Telecommunication services / India

3 June 2011

Target price: Rs105.00 → Rs79.00

Reliance Communications Up/downside: -15.9%
RCOM IN Share price (1 Jun): Rs93.95

Accounting raises questions

• Disclosure over indefeasible rights of use raises questions
• Lacklustre operational outlook; target price lowered by 25%
• Despite the YTD pullback in the share price, the stock is still not
worth revisiting

How do we justify our view?

For example, there is no clarity on How we differ

Ramakrishna Maruvada
(65) 6499 6543
ramakrishna.maruvada@sg.daiwacm.com
Pratap Parimi
(91) 22 6622 1011
pratap.parimi@in.daiwacm.com
What's new
We are concerned about the lack of
adequate disclosure on the change of
accounting treatment for
indefeasible rights of use (IRUs)
contracts, which effectively boosted
whether the cash payments for these Our FY12-14 EPS forecasts are 33-
contracts are paid fully in advance. 56% lower than those of the
Otherwise, there could be a Bloomberg consensus.
mismatch between future revenue
and cash flow, and this raises the Forecast revisions (%)
Year to 31 Mar 12E 13E 14E
question of what happens in the
Revenue change (2.1) (5.8) n.a.
event of a customer default. Net-profit change (34.1) (42.9) n.a.
EPS change (34.1) (42.9) n.a.
RCOM also said it intended to sign Source: Daiwa forecasts
an IRU contract with its subsidiary,
Share price performance
Reliance Infratel, in 2009. It is
unclear if this contract exists today,
and what changes, if any, have been
made to the accounting treatment of
the corresponding revenue and costs.
We believe the use of the 12-m onth share-price performance

Reliance Communications’ (RCOM) EV/EBITDA ratio as a metric to Relative to BSE SENSEX 30 Index

FY11 EBITDA by 39%. assess relative value among listed 12-month range 80.20-201.65
Indian telco stocks could wane. Market cap (US$bn) 4.32
What's the impact Average daily turnover (US$m) 22.23
We believe more disclosure would What we recommend Shares outstanding (m) 2,064
be welcomed by investors, as We would like to see more Major shareholder AAA Communications (54.2%)
accounting for IRUs is complex and disclosure on IRU accounting, as it
has attracted considerable attention may improve investor confidence. Financial summary (Rs)
in the past following the bankruptcy The 25% cut to our DCF-based Year to 31 Mar 12E 13E 14E
target price is, however, due to a Revenue (m) 220,029 232,175 245,189
of Global Crossing in 2002. Operating profit (m) 20,413 23,033 26,043
downward adjustment to our
Net profit (m) 9,668 11,664 11,521
We are unable to assess objectively mobile-revenue outlook, which
Core EPS 4.684 5.651 5.582
how this accounting change – which drove 34-43% downward revisions EPS change (%) (27.5) 20.6 (1.2)
recognises some IRUs as upfront to our FY12-13 EPS forecasts. We Daiwa vs Cons. EPS (%) (33) (43) (56)
licence income instead of lease see the key upside risk as tower PER (x) 20.1 16.6 16.8
revenue spread over the life the divestments. Dividend yield (%) 1.0 1.1 1.1
contract – would affect RCOM’s DPS 0.950 1.000 1.000
future revenue and cash flow. PBR (x) 0.5 0.5 0.5
ROE (%) 2.7 3.2 3.0
Source: Bloomberg, Daiwa forecasts

Important disclosures, including any required research certifications, are provided on the last two pages of this report.
 Telecommunication services / India
RCOM IN
3 June 2011

How do we justify our view?

Growth outlook
Valuation
Earnings revisions

Growth outlook RCOM: revenue and EBITDA growth rates (YoY)

We forecast a 28% YoY drop in net profit for RCOM for 30%
FY12, due partly to 3G-related amortisation expenses.
20%

10%

0%

(10%)

(20%)

(30%)
FY10 FY11 FY12E FY13E FY14E
Revenue growth EBITDA growth

Source: Company, Daiwa forecasts

Valuation FY12E earnings dispersion across ASEAN-India telcos

We have lowered our DCF-based six-month target price Co-efficient of variation

by 25% to Rs79 from Rs105, due to 34-43% downward 40%
revisions to our FY12-13 EPS forecasts. RCOM is trading Large degree of uncertainty for RCOM's FY12
currently at a one-year forward EV/EBITDA multiple of 30% earnings forecasts
6.6x. While this is below its past-three-year mean of
10.2x, we expect the stock to be derated further, due 20%

partly to regulatory overhang.

