Reliance Communication

1QFY213 Result Update Telecom August 13, 212 Reliance Communication Performance highlights (` cr) 1QFY13 4QFY12 % chg (qoq) 1QFY12 % chg (yoy) Net sales 5,319 5,31.2 4,94 7.7 EBITDA 1,65 1,632 1.1 1,61 3.1 EBITDA margin 31. 3.7 29bp 32.4 (139)bp PAT 162 332 (51.) 158 3. For 1QFY213, Reliance Communications (RCom) reported modest results with a better-than-expected performance on the operating front due to an ~3% qoq decline in network-related expenses. Due to lack of triggers except for the planned monetization of its Infratel business and listing of the under-sea cable business in Singapore, which can cut down its debt by more than half, we remain Neutral on the stock. Quarterly performance: RCom reported revenue of `5,319cr, almost flat q-o-q. The wireless revenue came in at `4,527cr, up merely.5% qoq, on the back of a.4% qoq growth in minutes of usage (MOU) to 228min. The average revenue per user (ARPU) slipped by 1.% qoq to `98. The overall network traffic grew by 1.7% qoq to 15bn min. RCom s overall EBITDA margin improved by 29bp qoq to 31.%, aided by an ~3% qoq lower network operating cost (NOC). The PAT for the quarter came in at `162cr, boosted by a 6.3% qoq decline in depreciation costs. RCom had in the past, increased the useful life of certain fixed assets like towers, which led to a decline in depreciation costs. Outlook and valuation: The company s recent quarter performance is in line with its peers, with a qoq decline in major key performance indicators (KPIs). With increasing competitive intensity in the industry, we believe it is difficult to see any major improvement in the voice business any time soon as a significant cut has been taken by telecom companies including RCom on 3G tariffs and as a lot of regulatory uncertainties continue to prevail. Currently, the company is striving to reduce the debt level in its books and has again maintained its stance of possibly selling stake in its tower assets, which might help the company to deleverage its balance sheet and reduce debt. This can act as a positive trigger to the stock price coupled with the company s plan of listing its under-sea cable business in Singapore. We maintain our Neutral view on the stock. Key financials (Consolidated, Indian GAAP) Y/E March (` cr) FY21 FY211 FY212E FY213E FY214E Net sales 21,614 22,43 19,775 21,553 22,494 % chg (2.8) 3.8 (11.8) 9. 4.4 Net profit 4,74 1,346 923 718 919 % chg (2.6) (71.4) (31.4) (22.2) 27.9 EBITDA margin 33.5 37.5 29.7 31. 3.7 EPS (`) 23. 6.5 4.5 3.5 4.5 P/E (x) 2.4 8.6 12.4 16. 12.5 P/BV (x).3.3.3.3.3 RoE 1.8 3.3 2.5 1.9 2.4 RoCE 4.7 2.4 2.6 4. 4.2 EV/Sales (x) 1.7 1.9 2.4 2.1 1.8 EV/EBITDA (x) 5. 5.2 8. 6.6 6. NEUTRAL CMP `56 Target Price - Investment Period - Stock Info Sector Market Cap (` cr) Net debt (` cr) 35,649 52 Week High / Low Avg. Daily Volume Bloomberg Code Telecom RCOM@IN Shareholding Pattern Promoters 67.9 MF / Banks / Indian Fls 9.3 FII / NRIs / OCBs 7. Indian Public / Others 15.8 Abs. 3m 1yr 3yr Sensex 8.2 4.7 13.6 RCom (17.7) (33.9) (79.) Please refer to important disclosures at the end of this report 1 Beta Face Value (`) BSE Sensex Nifty Reuters Code Ankita Somani +91 22 3935 78 Ext: 6819 ankita.somani@angelbroing.com 11,496 1.7 11/53 2,57,465 5 17,633 5,348 RLCM.BO

