>RELIANCE COMMUNICATIONS (NOMURA)

MONETISING SCALE

■ Upside from new tower deals
We have increased forecast revenue / EBITDA over the next three years by 5-8% to account for recent tower deals, and higher incremental external tenancies of ~0.5x (to give total external
tenancies of ~1.0x). RCOM is well positioned to be able to offer end-to-end services (backhaul / network management), and is perhaps being more aggressive and offering greater discounts /
incentives on these deals. We assume EBITDA margins of 52-55%, with monthly revenue / tenant / tower of ~INR30k, as there are still uncertainties on the survivability of some new-comers. We derive an EV of US$7bn for the towers (INR77/share).

■ More clarity on normalised numbers
We have adjusted FY09 numbers for one-time non-operating gains / losses, provisions, write-offs etc, after the release of the annual report. We estimate underlying NPAT of INR38bn, vs the INR59bn reported, representing a 11% y-y fall. This also adjusts for one-time investment
income from the sale of a 5% stake in the tower business in FY08.

■ Competitive intensity remains unchanged
Our recent discussions with the company suggest: a) the operating environment remains competitive; b) RCOM is holding its position, with monthly net adds of 2-2.3mn; and c) the revenue outlook is for mid-single digit growth in the upcoming quarter, we believe. Aggressive promotions by new carriers have kept a lid on net add growth for incumbents. With Telenor and Etisalat now making headway with their service launches, pricing has yet to hit bottom. The company’s early repayment of debt is also encouraging; along with continued improvement in wireless business and progress on listing the tower business, this could be another catalyst for the stock.

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