10%

In our view, the wide dispersion among the Bloomberg- 0%

consensus forecasts for RCOM for FY12 underscore the
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fact that the earnings uncertainty remains high, and

investment metrics like PER may not be accurate
indicators of value. Source: Bloomberg, Daiwa

Earnings revisions RCOM: FY12 EPS forecasts

The lacklustre operational performance over the past (Rs)

few quarters has resulted in continuous downward 18
revisions to the Bloomberg-consensus forecasts. We 16
expect further such downgrades as our FY12-14 EPS 14
forecasts are 33-56% lower than those of the Bloomberg 12
10
consensus.
8
6
4
2
0
Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
Consensus Daiwa
Source: Bloomberg, Daiwa

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 Telecommunication services / India
RCOM IN
3 June 2011

Financial summary

Key assumptions
Year to 31 Mar 2007 2008 2009 2010 2011 2012E 2013E 2014E
Total mobile subs (m) 28.97 45.79 72.67 102.42 135.72 164.78 190.52 213.69
Subscriber net add (m) 14.29 16.83 26.87 29.76 33.30 29.06 25.74 23.17
Total usage (bn min) 175 206 277 350 375 430 509 579
MOU per sub (min) 475 458 389 333 262 239 239 239
Blended ARPU (Local curr.) 348.3 339.2 244.4 158.4 116.0 98.6 86.8 79.0
Data as % of total ARPU 6.2% 6.5% 7.3% 7.7% 8.0% 9.0% 10.0% 10.0%

Profit and loss (Rs m)

Year to 31 Mar 2007 2008 2009 2010 2011 2012E 2013E 2014E
Wireless 128,479 152,135 173,677 166,396 165,762 177,791 184,991 191,518
Global 65,922 54,750 67,761 83,187 100,519 76,061 80,940 85,637
Others (19,999) (16,562) (16,098) (30,357) (35,205) (33,824) (33,756) (31,965)
Total revenue 174,403 190,323 225,340 219,226 231,076 220,029 232,175 245,189
Other income 0 0 0 0 0 0 0 0
COGS (68,077) (62,591) (79,845) (92,783) (92,764) (100,266) (105,200) (110,214)
SG&A (27,772) (34,059) (38,599) (35,328) (32,741) (35,205) (37,148) (39,230)
Other op. expenses (40,481) (39,928) (52,805) (52,466) (79,795) (64,145) (17,843) (18,735)
Operating profit 38,073 53,746 54,092 38,649 25,776 20,413 23,033 26,043
Net-interest inc./(exp.) (1,487) 128 (9,725) (12,491) (10,722) (8,074) (6,775) (8,657)
Assoc/forex/extraord./others (595) 16,874 17,616 26,044 22 0 0 0
Pre-tax profit 35,991 70,747 61,983 52,202 15,076 12,339 16,259 17,385
Tax (731) (2,836) 518 (4,454) (118) (1,481) (3,252) (4,346)
Min. int./pref. div./others 49 (13,901) (2,052) (1,193) (1,503) (1,190) (1,343) (1,518)
Net profit (reported) 35,309 54,011 60,449 46,556 13,455 9,668 11,664 11,521
Net profit (adjusted) 35,899 37,122 42,850 20,480 13,334 9,668 11,664 11,521
EPS (reported) (Rs) 17.269 26.291 29.287 22.556 6.519 4.684 5.651 5.582
EPS (adjusted) (Rs) 17.558 18.070 20.760 9.922 6.460 4.684 5.651 5.582
EPS (adjusted fully-diluted) (Rs) 17.558 18.070 20.760 9.922 6.460 4.684 5.651 5.582
DPS (Rs) 0.500 0.754 0.800 0.850 0.850 0.950 1.000 1.000
EBIT 38,073 53,746 54,092 38,649 25,776 20,413 23,033 26,043
EBITDA 67,266 81,798 90,169 76,114 90,814 67,882 71,984 77,010

Cash flow (Rs m)

Year to 31 Mar 2007 2008 2009 2010 2011 2012E 2013E 2014E
Profit before tax 34,903 83,429 77,693 51,859 15,296 12,339 16,259 17,385
Depreciation and amortisation 29,193 28,053 36,077 37,465 65,038 47,469 48,951 50,967
Tax paid (1,153) (2,160) (3,926) (3,122) (73) (2,468) (3,252) (4,346)
Change in working capital 63,409 (35,837) (21,519) 25,293 (69,859) (1,570) 3,346 3,585
Other operational CF items 2,212 (29,019) (23,250) (15,851) 11,596 8,384 6,435 8,293
Cash flow from operations 128,564 44,465 65,075 95,645 21,998 64,154 71,738 75,884
Capex (52,488) (173,928) (122,426) (74,959) (95,013) (15,402) (30,183) (31,875)
Net (acquisitions)/disposals (54,436) (29,791) 15,567 54,884 0 0 0 0
Other investing CF items 6,550 7,764 6,779 1,689 0 0 0 0
Cash flow from investing (100,374) (195,955) (100,079) (18,387) (95,013) (15,402) (30,183) (31,875)
Change in debt 24,878 100,745 75,084 (69,898) 90,550 (68,906) 0 0
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid 0 (1,183) (1,792) (1,911) 0 (2,053) (2,294) (2,415)
Other financing CF items (6,535) (10,227) (30,861) (14,408) (9,895) (8,074) (6,775) (8,657)
Cash flow from financing 18,342 89,335 42,431 (86,217) 80,655 (79,033) (9,069) (11,072)
Forex effect/others (44) (1,071) 620 316 11 0 0 0
Change in cash 46,489 (63,225) 8,047 (8,644) 45,087 (30,281) 32,486 32,938
Free cash flow 76,077 (129,462) (57,350) 20,686 (73,015) 48,752 41,555 44,010

