OPINION

Reliance Communications - Go, India Go

May 19, 2008
Varun P

Reliance Communications or RCOM (formerly known as Reliance InfoComm) is India’s largest private sector information and communications company with a subscriber base of over 48 million subscribers. Founded in 2002, RCOM has established itself as a dominant service provider in the CDMA segment. The company is now looking to grow via acquisitions and expansion of service offerings under the wireless and non-wireless service offerings. The next 12-18 months will see the introduction of plenty of new growth drivers for the company. Below is a brief look at some of the drivers:

1) Wireless Segment:

RCOM is gearing up operations to commence with one of the biggest roll-outs of GSM operations, aiming to achieve 90 percent population coverage within 12 months of the launch in India. The company is confident of rolling out its GSM services from the fourth quarter of 2008. The company has already established its presence in the CDMA segment and its dual-SIM enabled CDMA handsets will aid the company in retaining subscribers as well as easing the switch from CDMA to GSM. The company has secured a loan of $750 million China Development Bank for this purpose.

The company is also planning to introduce a net-enabled phone at a price of only Rs. 480/- per handset. This marks a steep discount to the currently available internet browsing phones at a cost of Rs. 1,400/-! The company intends to place an initial order for 12 million handsets. It will target the 600 million rural population and expects to sell around 1 million pieces a year in the rural and semi-urban areas. The company is also looking at roping in the labour ministry that is looking at digitisation of communication technology and making mobile phones affordable to farmers.

Reliance Infratel, RCOM’s tower arm, currently has 37,000 towers. Infratel is looking to increase to tower count to 60,000 by 2009 and 70,000 by 2010. The increase in the tower count will result in a higher transmission capacity. The increase in the tower count coupled with the GSM launch will drive higher revenue from the company’s wireless segment. Additionally, RCOM is seeking possible listing of Reliance Infratel on the Indian stock markets. Infratel has received the SEBI approval to proceed with the IPO which will witness the dilution of 10% stake in Infratel for a sum of Rs. 50,000 crore – Rs. 60,000 crore. Listing of Infratel’s IPO will result in significant unlocking of value for RCOM’s shareholders.

2) Non-wireless segment:

One of the most significant components of RCOM’s non-wireless segment is Reliance Globalcom. After Reliance Infratel, I believe that the company stands to gain significantly from the significant expansion activities being undertaken at Globalcom. From increasing the private undersea cable system to 137,000 route-km (r-km) (at an estimated cost of Rs. 1.5 billion) and landing ports to 64 to presence in 60 countries in 2010, Globalcom will enable RCOM to not only post strong margins (since a major part of expansion will take place in emerging markets) but it also help the company to maintain a higher growth rate compared to national as well as global peers. The expansion in the undersea cable network is expected to address the global connectivity needs of 90% of world population. Some news report also state that Globalcom is in talks with banks and mobile operators for setting up a global backbone to enable interbank money transfer on mobile platforms.

RCOM is also ready to begin with the roll-out of its Direct-to-Home (DTH) services, known as Big TV. I expect the company to corner a significant share of the DTH campaign based on its superior service offering (over 240 channels) and presence in over 4000 towns. The higher market penetration will in turn enable the company to derive higher revenue from the non-wireless segment.

RCOM is looking to increase its presence in Wimax with the acquisition of a majority stake in eWave world in April 2008. The company will invest $500 million in this service by 2012. RCOM estimates the revenue potential in emerging markets at $10 billion; the company expects to capture 10% of the market share in the next 24 months which will translate into revenues of $1 billion by 2010.
RCOM is also aiming to double its market share in the US in managed Ethernet. Acquisition of Yipes in July 2007 provided the company with 5% market share in the US in managed Ethernet. By 2010, the company has guided to revenues of $200 million - $250 million with a market share of 10%. In the Internet Data Centre (IDC) space, the company has set itself a target of being among the top three providers by March 2009. Additional expansion into the area of global conferencing will lead to further upside.

My entire argument for an investment in RCOM is based on the factors listed above. I’ve purposefully not taken the company’s base business (the CDMA segment) into consideration. I’ve also deliberately made an attempt to stay away from discussions on the company’s cash position or the net debt on its balance sheet. I believe that while the underlying business of the company’s remains strong, the next wave of growth could be derived from one or more of the above factors. But I must sound a note of caution: Although the company is very confident of delivering on its promises, I believe that the company is exposed to significant execution risk. Most of the company’s plans are highly ambitious and aggressive and require significant upgrade in operational efficiencies. Additionally, changes in government regulations may hamper the company’s plans and possible slow-down the execution ability of the company. Another concern is the amount of financing which the company will need to successfully carry out these expansion activities.

While the Indian Telecom industry is recording one of the fastest growth rates in the worldwide telecom market, the growth path is not without its share of obstacles, with the raging war between the CDMA and the GSM operators over spectrum allocation being one of them. However, despite the likely hurdles in its path, I expect RCOM to reap the benefits from the aggressive strides that the company is looking to make in both the wireless and non-wireless segments. The company is looking to drive incremental growth in India with the roll-outs of the GSM operations and Big TV while internationally, Globalcom is expected to provide a major thrust to the company’s top- and bottom-line growth by 2010. Besides the incremental revenue from these expansions, IPOs for Globalcom and Infratel will also unlock significant value for shareholders. Given the current market conditions, I believe this is the right time to accumulate shares of RCOM.

This article does not recommend any investment decisions. Readers are strongly urged to do independent research and make their own conclusions. Desicritics does not review or verify any of the information presented by our authors. The article is presented for your reading pleasure only. 

 

A passion for reading translates itself into a passion for writing .. Or you may say, that beacuse of loading too much of what I read onto my brain, I constantly need to pen it down to help my brain cope with the craziness floating around in my head!
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