Reliance Communications - Go India, Go!

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.

To invest or not to invest in REC IPO?? Presenting a SWOT Analysis..

The REC IPO has already been subscribed fully. Sensible companies will always have a market because this IPO has being priced very attractively. This company lends largely to the power sector projects, especially to the transmission and to the generation space of it. It also mainly participates in the rural power generation projects.

If one takes a look at what this company is likely to do, there is a whole host of business opportunities waiting for it. This company may be looking at putting in USD 592 billion in the 11th Power Plan that the government has laid out - about 15-20% of the total outlay in the 11th Plan will be fully funded by REC. So the company has been growing about 23% CAGR from FY04-FY07 and from here to FY10, they are likely to grow in a CAGR of 20-21%; as per CNBC-Tv18 analysis.

But one biggest concern of this company has been, the spread that they get it on. The biggest positive for REC hs been the cost of funds that they have been able to raise largely because of funds coming in from the government and the section 54 EC bonds that they have been able to raise.

If you take a look at how it is panned out over the past few years, the quantum of bonds that can be given under section 54 EC has been cut down. REC and NHAI are the only two institutions that can come out with these bonds. For REC, they have capped it at Rs 80 billion - REC wanted to raise Rs 45 billion in FY08, of which it has taken only Rs 15 billion in FY07.

The CBDT (Central Board of Direct Taxes) has said that they are rolling it forward. So in this year also, they can raise this money from the market.

But the cost of funds raising after FY09 gets a little bit murky because what happens to the government concession that they have been giving? Will the concession and the Section 54 EC continue? If these don’t continue, the cost of fund which is rather attractive at 6%, which they have been able to lend at 9%, incremental lending at 10%; that is likely to go down. So this is one concern that we have in REC.

But it is very attractively priced at Rs 90-105 on the upper band of Rs 105. On a price-to-earnings basis, it’s at 8.6-times FY08, whereas PFC is at 17.8 and IDFC is at 31.2 FY08 earnings. Being an NBFC, we also looked at the price to book one-year earnings and it is at 1.5-times price-to-book, whereas the PFC is at two-times and IDFC is at 6-times price-to-book. Even on the returns ratio, whether it is returns-on-assets or returns-on-net-worth, it is very attractive compared to these two peers. That’s why you are seeing institutional interest coming in this IPO and it’s also a very good dividend play.

Now, the question is, is there any reason to suspect that this concession received under section 54 EC will not be continued? That is where one has to give the benefit of doubt that maybe at least for these two companies, it will continue. This is because raising funds for these two companies- the list used to be as big as five companies, it is being cut down to two companies in the previous Budget. So whether they will be allowed to, is going to be the important thing.

But attracting cost of funds for these companies has becoming harder and since they are giving it for the rural infrastructure growth only, maybe the government may be happier to just let these two companies continue as it is.

Meet Mr. C.B. Bhave, the new SEBI Chief!

It's like a homecoming for Chandrasekhar (Chandu) Bhaskar Bhave, the newly-appointed chairman of India's capital market regulator. The 1975-batch IAS officer of the Maharashtra cadre was the executive director in charge of the secondary and later the primary markets between 1992 and 1996.

That was the time when the Securities and Exchange Board of India was taking its initial steps to reform the stock exchanges and putting in place systems that help in investor protection. The Bombay Stock Exchange was then known as a brokers' club and Bhave was on the board of the exchange in his capacity as a representative of Sebi.

It was during his stint in Sebi that his boss, G V Ramakrishna, banned badla. Bhave also played a pivotal role in ensuring that market players get sophisticated hedging tools and are properly regulated. Bhave maintained that the capital market regulator's primary job is to protect individual investors and simultaneously develop systems that take care of the interests of issuers -- companies and intermediaries. He also ensured that the new National Stock Exchange's surveillance systems were top class.

The slimly built Bhave, who plays tennis regularly, has a self-effacing style, but is a tough administrator. As the head of the National Securities Depository Ltd (NSDL), he revolutionised the capital market by getting market players to accept the new system of dematerialised shares and debentures. He won buyers' support by arguing that demat would eliminate bad deliveries of shares and impressed upon the sellers that this would facilitate early settlement and early payments.

Setting up of a depository that converts physical share certificates into electronic form was not at all easy. For example, the UK has still not been able to implement it. But under Bhave, NSDL set up the depository at under Rs 100 crore (Rs 1 billion), or a seventh of the original estimate, and achieved paperless trading within just three years, the fastest in the world.

All this experience will come in handy when Bhave takes over as the sixth chairman of Sebi. For, the challenges are many as the investment climate is much more dynamic now than when he was the executive director.

He is also coming in at a time when the market sentiment is not favourable for small investors and many of them have had huge losses in some of the recent high profile IPOs. Also, the Indian capital market has seen the entry of thousands of new investors into the system. Private equity players are getting stronger and more influential in the market and there is a demand to regulate them. This is an international issue and the Indian market regulator will have to face it, too.

There is a need to reform the primary market to speed up the processes as well. The price discovery mechanism, for example, is not efficient even in book-building as institutional investors are paying just 10 per cent and putting bids for 10 times of the amount they pay in IPOs.

Short selling and physical settlement in derivatives are the other issues that need to be looked into. The allotment and listing also need to be much faster. His predecessor M Damodaran has ensured that the homework for all these is ready and it is up to Bhave to "implement" them.