Source: Company, Daiwa forecasts

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 Telecommunication services / India
RCOM IN
3 June 2011

Financial summary continued …

Balance sheet (Rs m)

As at 31 Mar 2007 2008 2009 2010 2011 2012E 2013E 2014E
Cash & short-term investment 137,201 117,431 109,671 48,585 53,272 22,991 55,478 88,415
Inventory 4,821 4,059 5,427 5,446 5,172 5,457 5,758 6,081
Accounts receivable 18,316 27,224 39,618 33,117 40,017 36,169 38,166 40,305
Other current assets 35,987 65,753 85,271 74,825 62,323 60,636 63,189 66,054
Total current assets 196,325 214,466 239,987 161,972 160,784 125,253 162,591 200,855
Fixed assets 330,422 523,126 727,053 712,539 679,432 647,365 628,597 609,504
Goodwill & intangibles 26,588 35,654 52,215 49,976 49,976 49,976 49,976 49,976
Other non-current assets 11,920 1,348 2,815 1,200 1,089 1,089 1,089 1,089
Total assets 565,254 774,593 1,022,070 925,687 891,281 823,683 842,252 861,424
Short-term debt 35,209 117,137 118,716 80,634 0 0 0 0
Accounts payable 44,423 86,948 46,471 40,899 50,647 48,225 50,888 53,740
Other current liabilities 117,059 113,828 154,343 146,453 101,114 96,280 101,595 107,290
Total current liabilities 196,691 317,913 319,530 267,985 151,761 144,505 152,482 161,030
Long-term debt 139,175 141,081 272,906 216,520 373,757 304,851 304,851 304,851
Other non-current liabilities 26 1,028 281 991 0 0 0 0
Total liabilities 335,892 460,021 592,718 485,496 525,518 449,356 457,333 465,880
Share capital 10,223 10,320 10,320 10,320 10,320 10,320 10,320 10,320
Reserves/R.E./others 219,083 279,943 412,483 423,286 347,198 354,572 363,821 372,927
Shareholders' equity 229,306 290,263 422,803 433,607 357,518 364,892 374,141 383,247
Minority interests 56 24,309 6,549 6,584 8,245 9,435 10,778 12,296
Total equity & liabilities 565,254 774,593 1,022,070 925,686 891,281 823,683 842,252 861,424
Net debt/(cash) 37,183 140,786 281,951 248,569 320,485 281,859 249,373 216,435
BVPS (Rs) 112 141 205 210 173 177 181 186

Key ratios (%)

Year to 31 Mar 2007 2008 2009 2010 2011 2012E 2013E 2014E
Sales (YoY) n.a. 9.1 18.4 (2.7) 5.4 (4.8) 5.5 5.6
EBITDA (YoY) n.a. 21.6 10.2 (15.6) 19.3 (25.3) 6.0 7.0
Operating profit (YoY) n.a. 41.2 0.6 (28.5) (33.3) (20.8) 12.8 13.1
Net profit (YoY) n.a. 3.4 15.4 (52.2) (34.9) (27.5) 20.6 (1.2)
EPS (YoY) n.a. 2.9 14.9 (52.2) (34.9) (27.5) 20.6 (1.2)
Gross-profit margin 61.0 67.1 64.6 57.7 59.9 54.4 54.7 55.0
EBITDA margin 38.6 43.0 40.0 34.7 39.3 30.9 31.0 31.4
Operating-profit margin 21.8 28.2 24.0 17.6 11.2 9.3 9.9 10.6
ROAE 15.7 14.3 12.0 4.8 3.4 2.7 3.2 3.0
ROAA 6.4 5.5 4.8 2.1 1.5 1.1 1.4 1.4
ROCE 9.4 11.0 7.8 5.0 3.5 2.9 3.4 3.7
ROIC 14.0 14.3 9.3 5.0 3.7 2.7 2.9 3.1
Net debt to equity 16.2 48.5 66.7 57.3 89.6 77.2 66.7 56.5
Effective tax rate 2.0 4.0 n.a. 8.5 0.8 12.0 20.0 25.0
Accounts receivable (days) 38.3 43.7 54.1 60.5 57.8 63.2 58.4 58.4
Payables (days) 93.0 126.0 108.1 72.7 72.3 82.0 77.9 77.9
Net interest cover (x) 25.6 n.a. 5.6 3.1 2.4 2.5 3.4 3.0
Net dividend payout 2.9 2.9 2.7 3.8 13.0 20.3 17.7 17.9
Source: Company, Daiwa forecasts

Company profile
Reliance Communications (RCOM) is India's second-largest mobile-service provider in terms of subscriber numbers. The
company offers wireless services using both CDMA and GSM technology. Its subsidiaries include Reliance Globalcom, which
operates an undersea cable and domestic fibre-optic cable network, and Reliance Infratel, which operates a passive-
infrastructure business.

