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460 13800
% chg 612.0 56.9 40.4
EPS (Rs) 2.1 14.7 23.0 32.3
Price (Rs)
Sensex
425 13250
14/09/2006
31/10/2006
13/12/2006
31/01/2007
16/03/2007
4/5/2007
18/06/2007
31/07/2007
Date
ARPUs (Rs/user/month) 384.8 370.8 352.3 324.1
Source: Company, Angel Research
August 1, 2007 1
TM
As far as average revenues per user (ARPUs) are concerned, these saw a spurt of 10.0% qoq to
Rs375.5 per user per month on a blended basis (Rs341.3 per user per month in Q4FY2007). On a
yoy basis, the fall was not that significant, at just 1.1%. This was primarily due to the low base
effect of the last quarter, when RCOM reported a 2mn fall in subscribers over the quarter. Thus,
even as the subscribers who were generating negligible revenues have been cleaned out from the
company’s network, its other customers and new additions to the network continue to generate
revenues at a strong pace, leading to the quarterly spike in ARPUs. However, we believe that this
is just a temporary phenomenon and that ARPUs will resume their downward trend going forward.
A peculiar feature of this quarter’s results is that the minutes of usage (MoUs) in the Wireless
Business fell 5.7% qoq, while revenues per minute actually rose 5.4% qoq. Typically, these
metrics move in the opposite direction when compared with what RCOM has reported this quarter.
The reason attributed by the management for this is that the company, due to its strong focus on
selling its own ‘Classic-branded’ handsets rather than those of Qualcomm, gave out a lesser
number of free minutes. Thus, given this factor, subscribers this quarter ended up talking less on
their phones, which also resulted in revenues per minute rising. RCOM’s total MoUs on the
network rose 45.7% yoy and 7.8% qoq, while revenues per minute reduced by 4.8% yoy (rise of
5.4% qoq).
40,000
28,000
22,000
16,000
Q1FY06 Q2FY06 Q3FY06 Q4FY06 Q1FY07 Q2FY07 Q3FY07 Q4FY07 Q1FY08
August 1, 2007 2
TM
However, as was the case in the previous quarter, RCOM’s Global Business Unit proved to be the
party spoiler, as this business grew by just 5.6% yoy and by a marginal 0.7% qoq. This was the
case, even as the minutes of usage soared by an impressive 68.2% yoy and by 13.4% qoq.
Clearly, the significant fall in revenues per minute was the chief culprit that restricted the growth of
this business, despite strong volume growth. Revenues per minute fell by as much as 37.2% yoy
and by 11.2% qoq.
Marks entry into the global enterprise data market through the acquisition of Yipes
RCOM during the last quarter acquired Yipes Holdings Inc, a US-based provider of managed
Ethernet and application delivery services. This is RCOM’s largest-ever acquisition so far.
Ethernet is the fastest-growing segment of the data communication market and as per various
industry sources, will record a CAGR growth of 30% over 2006-10, when it will achieve a size of
US $25bn (approximately Rs1,00,000cr) globally. Yipes has a total of nearly 1,000 enterprise
customers focused across four industry verticals – financial, legal, government and healthcare,
which account for 50% of the Ethernet market. The company has over 22,000 route-kilometers
(R-kms) of fibre across 14 US metros, covering 40% of the total US datacom market. Yipes also
has a presence in London, Hong Kong and Tokyo.
RCOM acquired Yipes for a total consideration of US $300mn (approximately Rs1,200cr). Yipes’
Topline stands at around US $100mn, with EBITDA margins of over 50%. Thus, the deal has
been valued at an EV/EBITDA multiple of around 6x, which appears reasonable, given the well-
established credentials of the company. With the acquisition, RCOM will also get access to the
global enterprise data market, worth US $100bn (approximately Rs4,00,000cr). The company will
also be able to better serve its international customers directly in the US. The acquisition has
been made through RCOM’s subsidiary, FLAG Telecom.
August 1, 2007 3
TM
The total implied value of RTIL leads to Rs135 per RCOM share, which is over 25% of the current
market price. Going forward, the management is evaluating various options including an IPO of
RTIL and/or strategic sale to unlock value for shareholders. We believe that there is significant
potential in the telecom infrastructure business, given the competitive dynamics and growth
potential of the Indian telecom sector and that this move is likely to unlock significant value for
RCOM shareholders going forward.
Marketshare performance
RCOM recorded a decent performance on the marketshare front this quarter, gaining 24bp over
the period. In terms of net adds, the company’s share stood at 19.6%. RCOM has made a strong
comeback after the subscriber disconnections made in March and going forward, we expect the
company to be one of the key beneficiaries of the Indian telecom growth story.
20
15
10
0
FY02 FY03 FY04 FY05 FY06 FY07 Q1FY08
RCOM has out-performed our Topline estimates by 5.7%, while the out-performance on the
Bottomline front has been a significant 21.3%. EBITDA margins also exceeded our estimates by
42bp. The company’s mobile subscriber base at the end of June has been slightly above our
projections, while ARPUs have also been higher than our estimates.
Going forward, we expect RCOM to record a 35.7% CAGR growth in Topline over FY2007-09E,
while Bottomline CAGR growth is expected to come in at 48.4%. We expect operating leverage to
drive a strong 410bp margin expansion over this period.
At the CMP, the stock trades at 16.4x FY2009E EPS and an EV/subscriber of US $358.2 on our
FY2009E mobile subscriber base. Given the strong growth expected in mobile subscribers and
visibility on various initiatives such as the global listing of FLAG Telecom and hiving off of the tower
business, there remain significant upside triggers for stock price movement. We maintain a Buy
on the stock, with a revised 12-month Target Price of Rs627.
August 1, 2007 4
TM
TM
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August 1, 2007 5