolkata 19 28 11 24 17 5 2176 72
Maharashtra 20 19 16 9 23 13 6 1800 62
Gujarat 15 17 9 36 16 7 6 2199 69
A.P 26 22 14 11 14 13 6 1858 63
Karnataka 36 18 15 15 7 9 6 2216 69
Tamil 18 19 21 10 28 5 6 1996 67
Kerala 13 21 27 11 21 7 6 1943 69
Punjab 32 10 12 14 23 8 7 2054 69
Haryana 18 12 19 17 20 13 6 1715 57
UP(W) 13 19 17 20 21 10 6 1762 60
UP(E) 14 21 28 27 3 7 6 2206 76
Rajasthan 23 18 24 19 3 12 7 1938 66
MP 18 36 17 21 7 5 2447 76
W.B. 15 27 21 27 3 8 6 2156 74
Himachal 41 20 31 1 7 5 3099 92
Bihar 34 38 20 8 4 3030 92
Orissa 31 29 26 6 9 5 2574 86
Assam 28 18 27 26 4 2563 82
N.E. 23 14 38 25 4 2804 86
J&K 37 57 6 3 4663 100
India 22.9 17.4 19.3 16.4 8.5 3.1 0.7 1.7 9.3 11 1650 60.1
(Source: Sector Report - Batlivala & Karani Securities Research)
29

Fig 3.4: Telecom I ndustry Profitability a Global Comparision

Name Ebitda margin (%)
Malaysia 48.2
Singapore 43.0
Canada 42.5
New Zealand 41.0
Belgium 40.7
Italy 40.2
China 39.7
I ndia 37.5
Switzerland 37.3
Sweden 37.0
Austria 35.8
France 35.6
Germany 34.9
Korea 34.9
Ireland 33.5
US 32.0
Australia 30.5
Denmark 26.0
Japan 25.9
UK 25.6
(Source: Business Standard - July 23, 2007)
30
Annexure 4

Figure 4.1: ARPM vs MoU



















(Source: Sector Report - Batlivala & Karani Securities Research)

Figure 4.2: Reliance Communications Projected Market Share




















(Source: Sector Report - Batlivala & Karani Securities Research)
Projected Market share
21.1
21.6
22
22.1
20.9
20.6
20.5
20.9
19.5
20
20.5
21
21.5
22
22.5
Dec 05 Dec06 Dec07 Dec08 Dec09 Dec10 Dec11 Dec12
CY Ended
%

M
a
r
k
e
t

s
h
a
r
e
Average call charges per minute
MoU /
ARPU

ARPM
MoU
Inelasticity of MoUs to fall
in ARPM (tariffs)
High
Low