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 Telecommunication services / India
RCOM IN
3 June 2011

investors can derive little competitive advantage over

their peers through the conventional process of
investment research.

Dispersion of Bloomberg-consensus one-year-forward EPS

Accounting change
forecasts
Co-efficient of variation

raises questions 40%

Large degree of uncertainty for RCOM's FY12
30% earnings forecasts

Disclosure needs to improve to gain 20%

investor confidence; target price lowered 10%

due to lacklustre operational outlook
0%

Axiata
StarHub
M1

XL
SingTel

Globe

Bharti

Digi
DTAC

Idea
Maxis

PT Telkom

AIS

TM

RCOM
PLDT

Indosat
Wise to wait on the sidelines
Source: Bloomberg, Daiwa
We see several transformational events on the horizon Note: Dispersion measured by standard deviation of EPS forecasts divided by mean
for RCOM: 1) the outcome of the ongoing 2G
controversy, 2) the impact and implications of the As a result, given the lacklustre operational outlook for
recent accounting-policy changes for IRUs, 3) tower the core mobile business, where RCOM has been losing
divestments, and 4) a possible structural decrease in revenue share to its rivals, we have lowered our DCF-
capital intensity. Against this backdrop, we ask based six-month target price to Rs79 and revised down
ourselves whether it is worth revisiting the stock. This our FY12-13 EPS forecasts by 34-43%. We recommend
is especially so given the significant year-to-date investors continue to underweight the stock compared
underperformance of the shares against their listed to the local SENSEX index on a six-month time horizon.
telecoms peers in the ASEAN region and India. We also believe its performance is likely to lag that of
ASEAN-India telcos: share-price performances YTD
the MSCI AP Ex-Japan Telecom Index over the period.
(%) In this note, we elaborate on our concerns arising from:
50
40 1) the change in accounting policy, 2) the possible
30 fallout from the 2G spectrum scandal, and 3) why we
20
10 believe investors should wait for more details, even if
0
(10) there is renewed talk in the market about tower
(20) divestment.
(30)
(40)
(50)

IRU accounting raises issues

Axiata
DTAC
XL
Digi

M1

Telecom Index*

Idea
AIS

SingTel

Bharti
TM

Maxis

PT Telkom

RCOM
Indosat
Globe
StarHub

PLDT

At its recent 4Q FY11 results announcement, RCOM

Source: Bloomberg
said that it had changed its accounting policy for some
IRU contracts, which are typically used for long-term
On balance, we believe investors would be better off capacity sales (eg, fibre capacity).
waiting on the sidelines: the regulatory overhang is
unlikely is dissipate anytime soon, and we think more This change in accounting policy boosted RCOM’s FY11
clarity is needed from the company on some of the revenue and EBITDA by Rs25.45bn and Rs25.3bn,
changes to its accounting policies relating to IRUs. respectively. It appears to be a significant change, in
our view, as revenue and EBITDA jumped by around
The uncertainties over the 2G spectrum controversy 12% and 39%, respectively, as a result.
and implications of the IRU accounting changes add to
the already existing inability of the sell-side analysts (as IRU contracts are used typically where a network
evidenced by wide dispersion among FY12 earnings provider gives the right to use of specified amount of
forecasts of contributors to Bloomberg consensus) to network capacity or identifiable physical assets to a
form a reasonably accurate picture of its future buyer for an agreed period, while retaining the
earnings potential. We also now feel that buy-side ownership of the network assets. Typically, they tend to

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 Telecommunication services / India
RCOM IN
3 June 2011

be long-term contracts, and are on standard industry Our concerns:

