Performance Highlights

Wireless Business powers Topline, aided by soaring ARPUs:

Reliance Communications (RCOM) recorded a 32.8% yoy and a 9.7% qoq Topline growth in Q1FY2008. This was driven by the Wireless Business unit, which recorded a 38.7% yoy and a 13.6% qoq growth in gross revenues. This business accounted for over 81% of incremental revenues of RCOM on a yoy basis and over 84% on a qoq basis. The company’s mobile subscriber base now stands at 31.9mn, which implies an increase of 3.9mn over the quarter. This is the second-highest ever quarterly addition made by RCOM. This growth comes after a fall of 2.0mn subscribers in the last quarter on account of subscriber disconnections made to comply with the subscriber reverification norms. In fact, due to these disconnections, the company’s average revenues per user (ARPUs) rose significantly this quarter, by 10.0% qoq. On a yoy basis, the fall was just 1.1%. As regards the other segments, the Global Business, which includes longdistance services, carrier-related services and bandwidth capacity sales, grew by a mere 5.6% yoy and by 0.7% qoq. The Rupee appreciation, to some extent, seemingly impacted revenue growth for this business. Revenues per minute continue to witness a secular decline, falling by as much as 37.2% yoy and by 11.2% qoq, even as minutes of usage have soared by an impressive 68.2% yoy and by 13.4% qoq. As for the Broadband Business, this segment clocked a strong 68.8% yoy and a 16.5% qoq growth during the quarter.

Margins continue to surge, at par with Bharti Airtel:

RCOM recorded an impressive 580bp yoy margin expansion on account of operating leverage and cost management. Even on a qoq basis, EBITDA margins rose by 82bp. With this performance, RCOM’s EBITDA margins are now at par with those enjoyed by industry leader, Bharti Airtel.

Bottomline steams ahead on margin expansion, forex gains:

Due to the margin expansion and forex gains (Rs204.2cr), RCOM witnessed a surge in Bottomline by over 138% yoy and by 19.2% qoq during the quarter.

Wireless Business continues to witness robust growth

During Q1FY2008, RCOM recorded a 32.8% yoy and a 9.7% qoq growth in Topline. The key growth driver for this performance was the Wireless Business, which grew by 38.7% yoy and by 13.6% qoq. At the end of June 2007, RCOM had a total of 31.9mn mobile subscribers on its network, recording net adds of 3.9mn over the quarter, giving it an incremental share of 19.6% of industry net adds over the period. The company has clearly made a strong comeback since March, when it had to disconnect 5.6mn subscribers to comply with the subscriber re-verification norms. In June, RCOM added its highest-ever monthly subscriber additions, at over 1.45mn. The company remains the second-largest wireless operator in the country, with a total marketshare of 17.6% (up from 17.4% in March). 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.

Outlook and Valuation

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 Rs 627.