>War cries getting louder - RELIANCE COMMUNICATIONS (ICICI SECURITIES)

Reliance Communications’ (RCom) announced an aggressive tariff plan that is likely to accentuate the rising pricing pressure in the wireless sector. RCom has launched a plan titled, Simply Reliance, that offers all calls & SMS at a flat rate of Rs0.5. The plan offers voice ARPM at Rs0.36/min versus RCom’s current voice ARPM of Rs0.58/min, a 37.9% decline. While we do not expect industry realisations, post the launch, to actually decline to Rs0.36/min, the plan strengthens our case of aggressive pricing and is likely to be replicated by other incumbents. If the TRAI implements its plans of making per-second tariff plans mandatory, realisations will be impacted further. Our aggressive tariff war scenario factors in ARPMs of Rs0.51/min in FY11E and will impact valuations 5- 13% for telcos. We maintain our cautious view on the sector, but do not downgrade valuations as there is limited scope for realisations to fall below Rs0.5/min in the short-term. We maintain HOLD on BAL (target price Rs436, stress-case Rs415) and on RCom (target price Rs285, stress case Rs265) and reiterate SELL on Idea (target price Rs75, stress case Rs66).

■ RCom launches Simply Reliance – Aggressive but is likely to have riders as management continued with the stance of maintaining realisations above Rs0.5/min, which is unlikely if Simply Reliance is heavily subscribed to by existing subscribers.

■ MoU elasticity unlikely to drive growth. In the past, growth in subscribers translated to high revenue growth as MoUs expanded with falling tariffs. However, recently, elasticity of MoUs has reduced with falling tariffs and we do not expect any significant improvement in MoUs due to the reduction in tariffs.

■ Stress-case scenario suggests 5-13% downgrade in target price. Our aggressive tariff pricing scenario suggests further downside of 5-13% to target price of telecom stocks. Our stress-case scenario factors in Rs0.56/min and Rs0.51/min ARPMs for FY10E and FY11E, which implies a decline of 19.7%, 19.1% and 20.8% over FY09-11E, for BAL, RCom and Idea respectively.

■ Valuations. Telecom stocks have been the worst performers in the recent stock market rally and there are no signs of an uptick. The only hope of positive newsflow is value unlocking in the tower business, the dynamics of which are improving with consolidation in the tower industry. We do not see Simply Reliance as a strong enough trigger to factor in aggressive tariff scenario, as RCom’s earlier plans such as Monsoon Hungama and GSM Customer Experience had limited impact on sectoral financials. We maintain our cautious view on the sector and recommend BAL as our top pick with HOLD. We continue to be negative on Idea. We maintain HOLD on RCom and raise our target price slightly to Rs285/share from Rs276/share owing to inclusion of FY09 balance sheet actuals.

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