terms. 1) The motivation for the change (other than the fact
RCOM: quarterly financials
that it is legal) is unclear, making us wonder
(Rs bn) 4Q10 1Q11 2Q11 3Q11 4Q11 FY11 whether it is prudent or an aggressive accounting
Reported numbers practise. We need at least a few quarters of data to
Revenue 50.9 51.1 51.2 50.0 78.8 231.1 ascertain the wisdom of this change in policy, and
EBITDA 16.0 16.3 16.6 16.7 41.2 90.8 believe the company’s FY12-14 revenue and
EBITDA margin % 31.5 31.9 32.4 33.3 52.3 39.3
EBIT 5.2 6.7 7.0 6.3 5.7 25.8
EBITDA may be rather volatile as a consequence.
Profit before tax 14.5 2.3 4.2 5.0 3.6 15.2 2) We believe the disclosure of certain information
Profit after tax 13.4 2.5 4.5 4.8 1.7 13.5
Adjusted numbers
relating to the nature of the IRU contracts is vital.
Revenue 50.9 51.1 51.2 50.0 53.3 205.6 It is not clear if the new accounting treatment will
EBITDA 16.0 16.3 16.6 16.7 15.9 65.5 be applied only to long-term IRU contracts or those
EBITDA margin (%) 31.5 31.9 32.4 33.3 29.9 31.9 that are paid for fully upfront. If the cash payments
EBIT 5.2 6.7 7.0 6.3 5.7 25.8 are spread out over the life of the contract, then
Profit after tax 13.4 2.5 4.5 4.8 1.7 13.5
Source: Company data, Bloomberg
there would be an obvious mismatch between
revenue recognition and the cash cycle, and this
Prior to FY11, RCOM recognised revenue related to the also raises questions over contingencies in the
sale of network capacity on a straight-line basis over event of customer defaults.
the period of the IRU. As of 4Q FY11, RCOM has 3) As per the draft prospectus of Reliance Infratel
revised its policy, and now recognises IRU revenue and (RITL, Not listed), dated 24 September 2009, a
licence income upfront (upon activation of circuits), memorandum of understanding (MOU) was signed
similar to the sale of a product, rather than the between RITL and RCOM granting RCOM an IRU
provision of a service over the duration of a contract. for up to 80% of the total capacity of the optic-fibre
cable (OFC) network. We are not sure if the master
RCOM: revenue recognition for IRU contract
Accounting policy
service agreement exists today. If indeed it does,
FY09 Annual Report Network capacity service (IRU) revenue is accounted as operating and under the terms disclosed originally, we are
lease, and recognized over the term of the contract not sure whether the new accounting treatment has
Payments received from customers for long term contracts and for been applied to this specific contract. Furthermore,
which revenue is not recognised are included in deferred revenue /
unearned income. the impact of the accounting change on revenue
FY10 Annual Report -same as in FY09 - and cost recognition between group companies is
For FY11 RCOM recognises network-capacity revenue upfront, similar to the sale not clear.
of a product, rather than the provision of a service over the duration of
a contract. Agreements between RCOM and Reliance Infratel
Source: Company Scheme of arrangement of demerger Effective from 1 April 2008
Optic-fibre (OF) undertaking transferred to RITL from
RCOM
IRUs are legitimate business tools, but we believe the
RCOM gets a non-exclusive right to use the OFC of
financial disclosure by RCOM about the nature and RITL
type of these contracts (and whether payments are OFC MOU Dated 15 March 2009
made in advance) is grossly inadequate. We have the RITL grants RCOM an exclusive indefeasible right of
connectivity through 20 pairs of OFC connecting
following concerns: identified destination points
Contractual agreements to be captured in a master
IRU complexity has proven to be an accounting service agreement
Proposed Master service agreement RITL granted RCOM an IRU for up to 80% of the total
time bomb in the past between RITL and RCOM capacity of the OFC network for a period of seven
years
IRU accounting is complex and depends pretty much RCOM will pay rent annually
on the commercial substance of the underlying Source: Draft IPO prospectus of Reliance Infratel dated 24 September 2009

transaction. This subject received widespread scrutiny

from the press and analysts in 2002 after the filing for 4) We also think the popular investment metric,
bankruptcy of several telecom companies (including EV/EBITDA, would be an inferior valuation tool as
Global Crossing). Particular concerns were expressed it could be distorted by accounting changes rather
about the accounting treatment of ‘capacity swap’ than operational results. The EV/EBITDA metric
contracts. As a result of this, we believe companies has been widely used in the Indian context to
(including RCOM) should raise the level of disclosure, assess relative value among telcos, and its
especially when changing accounting treatment related popularity could wane unless it becomes clear what
to IRUs. adjustments need to be made to various
companies’ financials.