Exhibit 1: 1QFY213 Financial performance (Consolidated, Indian GAAP) (` cr) 1QFY13 4QFY12 % chg(qoq) 1QFY12 % chg (yoy) FY212 FY211 % chg (yoy) Net revenue 5,319 5,31.2 4,94 7.7 19,775 22,43 (11.8) Operating expenditure 3,669 3,678 (.2) 3,339 9.9 13,893 14,26 (1.) EBITDA 1,65 1,632 1.1 1,61 3.1 5,883 8,44 (3.) Dep. and amortization 99 97 (6.3) 976 (6.8) 3,978 6,54 (38.8) EBIT 741 662 11.9 625 18.5 1,94 1,9.2 Interest charges 553 58 (4.5) 45 36.6 1,593 1,72 48.6 Exceptional items - - 1 (12) Other income - - - 567 677 PBT 187 82 127.5 219 (14.5) 878 1,518 (42.1) Income tax (4) (119) (96.7) (2) 62.5 (16) 12 (1,4.6) PAT 191 22 (5.1) 222 (13.7) 984 1,56 (34.6) Share in earnings of associate - - - - - - (1.) Minority interest 29 (129) (122.5) 65.1 (55.5) 6.9 16.5 (62.1) Adj. PAT 162 332 (51.) 158 3. 926 1,333 (3.5) EPS (`).8 1.6 (5.8).8 3. 4.5 6.5 (3.5) EBITDA margin 31. 3.7 29bp 32.4 (139)bp 29.7 37.5 (772)bp EBIT margin 13.9 12.5 146bp 12.7 127bp 9.6 8.5 116bp PAT margin 3.1 6.2 (319)bp 3.2 (12)bp 4.5 5.8 (129)bp Exhibit 2: 1QFY213 Actual vs. Angel estimates (` cr) Actual Estimate % Var. Net sales 5,319 5,415 (1.8) EBITDA margin 31. 29.5 15bp PAT 162 14 15.7 Modest revenue growth During 1QFY213, RCom reported a flat q-o-q revenue growth, with revenue coming in at `5,319cr. The revenue performance was muted across all the segments. Exhibit 3: Revenue break-up (Segment wise) Segment (` cr) 1QFY13 4QFY12 % chg (qoq) 1QFY12 % chg (yoy) Wireless 4,527 4,56.5 4,327 4.6 Global enterprise 2,451 2,44.5 2,292 7. Others 243 27 (1.) 278 (12.6) Eliminations 1,92 1,95 (.2) 1,956 (2.8) Net revenue 5,319 5,31.2 4,94 7.7 Wireless segment: The wireless segment registered revenue of `4,527cr, up merely.5% qoq on the back of a.4% qoq growth in MoU to 228min. The average revenue per minute (ARPM), however, declined by 2.% to `.43/min, as competitive intensity remains stiff in the telecom industry. Thus, the ARPU slipped by 1.% qoq to `98 in 1QFY213. The overall network traffic grew by 1.7% qoq to 15bn min. The segment s EBITDA margin remained almost flat qoq at 26.7% as August 13, 212 2

against expectations of it declining qoq. The EBITDA was aided by lower network operating costs. Exhibit 4: Trend in MOU (qoq) Exhibit 5: Trend in ARPM (qoq) (min) 3 28 26 24 22 2 (7.2) (6.4) 295 276 (4.) (9.1) 251 241 (3.3) 233 (2.6) 227 (1.3) 224 1.3 227.4 228 4 (4) (8) (12) ( `/min).46.45.43.42.41.4......45 2.3.45. (2.2) (2.).43 4 2 (2) (4) 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 MOU (min) qoq growth ARPM (`/min) qoq growth Exhibit 6: Trend in subscriber additions (qoq) Exhibit 7: Trend in ARPU (qoq) 16 12 14 (1.9) (1.) (1.) (1.) (mn) 14 12 1 8 8.2 5.9 7.1 8. 5.6 2.7 2. 2. 8 4 1. (`/month) 13 12 11 1 9 13 (6.5) 122 (6.3) (3.6) (3.7) (8.8) 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 111 17 13 11 1 99 98 (2) (4) (6) (8) (1) 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 Total subscribers (mn) qoq growth ARPU (`/month) qoq growth Global enterprise segment: RCom has combined its global and broadband business under one segment called global enterprise. During the quarter, the global enterprise segment also witnessed a mere.5% qoq revenue growth with revenue coming in at `2,451cr. The EBITDA margin of this segment also remained almost flat qoq at 24.1%. The global segment posted a 1.7% qoq decline in total long distance minutes usage to 2.1bn min vs 2.4bn min in 4QFY212. The degrowth in total long distance minutes was due to a 4.5% qoq decline in national long distance (NLD) mins to 14,746mn min, partially offset by a 7% qoq increase in international long distance (ILD) mins to 5,344mn min. August 13, 212 3

EBITDA margin inches up During the quarter, RCom s overall EBITDA margin improved by 29bp qoq to 31.%, aided by ~3% lower NOC q-o-q. The NOC as a % to sales stood at 39.4% in 1QFY213 as against 4.8% in 4QFY212. Exhibit 8: Segment-wise EBITDA margin trend (qoq) 35 32.4 31.8 31.9 3.7 29.9 31. 3 27.4 27.1 26.6 26.6 26.7 26.7 25 2 15 1 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 Wireless Consolidated ; Exhibit 9: Opex break-up 1 8 6 4 2 32.4 31.8 31.9 3.7 31. 7.1 6.5 5.8 5.8 5.9 14.6 15.9 14.8 13. 13.4 5.4 5.5 6. 5.4 5.2 27. 27.3 29.6 34.6 33.6 13.5 12.9 11.9 1.4 1.9 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 Access charges Network costs License fee S,G&A cost Employee cost EBITDA margin The PAT for the quarter came in at `162cr, boosted by a 6.3% qoq decline in depreciation costs. RCom had earlier increased the useful life of certain fixed assets like towers which led to a decline in depreciation costs. Also, the company again got tax write-backs, which led to an almost negligible tax expense for the quarter. August 13, 212 4

