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Reliance Infocomm : Value likely on listing

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Reliance Infocomm : Value likely on listing - February 26th, 2006

The value of Reliance Communication Ventures — a proxy for Reliance Infocomm — works out to a price band of Rs 275-350 per share. The company's market capitalisation will be Rs 35,000-45,000 crore.

This is the broad inference that can be drawn from the financial parameters for the first nine months ended December 2005.

Since Reliance Industries holds an indicative 65 per cent shareholding in RCV, the listing price reflecting this shareholding will be in the price band of Rs 180 to Rs 235.

If it lists at the upper end of this band, Reliance Industries shareholders, who have been allotted shares in this company, will be sitting on substantial gains; it is likely to be well in excess of the imputed value for Reliance Infocomm in the special trading on January 17.

This was held to discover the value of Reliance Industries stripped of its investments in group companies that are now part of the Anil Ambani group. Based on the listing price of Reliance Industries on January 17 at Rs 715, the imputed value of RCV worked out to Rs 170.

The likely gains on listing, due in the first fortnight of March, are justified on account of several variables. Especially if the financial parameters of RCV are compared to that of Bharti Tele-Ventures — the only integrated listed peer in the telecom segment.

RCV consists of four companies — Reliance Infocomm, Reliance Communications Infrastructure, Flag Telecom and Reliance Telecom. Of these, Reliance Infocomm will primarily dictate the valuation of RCV; it has 17.5 million subscribers across the country.

Since the squabble in the Reliance empire, the operations of Reliance Infocomm have reached a steady state only in the third quarter of 2005-06. It will be fair to use the financial performance of the third quarter of 2005-06 as a benchmark for a comparison with Bharti.

As the mobile business is the biggest contributor to revenues and profits of both companies, this segment will continue to dictate valuations.

For Bharti, the mobile business contributes about 65 per cent of revenues and the same (about 60-65 per cent) is assumed for Reliance Infocomm, in the absence of additional details. Based on Bharti's market capitalisation of Rs 68,000 crore, the mobile business' valuation works out to Rs 44,200 crore. A discount factor will, however, have to be applied to Reliance Infocomm's mobile business as there are key differences in their financial and operational parameters:

Profits and margins

In the quarter-ended December 31, 2005, the consolidated operating profits of RCV on a higher revenue base were 25 per cent lower than that of Bharti's. This is reflected in the operating profit margin of RCV at 25 per cent compared to 37 per cent for Bharti.

There has been a sharp improvement in the operating margin to 25 per cent from 15 per cent and 6 per cent respectively in the first two quarters of FY 06.

RCV's consolidated cash profits and post-tax earnings are also 30 per cent and 43 per cent lower than Bharti's.

Composition of users

As the revenues of Reliance Infocomm and Bharti are more or less similar, the inference is that the average revenue per user (ARPU) will be broadly the same.

In the third quarter of 2005, Bharti's mobile average revenue per user worked out to Rs 470, with 80 per cent of the subscribers in the prepaid category. As Bharti has sustained the ARPU between Rs 470 and Rs 510 in the last six quarters, its quality and composition of users is established.

For Reliance Infocomm, however, in the absence of break-up between post- and pre-paid users, average minutes of usage and customer churn or dropouts, the comfort level is considerably lower.

In March 2005, the company had initiated a one-time churn by dropping 0.98 million subscribers and moving them from post-paid to pre-paid schemes.

In the third quarter, the operating expense as a percentage of revenues of Reliance Infocomm is nearly ten percentage points higher than Bharti's, dragging overall profits.

Though the consolidated operating expenses percentage has trended down in the past two quarters, its improvement will be critical to Reliance Infocomm's margins in the medium term.

Likely market cap

With the recent clean up of Reliance Infocomm's balance-sheet and financing plans tied-up in the form of debt for future expansion, applying a discount factor of 25-30 per cent to Bharti's mobile market cap appears reasonable. On this basis, Reliance Infocomm's mobile market cap works out to Rs 30,000-33,000 crore.

We are heavily discounting the other businesses of RCV, because their operations, revenues, profitability and capital employed are not known, adding to a total market cap of Rs 35,000-45,000 crore.
Based on a book value of Rs 90 per share for RCV, post write-offs of bad debts, obsolete inventories and impairment of assets as of March 31, 2005, its price to book value works out to 3-4 times compared to eight times for Bharti.
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