It's also an irony of sorts that Bhave, 57, is joining as the regulator. His organisation, NSDL, has been fighting a bitter legal battle with Sebi since April 2006, when Sebi uncovered a massive scam involving the cornering of share allotments in IPOs for small investors. In November 2006, Sebi ordered NSDL and a few others 'implicated' in the IPO scam to return Rs 115 crore (Rs 1.15 billion) in "illegal profits" made from IPO deals. Of this, NSDL's share was Rs 45 crore. NSDL appealed to the Securities Appellate Tribunal (SAT), which, in December, set aside the Sebi order, describing its action as a clear "violation of the principles of natural justice."
Sebi investigation on the IPO scam isn't concluded. So as the new Sebi chairman, Bhave will have to resolve this tricky issue. As a regulator, he cannot be seen to be hurting the interest of the organisation which he founded.

Reliance Power Disappoints..

Hey readers, how many of you are left crest-fallen with the listing of the Reliance Power?? I am sure many of you are left holding your heads in your hands; with Reliance Power listing @ 430 (vs. an issue price of 450 and a listing price fixed @ 610), experts, investors and first-timers alike are left wondering as to what to do!

I have read a lot on this issue and in none of my readings did any expert expect the issue to list below 525!! Yes, the minimum premium for the shares was Rs. 75 and that was supposed to be a PESSIMISTIC ESTIMATE!! The energy shares have not taken to the listing all that kindly; last checked, both Reliance Energy and Tata Power were trading 5% lower.

However, after listing @ 430, Reliance Power seems to have made some sort of a recovery, with the shares now trading @ 450. One can only hope, pray and keep fingers crossed that the stock closes above Rs. 500 today. A close above 500 would not only make Ambani Jr the richest Indian on earth, it would also signal that maybe, just maybe, there is some light @ the end of the tunnel!!

After the events of the last fortnight, I hope none of you are left wondering over why this site is called the "The Sensexxxational Ride"!! ;-) Abhi picture baaki hai mere doston, hang on!! :-D

Reliance Power to list today!

Finally the day is upon us when we will know how strong the Ambani name is in the market. Reliance Power, India's biggest IPO to date, received a tremendous response, being oversubscribed by as much as 73x. However, times have changed for the markets since the IPO opened to the public on January 15, 2008. At the time of the IPO opening, experts had expected shares of Reliance Power to list at Rs. 900/- .. Compare it to the current expectations of the IPO listing at Rs. 550 - Rs. 600 and you know something really bad went on during this interim period.

So what caused a sharp decrease in the premium for Reliance Power? I believe the slowdown in the U.S. market led to heightened fears of recession, which in turn caused a severe correction in the Indian markets. This has affected the investors' appetite for IPOs; this is very much evident from the withdrawals of the IPOs for Emaar MGF and Wockhardt Hospitals last week. Both the comapnies saw a poor response to their IPOs and have now decided to raise money from the primary market at a later date when market conditions are more favorable.

The markets too have been trading in the negative for most of last week and everyone's eyes are now on the listing of the IPO for Reliance Power. A blockbuster listing for Reliance Power should see some short-term bullsih momentum enter the market. The Indian markets severely need some positive indicators to stem the outflow of FIIs and generate some liquidity in the primary market. I'm keeping my fingers crossed for no matter how flawed Reliance Power may be as a company, the name RELIANCE can make or break the Indian market! There is just no denying the fact that divided, the Ambani brothers stand taller!!

Reliance power listing date.. Stay invested in RCOM!!

Reliance Power will list on February 11. The IPO price was of Rs 450/share and is expected to list at Rs 610/share. It was the largest IPO ever for India and it raised Rs 11,5000 crore.

Today, Reliance Communications was also in the news as it filed a Draft Red Herring Prospectus (DRHP) for Reliance Telecom Infrastructure, valued at Rs 5,000 to Rs 6,000 crore. Reliance Infratel Ltd. is expected to have 60,000 towers by FY09 and Reliance Communications will hold 95% of the company. Today, Reliance Communications closed at Rs 685, up 12% on the BSE. Shares of Reliance Communication advanced on reports that its subsidiary Reliance Telecom Infrastructure, is planning to hit capital market with Rs 5,000-6,000 crore initial public offer.

Reliance Telecom will sell nearly 10 per cent of its post-issue share capital through the IPO which will put its valuation more than double of what it achieved in July 2007 when it privately placed 5 per cent stake to a group of institutional investors.

RTIL, a 95 per cent subsidiary of Reliance Communications, sold the stake for Rs 1,400 crore to a host of investors including George Soros, HSBC, Fortress Capital, New Silk, Galleon, DA Capital and GLG Capital in a deal which had put its valuation at Rs 27,000 crore.

Going by the IPO size, the equity valuation of RTIL, a company engaged in the business of building, owning and operating communications towers, will be around Rs 50,000-60,000 crore. This will translate into nearly Rs 250-300 per RCOM share.

RCOM demerged its tower assets in RTIL last year in a move which was followed by most telecom companies in India. RTIL has a presence in all 23 telecom circles in the country. It has a 10-year master services agreement to provide passive telecom infrastructure to RCOM

In my post dated December 31, 2007, I'd given the following reasoning for an investment in Reliance Communication (RCOM):

Having established itself as a dominant player in the CDMA segment, RCOM is all set to take the GSM segment by storm when the company will launch its GSM operations in 2008. The company is also planning to introduce a net-enabled phone at 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 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 Communications is looking to expand its tower business to take on the mega tower company created by the big three GSM players of the Indian mobile market. For this purpose Anil Ambani's tower company seems to be targeting an unlikely partner, the state owned telecom giant Bharat Sanchar Nigam Limited (BSNL). The company had earlier invited bids from private players for taking towers on rent but this venture will be different as towers will be shared on a reciprocal basis. Reliance tower infrastructure limited has about 17,000 towers while BSNL has about 36,000 towers putting their total tower strength at 53,000 towers. Both of them are not very far from the 70,000 towers under Indus tower, the joint venture tower company of Bharti Airtel, Vodafone and Idea. All these factors combined should push the share price of RCOM in the Rs. 850 - Rs. 900 range!