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5) IRU accounting changes would make the headline
FY11 net-debt/EBITDA ratio look a lot better than
it would have done otherwise.
Possible fallout of the 2G
investigation
As part of the investigation into the 2G scandal
conducted by the Central Bureau of Investigation under
the direct supervision of India’s Supreme Court,
Reliance Telecom (a 100% subsidiary of RCOM), along
with three senior officials of the Anil Dhirubhai
Ambani (ADA) group, have been charged in connection
with the high-profile 2G scandal.
2G scandal timeline
Event
Resignation of Telecom Minister, Mr. A. Raja
Mr. Kapil Sibal appointed as the new Telecom Minister
Comptroller and Auditor General (CAG) report tabled in parliament
Arrest of Mr A. Raja and two close aides in the Telecom Ministry
Arrest of Shahid Balwa (Swan Telecom)
Setting of Joint Parliamentary Committee (JPC) to probe the 2G spectrum scandal
CBI files first charges in the 2G scandal
Arrest of Sanjay Chandra (Unitech MD), Vinod Goenka (Swan Telecom), Gautam
Doshi (ADA Group MD), and two other officials of the ADA group
CBI files second round of charges in the 2G scandal
Arrest of member of parliament, Ms K. Kanimozhi (same political party as A. Raja)
Source: Daiwa
At this stage, we are unable to assess the extent of the
financial or other penalties that may be levied against
individuals or the company if found guilty. However,
we believe that the investigation and possible
implications could result in the following scenarios at
RCOM.
1) The uncertainty surrounding the investigation
could lead to delays in the sale of its tower portfolio
or the sale of a stake in RCOM itself to a strategic
partner. The company’s earlier efforts to sell stakes
to lower its high debt levels on its balance sheet
failed.
2) Possible cancellation of licences – This looks like
an extreme step, although the Comptroller and
Auditor General (CAG) said in its report (published
in early-November 2010) that RCOM received the
dual-technology licence (for its GSM operations)
unfairly.
3) Loan recalls by creditors. While we do not have any
details about the loans that were extended to
RCOM, any cancellation of its licenses could result
in its creditors possibly recalling them. We believe
this could drive RCOM to sell its assets for less
than their replacement cost.
Telecommunication services / India
RCOM IN
3 June 2011
Sale of stake in Reliance Infratel
The company has confirmed recently through a press
release that it had received offers from several parties
to acquire a controlling stake in RITL. Some media
reports (on CNBV TV) indicated that US-based
American Tower Company (ATC) (Not rated) has put in
a bid for Rs195bn to buy out Reliance Infratel. This
values each tower at Rs3.9m, based on the company’s
latest disclosure of 50,000 towers. The valuation is
about 10% lower than deals completed in recent times
(Aircel [Not listed]-GTL Infrastructure [GTLI IN, Not
rated] deal in January 2010, ATC -Essar Telecom [Not
listed] deal in February 2010) in the India telecom
space.
Date We believe the current news flow on possible tower
14 Nov. 10 divestment, while positive on the surface, should be
15 Nov. 10 interpreted with caution, because:
16 Nov. 10
2 Feb. 11
8 Feb. 11 1) RCOM failed in the past to conclude a deal with
22 Feb.11 GTL Infrastructure after announcing initial terms.
2 Apr. 11
20 Apr. 11 2) RCOM remains the main captive customer of
Reliance Infratel and conditions that would be
24 Apr. 11
20 May 11
imposed by the buyer on future minimum leases
and prices are important to ascertain whether there
would be long-term value generation.
3) The unfolding developments regarding the recent
spectrum controversy is likely to be the overriding
share-price driver, in our view, as we believe that
any buyer of the tower portfolio would seek to
protect themselves from any negative
repercussions for RCOM.
Forecasts and target price revised
The IRU concern we elaborated on above relates to
poor disclosure standards. We are looking for
additional information, as we believe it would boost
investor confidence in the stock. The change to our
target price is driven purely by revisions to our
operational forecasts.
Some of the key management personnel – including
the head of tower business – have left RCOM recently.
Aside from this, we think the operational outlook for
RCOM remains lacklustre, especially for the mobile
division, which has been losing revenue market share.
We expect this trend to continue. We forecast an FY11-
14 mobile-revenue CAGR of 5% for RCOM, compared
with our forecast of a 10% CAGR for the telecom
industry over this period, indicating a likely decline in
RCOM’s share of market revenue.
-7-
 Telecommunication services / India
RCOM IN
3 June 2011

RCOM: mobile revenue share

(%)
13

12

11

10

8
FY10 FY11 FY12E FY13E FY14E

Source: Daiwa forecasts, TRAI

We have lowered our DCF-based target price by 25% to

Rs79 (from Rs105) after revising down our FY12-14
EPS forecasts. The downward revisions to our EBITDA
forecasts (3-9%) and EPS forecasts (34-43%) for FY12
and FY13 were driven largely by our lower mobile-
revenue forecasts.
RCOM: revisions to Daiwa forecasts (Rs bn)
FY12E FY13E
New Previous % change New Previous % change
Revenue 220 225 (2) 232 247 (6)
EBITDA 68 70 (3) 72 79 (9)
EBIT 20 26 (20) 23 33 (30)
Net profit 10 15 (34) 12 20 (43)
EPS (Rs) 4.7 7.1 (34) 5.7 9.9 (43)
Operating metrics
Subscribers (m) 165 154 7 191 178 7
ARPU (Rs) 99 107 (8) 87 99 (12)
Source: Daiwa forecasts

