>RELIANCE COMMUNICATION (MACQUARIE RESEARCH)

Good with India growth story for now

Event ■ Media reports have indicated that RCOM is in talks to buy Kuwaiti telecom operator Zain's African operations. We believe the news is speculative and the likelihood of this deal going through at this stage is fairly low. Maintain OP.

Impact
■ Potential sale of Zain’s African operations is possible. We note that Zain is in the midst of a restructuring exercise and that the potential sale of its African operations is one of the options the company is considering. Zain had publicly announced its intention to possibly sell its African assets last month, after talks with the French media and telecoms conglomerate Vivendi about a potential majority stake sale were called off. There is an extraordinary general meeting of Zain shareholders on 31 August, which might provide additional information about in what direction the deal is moving.

■ Uplift from pan-India GSM launch likely to play out in next six months. We believe the first signs of a resurgence in wireless growth, led by GSM, were clearly visible in 1Q FY3/10. RCOM posted its best sequential growth (6.5% QoQ) in wireless revenues in seven quarters. It reported 1Q FY3/10 wireless revenue growth of 16.4% YoY vs 19% for Bharti. Such similar wireless revenue growth between Bharti and RCOM has taken place after 12 straight quarters (it last occurred in June 2006).

■ Wireless broadband data access riding on EVDO (3G CDMA) is a new revenue stream that has just been tapped, with strong upside expected in two years, which should provide material upside to our current EPS forecasts.

■ Assign Rs37/sh value from recently signed towers sharing deal. Reliance Infratel, a 95%-owned subsidiary of RCOM, has signed a ten-year tower rental agreement with one of the greenfield telcos, Etisalat DB Telecom. Under the agreement, Reliance Infratel would provide Etisalat DB and its subsidiaries with complete tower and transmission infrastructure for its network rollout in 15 telecom circles. We view this as a significant positive for the stock and assign Rs37/share value, over and above our TP, for this deal.

Earnings and target price revision
■ No changes.

Price catalyst
■ 12-month price target: Rs275.00 based on a DCF methodology.
■ Catalyst: Positive effect of new GSM launch on operating metrics.

Action and recommendation
■ Reaffirm OP. We continue to like RCOM as a beta play, primarily based on improving traction in the new GSM business (no more price discounting and a focus on revenues rather than low-yielding subs), the new revenue stream emerging from 3G EVDO-led wireless broadband, the new mega towers deal with Etisalat DB and attractive valuations. RCOM has corrected 9% in the past month, and we think investors should use this opportunity to accumulate the stock.

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