Reliance Communications: Talking about Growth

Less than a decade back, owning a mobile was a status symbol in India. Now, it seems like everyone has one… from school kids to rickshaw pullers. Cheaper call rates and lower handset prices have made mobile phones affordable to everyone. According to telecom regulator TRAI, 10.2 million people signed up for mobile phones in March, resulting in India overtaking the US as the largest wireless market after China. With the 58% year-on-year jump to 261.09 million subscribers in March, India seems poised to cross the 300 million subscriber mark this year.

And Reliance Communications (RCom), which is part of the Anil Dhirubhai Ambani Group, was ready to strike while the iron was hot. Targeting the world's fastest-growing mobile market, RCom added 4.8 million mobile users in the quarter ended March 31, 2008, taking its total to 45.8 million subscribers. This strong performance allowed the Mumbai-based company to record 47% growth in its net profits. At Rs1,503 crore, the net profit figure was much higher than expectations.

So, how is RCom positioned?

• The company is addressing a huge market that is yet to be penetrated. Although India’s mobile users have surged, this is a phenomenon restricted to the bigger cities. Less than 25% of India's population own cell phones. So, the smaller towns and rural areas present a huge potential market.

• RCom faces still competition from Bharti Airtel, India’s leading mobile operator. Bharti Airtel has announced steep cuts in its long distance and roaming tariffs effective April 30.

• RCom plans to spend Rs25,000 crore to increase its coverage, including GSM (global system of mobile) expansions. The company currently provides GSM services to eight of India’s 23 circles. It expects to complete its GSM roll-out to the remaining 15 circles by the end of next year. Already orders worth around Rs4,000 crore have been placed for equipment and electronics for its GSM initiative.

• The company plans to list its global arm, Reliance GlobalComm, on the London Stock Exchange, provided values and markets are right.

• RCom is awaiting clearance from market regulator SEBI for the IPO of its tower business subsidiary, Reliance Infratel. The company hopes to raise Rs6,000 crore through the offer.

• The company has entered into India’s IT sector with the launch of its wholly-owned subsidiary, Reliance Technology Services.

• RCom has forayed into the Direct-to-Home (DTH) market with Big TV.

Analysts at Citi have recently initiated coverage of RCom with a buy rating and a target price of Rs760. Analysts believe that expansion of the wireless market and the company’s ability to capture market share profitably will continue in the longer term.

The company has just reported record results, beating expectations. Moreover, it addresses a large market opportunity and has a number of initiatives in place to boost growth. RCom shares appreciated 21% in the 12 months to March 31, while the Sensex rose 20% in the same period. Shares have declined significantly from their 52-week high of Rs844 (in mid-January) and the roll-out of the company’s various initiatives should lend upside.