Outlook and valuation RCom's 3G/data business subscriber base during the quarter stood at 4mn/2mn as against 3.2mn/2mn in 4QFY212. The average data usage per customer during the quarter was 24MB, which is in line with its peers. The company s recent quarter performance was in line with its peers, with it posting a q-o-q decline on key performance indicators (KPIs). With increasing competitive intensity in the industry, we believe it is difficult to see any major improvement in the voice business anytime soon as a significant cut has been taken by telecom companies including RCom on 3G tariffs and as a lot of regulatory uncertainties continue to prevail. Going forward, we expect RCom s mobile segment to record a 4% CAGR in subscribers over FY212 14E and ARPM to stabilize at `.43/min in FY213. Currently, the company is striving to reduce the debt level in its books and has maintained its stance of selling stake in its tower assets, which might help in deleveraging the balance sheet and reducing debt. This would act as a positive trigger for the stock price. The company also announced plans to list its under-sea cable business in Singapore but the same did not materialize during the quarter. Various other announcements related to measures to reduce debt have been made time and again in the past but no concrete step has been visible until now. We maintain our Neutral view on the stock. Exhibit 1: One-year forward EV/EBITDA 25, 2, EV (`cr) 15, 1, 5, Apr-7 Apr-8 Apr-9 Apr-1 Apr-11 Apr-12 EV 25 2 15 1 5 Exhibit 11: Recommendation summary Company Reco. CMP Tgt. price Upside FY214E FY214E FY211-14E FY214E FY214E FY214E (`) (`) P/BV (x) P/E (x) EPS CAGR RoCE RoE EV/Sales Bharti Airtel Neutral 26 26-1.7 17.3 (1.9) 1.5 9.6 1.6 Idea Cellular Neutral 75 75-1.6 15.4 21.5 12.2 1.2 1.3 RCom Neutral 56 56 -.3 12.5 (11.7) 4.2 2.4 1.8 August 13, 212 5

Company background Reliance Communications, a part of the Anil Dhirubhai Ambani Group, is India's fourth largest telecommunication service provider (TSP). The company offers GSM and CDMA wireless services in the country, with a subscriber base of 153mn. Other than mobile services, the company offers broadband, wire line, DTH and passive infrastructure services. The company owns 5, towers to provide passive infrastructure services. Profit and loss statement (Consolidated, Indian GAAP) Y/E March (` cr) FY21 FY211 FY212 FY213E FY214E Net sales 21,614 22,43 19,775 21,553 22,494 Network expenditure 6,173 5,472 6,43 7,158 7,336 % of net sales 28.6 24.4 3.6 33.2 32.6 License fee 1,145 1,157 1,133 1,122 1,192 % of net sales 5.3 5.2 5.7 5.2 5.3 Access charges 2,138 2,648 2,477 2,393 2,567 % of net sales 9.9 11.8 12.5 11.1 11.4 Other expenses 4,97 4,75 4,241 4,193 4,499 Total expenditure 14,363 14,26 13,893 14,866 15,594 % of net sales 66.5 62.5 7.3 69. 69.3 EBITDA 7,251 8,44 5,883 6,687 6,9 % of net sales 33.5 37.5 29.7 31. 3.7 Dep. and amortization 3,747 6,54 3,978 3,75 3,857 EBIT 3,54 1,9 1,94 2,937 3,43 Interest charges (1,186) 1,72 1,593 2,83 1,98 Other income, net 636 677 567 - - Exceptional items 38 (12) - - Profit before tax 5,289 1,518 878 853 1,135 Provision for tax 445 12 (16) 16 57 % of PBT 8.4.8-12.1 1.9 5. PAT 4,843 1,56 984 837 1,79 Share in profits of associate (2) - - - Minority interest 137 161 61 119 16 Adj. PAT 4,74 1,346 923 718 919 Diluted EPS (`) 23. 6.5 4.5 3.5 4.5 August 13, 212 6

