>RELIANCE COMMUNICATIONS (HDFC SECURITIES)

Wireless MOU expected to rise in Q1 FY10, but stabilize a bit lower in the long term
RCOM’s MOU in the fourth quarter decreased by a significant 9% qoq as the effect of the promotional minutes was felt only in half of the quarter. The promotional minutes were removed in the latter part and the tariffs were brought at par with its competitors. The effect of this will be fully seen in the first quarter, and as a result of this, there may be an increase in MOU on a qoq basis in Q1FY2010. However, with penetration rapidly increasing in the B &C circles, where usage is less, MOU may settle down a bit lower going forward. ARPM is also expected to settle a bit lower from the current levels of Rs 0.6.

GSM strategy
The company will soon enter into the postpaid GSM business, for which they have started mass media advertising for the first time. The company has plans of launching corporate offerings and utilizing its cross leveraging with its data card business. The existing CDMA network will enable RCOM to save costs to deploy an altogether new network for GSM, as slight further modifications to the CDMA network will ease the task of GSM deployment. New offer launches in the roaming business, strong brand positioning, selling its own equipments and handsets will add to RCOM’s advantage. Taking this discussion further, we believe the company is well poised for the launch of 3G, as wireless business of RCOM functions on EDGE platform and the cost required for converting an EDGE network to 3G is estimated to be lesser than the cost required for other companies to convert their 2G network to 3G. In this fashion, RCOM is expected to save a lot in 3G deployment. We also believe the impact of MNP will be felt lesser on RCOM, as the company has a huge chunk of low end GSM customers, who may switch to another operator even before MNP is implemented. As far as CDMA business is concerned, the management believes that MNP will require changing of handsets if a CDMA customer wants to switch to GSM. This will make customers reluctant to change their networks. Nevertheless, we believe the cost of retention per subscriber will increase post MNP, which may impact margins up to some extent.

Globalcom business to grow at 3-4% qoq growth in Q1 FY10
RCOM’s Globalcom business grew at 12% in Q4 FY10 on the back of some big contract wins and demand expansion in its Vanco and Yipes business. RCOM believes that this business will not witness such a strong growth in the first quarter as the contract wins are never consistent. Going forward, the Globalcom business is expected to grow at 3-4% on a qoq basis. Dollar depreciation may impact the business somewhat negatively.

Margin expansion to be seen in Broadband business
RCOM has completed the connection of 1 million buildings under its broadband business. The company has been reporting strong margin growth in this business. In Q4 FY09, the company has reported a 247 bps growth in broadband business EBITDA margins. As the company is amassing volumes, it is benefiting from economies of scale, as the company already has a vast broadband network and the only thing it has to do is the last mile connectivity. Due to this reason, a further margin growth is expected. IPTV business is further expected to boost the sales performance. The company’s broadband EBITDA is three times of its respective capex, which itself gives us the measure of its profitability. Management estimates this business to grow at 5-6% every quarter. In the DTH business also RCOM expects a strong growth in market share as the company has got strong distribution network and the technology platform of MPEC4, which provides more number of channels on the same transponder.

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