-8-

Appendix
The following table shows the deals announced by Reliance since June 2009. We have seen very few public
announcements relating to IRU contracts. As such, we believe disclosure needs to improve with regard to the
change in accounting policy.
Reliance Globalcom: order wins/renewals over the past two years
When? Client
12 Jan' 11 Pimkie
15 Dec' 10 Rieter Automotive
16 Nov'10 CERN
31 Aug' 10 Zeeman Textielsupers
10 Aug' 10 Acision
7 Sept' 10 Euromaster
9 June' 10 Attijariwafa bank
4 Mar' 10 Molex Far East South
Management
25 Jan' 10 Amer Sports
Dec’ 09 Aircel
2 Dec' 09 Société Générale de
Surveillance
17 Nov' 09 Süd-Chemie
16 Nov' 09 Richco, Inc
3 Nov' 09 Stena Line IT Services
12 Aug' 09 United Biscuits
9 July' 09 Neo Telecoms
26 June' 09 WorleyParsons
10 June' 09 Mott MacDonald
Source: Company
Clients' business
European fashion retailer
Automotive supplier
European Organization for Nuclear Research
Textile manufacturer and retailer
Mobile data services player
Integrated tyre service & car maintenance service provider Five-year contract
Morocco based bank
Manufacturer and supplier of interconnect products
Finnish sports equipment company
Telecom service providers
Inspection, verification, testing and certification company
German specialty chemicals manufacturer
Manufacturer of plastic components
Global IT service arm of Stena Line
Manufacturer of biscuits and snacks
Infrastructure and IP transit operators
Provides services to global energy & resources industries
Global management, Engg and development consultancy
-9-
Telecommunication services / India
RCOM IN
3 June 2011
Contract details
Four-year contract renewal
Upgrade and manage the wide area network (WAN) in Europe
Five-year contract extension, worth US$4.5m
Global network management, design and provisioning to support expansion into emerging markets
One-year contract extension
To provide gigabit ethernet connectivity between CERN’s research centre in Europe and the
Tata Institute of Fundamental Research in India
Five-year contract
Design, installation and management of a Pan European WAN solution across over 1,100 sites in
five countries
Three-year contract
To implement a truly hybrid ethernet, MPLS and Internet VPN solution across 33 locations
in 23 countries
Fully-manage all supporting WAN connectivity, in addition to managed security, tele-presence and
VoIP, LAN and fixed voice solutions
5-year contract
Implementation and management of its WAN in Europe, Middle East, and the inter-connection with
the corporate headquarters
Upgrade and management of their WAN in Asia
Four-year contract extension
Global network management, design and provisioning contract
NLD IRU contract worth Rs2.1bn
Five-year contract renewal
To provide global WAN and global Internet Security Services
Five-year contract renewal
Design, implement and manage a new global WAN
To provide managed Ethernet VPLS services
Two-year deal, worth US$3.5m
Enable real-time CCTV security camera footage from all sites to be continually transmitted and
monitored remotely.
GBP1.3m for three-year contract
To design, implement and manage its Global WAN
3.5 year contract; to provide data-centre services
Three-year contract
Design, implementation and ongoing provision of a new regional WAN to link business office
locations across 9 countries.
To design, implement and manage a business critical MPLS WAN solution across the Middle East
Daiwa’s Asia Pacific Research Directory
Hong Kong
Regional Research Head; Pan Asia Research Nagahisa MIYABE (852) 2848 4971 nagahisa.miyabe@hk.daiwacm.com
Regional Research Co-head Christopher LOBELLO (852) 2848 4916 christopher.lobello@hk.daiwacm.com
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Co-head of Hong Kong and China Property; Property Developers (Hong Kong)
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(Hong Kong, China)
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Head of HK and China Gaming and Leisure; Hotels, Restaurants and Leisure – Casinos Gavin HO (852) 2532 4384 gavin.ho@hk.daiwacm.com
and Gaming (Hong Kong); Capital Goods – Conglomerate (Hong Kong)
Regional Head of IT/Electronics; IT/Electronics – Semiconductor and Solar Pranab Kumar SARMAH (852) 2848 4441 pranab.sarmah@hk.daiwacm.com
(Regional, Taiwan, Singapore, Hong Kong and China)
Co-head of Regional IT/Electronics; IT/Electronics – Semiconductor/IC Design (Regional) Eric CHEN (852) 2773 8702 eric.chen@hk.daiwacm.com
IT/Technology Hardware – PC Hardware (Taiwan) Calvin HUANG (852) 2773 8782 calvin.huang@hk.daiwacm.com
IT/Electronics - Semiconductor/IC Design (Taiwan) Ashley CHUNG (852) 2848 4431 ashley.chung@hk.daiwacm.com
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Property (Hong Kong, China) Yannis KUO (852) 2773 8735 yannis.kuo@hk.daiwacm.com
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Small/Medium Cap (Regional) John CHOI (852) 2773 8730 john.choi@hk.daiwacm.com
Regional Head of Telecommunications; Telecommunications (Regional, Greater China); Marvin LO (852) 2848 4465 marvin.lo@hk.daiwacm.com
Internet (China)
Transportation – Aviation, Land and Transportation Infrastructure (Regional) Kelvin LAU (852) 2848 4467 kelvin.lau@hk.daiwacm.com
Transportation –Transportation Infrastructure; Capital Goods – Construction and Edwin LEE (852) 2532 4349 edwin.lee@hk.daiwacm.com
Engineering (China)
Regional Head of Clean Energy and Utilities; Utilities; Power Equipment; Dave DAI (852) 2848 4068 dave.dai@hk.daiwacm.com
Renewables (Hong Kong, China)
Head of Custom Products Group; Custom Products Group Justin LAU (852) 2773 8741 justin.lau@hk.daiwacm.com
Custom Products Group Philip LO (852) 2773 8714 philip.lo@hk.daiwacm.com
Custom Products Group Jibo MA (852) 2848 4489 jibo.ma@hk.daiwacm.com