Balance sheet (Consolidated, Indian GAAP) Y/E March (` cr) FY21 FY211 FY212E FY213E FY214E Liabilities Share capital 1,32 1,32 1,32 1,32 1,32 Reserves and surplus 42,329 39,717 35,678 36,192 36,96 Total shareholders funds 43,361 4,749 36,71 37,224 37,938 Minority interest 658 825 86 86 86 Total debt 29,715 37,376 36,918 35,588 33,188 Deferred tax liability 99 - - - - Total liabilities 73,834 78,95 74,488 73,672 71,986 Assets Gross block - fixed assets 78,665 82,9 99,564 11,64 12,264 Accumulated dep. 19,67 27,341 33,19 36,859 4,716 Net block 59,598 54,75 66,455 64,25 61,548 Capital WIP 11,656 18,191 5,23 6,146 5,787 Goodwill 4,998 4,998 4,998 4,998 4,998 Investments 4,16 19 123 123 123 Current assets Inventories 545 517 566 58 6 Sundry debtors 3,312 4,2 3,584 3,838 4,6 Cash and cash equivalents 819 5,327 1,79 2,59 3,441 Other current assets 2,73 1,146 2,957 2,359 2,332 Loans and advances 5,41 5,86 7,895 7,544 7,873 Total current assets 12,157 16,78 16,81 16,911 18,251 Less:- current liabilities 14,78 12,686 14,7 15,477 16,21 Less:- provisions 4,27 2,49 3,491 3,233 2,699 Total assets 73,834 78,95 74,488 73,672 71,986 August 13, 212 7

Cash flow statement (Consolidated, Indian GAAP) Y/E March (` cr) FY21 FY211 FY212E FY213E FY214E Pre tax profit from oper. 4,653 84 311 853 1,135 Depreciation 3,747 6,54 3,978 3,75 3,857 Pre tax cash from oper. 8,399 7,344 4,289 4,64 4,992 Minority interest 139 16 61 119 16 Other income 636 677 567 - - Net cash from operations 8,896 7,861 4,795 4,485 4,832 Tax (445) (12) 16 (16) (57) Cash profits 8,451 7,85 4,92 4,469 4,776 (Inc)/dec in Current assets 1,693 588 (4,251) 681 (49) Current liabilities (1,346) (3,559) 3,15 519 1 Net trade WC 347 (2,971) (1,236) 1,2 (48) Cashflow from oper. actv. 8,797 4,878 3,666 5,669 4,296 (Inc)/dec in fixed assets (2,295) (8,191) (2,515) (2,623) (841) (Inc)/dec in intangibles 224 - - - - (Inc)/dec in deferred tax liab. 71 (99) - - - (Inc)/dec in investments 5,46 4,51 (14) - - Cashflow frm investing actv. 3,46 (4,239) (2,529) (2,623) (841) Inc/(dec) in debt (9,447) 7,66 (458) (1,33) (2,4) Inc/(dec) in minority interest 3 166 36 - - Inc/(dec) in equity/premium (3,419) (3,836) (4,758) () Dividends 25 121 25 25 25 Cashflow frm financing actv. (13,67) 3,869 (5,385) (1,534) (2,65) Cash generated/(utilized) (864) 4,59 (4,249) 1,512 85 Cash at start of the year 1,683 819 5,327 1,79 2,59 Cash at end of the year 819 5,327 1,79 2,59 3,441 August 13, 212 8

Key ratios Y/E March FY21 FY211 FY212E FY213E FY214E Valuation ratio (x) P/E (on FDEPS) 2.4 8.6 12.4 16. 12.5 P/CEPS 1.4 1.5 2.3 2.6 2.4 P/BVPS.3.3.3.3.3 Dividend yield 1.8 1.1 1.8 1.8 1.8 EV/Sales 1.7 1.9 2.4 2.1 1.8 EV/EBITDA 5. 5.2 8. 6.6 6. EV/Total assets.5.5.6.6.6 Per share data (`) EPS 23. 6.5 4.5 3.5 4.5 Cash EPS 4.9 38. 23.7 21.6 23.1 Dividend 1..6 1. 1. 1. Book value 21 197 178 18 184 Dupont analysis Tax retention ratio (PAT/PBT).9.9 1.1.8.8 Cost of debt (PBT/EBIT) 1.5.8.5.3.4 EBIT margin (EBIT/Sales).2.1.1.1.1 Asset turnover ratio (Sales/Assets).3.3.3.3.3 Leverage ratio (Assets/Equity) 1.7 1.9 2. 2. 1.9 Operating ROE 1.8 3.3 2.5 1.9 2.4 Return ratios RoCE (pre-tax) 4.7 2.4 2.6 4. 4.2 Angel RoIC 6.7 3.8 3. 4.9 5.3 RoE 1.8 3.3 2.5 1.9 2.4 Turnover ratios (x) Asset turnover (fixed assets).3.3.3.3.3 Receivables days 56 65 66 65 65 Payable days 374 33 386 38 375 August 13, 212 9

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