>Reliance Communications (ANAND RATHI)

Net-adds drop in February but still tracking in-line

■ 3.4m net-adds in February. This implies a decline of 32% from the record 5.0m reported in Jan, yet RCOM is on track to meet our 4QFY09 forecast of 11.2m net-adds; the company needs to add 2.8m subs in March, which is achievable in our view. Furthermore, our FY10 forecast of sustainable monthly net-adds for RCOM is 2.1m, coupled with a 14% yoy decline in the ARPU.

■ Why the sharp decline in monthly net-adds? Three reasons in our view: (1) 10% fewer days in Feb vs. in Jan, (2) Reduced attractiveness of the promotional GSM package – initial cost to the subscriber is Rs100-110 vs. Rs25-50 in Jan, also reduction in free talktime value to Rs4/day (for 90 days) vs. Rs5-10 previously and, (3) conscious effort on the part of RCOM to limit the supply/sale of promotional GSM SIM cards, especially in those circles where RCOM is close to qualifying for additional spectrum.

■ 4Q recovery thesis intact. A positive surprise on net-adds (vs. our 11.2m forecast) now appears unlikely, but the key is revenue growth. RCOM has been offering discounted tariffs to boost usage and has indicated that the trends in recharge and ‘paid’ minutes are better than their own expectations. Furthermore, prebooking of bulk of the network operating costs and control in ad expenditure should contribute to healthy EBITDA growth in 4Q.

■ We find RCOM stock attractive given potential recovery in revenue/EBITDA growth and inexpensive valuations (FY10 P/E of 7.7x). Key risks include irrational competition and 3G auctions.

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