South Korea
Head of Research; Strategy; Banking/Finance Chang H LEE (82) 2 787 9177 chlee@kr.daiwacm.com
Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel Sung Yop CHUNG (82) 2 787 9157 sychung@kr.daiwacm.com
Banking/Finance Anderson CHA (82) 2 787 9185 anderson.cha@kr.daiwacm.com
Capital Goods (Construction and Machinery) Mike OH (82) 2 787 9179 mike.oh@kr.daiwacm.com
Consumer/Retail Sang Hee PARK (82) 2 787 9165 sanghee.park@kr.daiwacm.com
IT/Electronics (Tech Hardware and Memory Chips) Jae H LEE (82) 2 787 9173 jhlee@kr.daiwacm.com
IT Electronics (Tech Hardware) Steve OH (82) 2 787 9195 steve.oh@kr.daiwacm.com
Materials (Chemicals); Oil and Gas Daniel LEE (82) 2 787 9121 daniel.lee@kr.daiwacm.com
Pan Asia Research; Small/Medium Caps Yumi KIM (82) 2 787 9838 yumi.kim@kr.daiwacm.com
Telecommunications; Software (Internet/Online Games) Thomas Y KWON (82) 2 787 9181 yskwon@kr.daiwacm.com
Custom Products Group Shannen PARK (82) 2 787 9184 shannen.park@kr.daiwacm.com

- 10 -
Taiwan
Head of Taiwan Research; Pan Asia Research Hirokazu Mitsuda (886) 2 2758 8754 h.mitsuda@daiwacm-cathay.com.tw
Co-head of Research; Strategy Alex YANG (886) 2 2345 3660 alex.yang@daiwacm-cathay.com.tw
Banking/Diversified Financials Ling TANG (886) 2 8789 5158 ling.tang@daiwacm-cathay.com.tw
Consumer/Retail Yoshihiko KAWASHIMA (886) 2 8780 5987 y.kawashima@daiwacm-cathay.com.tw
IT/Technology Hardware (Communications Equipment); Software; Small/Medium Caps Christine WANG (886) 2 8788 1531 christine.wang@daiwacm-cathay.com.tw
IT/Technology Hardware (Handsets and Components) Alex CHANG (886) 2 8788 1584 alex.chang@daiwacm-cathay.com.tw
IT/Technology Hardware (PC Hardware - Panels) Chris LIN (886) 2 8788 1614 chris.lin@daiwacm-cathay.com.tw
IT/Technology Hardware (PC Components) Jenny SHIH (886) 2 8780 1326 jenny.shih@daiwacm-cathay.com.tw
Materials; Conglomerates Albert HSU (886) 2 8786 2212 albert.hsu@daiwacm-cathay.com.tw

India
Head of India Equities Strategy Jaideep GOSWAMI (91) 22 6622 1010 jaideep.goswami@in.daiwacm.com
Deputy Head of Research; Strategy; Banking/Finance Punit SRIVASTAVA (91) 22 6622 1013 punit.srivastava@in.daiwacm.com
All Industries; Pan Asia Research Fumio YOKOMICHI (91) 22 6622 1003 fumio.yokomichi@in.daiwacm.com
Automobiles Ambrish MISHRA (91) 22 6622 1060 ambrish.mishra@in.daiwacm.com
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Singapore
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Australia
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Japan
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Industrials (Regional); Pan Asia Research Daijiro HATA (81) 3 5555 7178 daijiro.hata@jp.daiwacm.com

- 11 -
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- 12 -
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Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

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extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.
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United States
This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views
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analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next six months.
"2": the security is expected to outperform the local index by 5-15% over the next six months.
"3": the security is expected to perform within 5% of the local index (better or worse) over the next six months.
"4": the security is expected to underperform the local index by 5-15% over the next six months.
"5": the security could underperform the local index by more than 15% over the next six months.
Additional information may be available upon request.

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• There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.
• Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.
*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of
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When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions
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Corporate Name: Daiwa Securities Capital Markets Co. Ltd.

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Japan Securities Investment Advisers Association

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