R Connect BB

7/27/2019 R Connect BB

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July 8, 2013

ICICI Securities Ltd|Retail Equity Research

Event Update

WHATS CHANGEDPRICE TARGET ............................... .................................... .... Changed from | 113 to | 145

EPS (FY14E) ........................................................................................................ Unchanged

EPS (FY15E) ........................................................................................................ Unchanged

RATING........................................................................................Changed from Sell to Hold

Value unlocking through spin off!!!Reliance Communication (RCom) has announced that its board hasapproved the demerger of its real estate into a separate company, whichwould be named Reliance Properties. Reliance Properties would beseparately listed and the shareholding pattern would be similar to that ofRCom on the record date. Each shareholder of RCom would get a shareof Reliance Properties. The indicative value of Reliance Properties is| 12000 crore, which corresponds to | 60 per RCom share. Also, it wouldbe working with global partners to develop the real estate, which includesabout 135 acres with saleable area of over 15 million square feet in NaviMumbai and about four acres in Connaught place, New Delhi. We havemaintained our estimates as this demerger would have no impact on theprofitability. However, it will lead to a value unlocking corresponding tothe value of Reliance Properties to the shareholders. We have estimatedthe value of Reliance Properties at | 6624 crore or | 32 per RCom shareand have added that to our previous target price to arrive at a target priceof | 145 per share. We rate the stock as HOLD.No help with debt; shareholders to get value

This deal would not help the company with its mounting debt as nomoney would be raised through the listing of Reliance Properties.However, RCom shareholders stand to receive shares of RelianceProperties free of cost, which when listed could bring in a value of| 32/share. Also, recent deals with Reliance Jio Infocomm and possiblesale of stake in Reliance Globalcomm to Samena Capital are the lateststeps taken by RCom to bring down its debt. RCom recently repaid $1billion debt and an additional $207 million in other currency.

Value unlocking!!!

We have maintained our estimates as this deal does not have any impact

on the profitability. The valuation of Reliance Properties would be directlyadding to the fundamental value of the core telecom business of RCom.We have estimated Reliance Properties will bring in a value of | 32/share,which when added to our previous target price of | 113/share yields atarget price of | 145/share. We rate the stock as HOLD.Exhibit 1:Key financials

(Year-end March) FY11 FY12 FY13 FY14E FY15E

Net Sales (| crore) 22,430.4 19,677.0 20,561.4 22,233.6 23,615.3

EBITDA (| crore) 8,404.3 5,785.0 5,943.1 6,942.0 7,004.9

Net Profit (| crore) 1,345.7 928.0 672.7 1,449.8 546.5

EPS (|) 6.5 4.5 3.3 7.0 2.6

P/E (x) 20.9 30.2 41.7 19.4 51.4

Price / Book (x) 0.7 0.8 1.0 0.9 0.9

EV/EBITDA (x) 7.4 11.1 11.2 8.9 8.3

RoCE (%) 2.4 2.4 3.0 4.3 4.4

RoE (%) 3.3 2.5 2.3 4.8 1.8

Source: Company, ICICIdirect.com Research

Reliance Communication (RELCOM)

| 136ting matrix

ing : Holdget : | 145

get Period : 12 months

ential Upside : 7%

y Financials

Crore FY12 FY13 FY14E FY15E

et Sales 19,677 20,561.4 22,233.6 23,615.3

BITDA 5,785.0 5,943.1 6,942.0 7,004.9

et Profit 928.0 672.7 1,449.8 546.5

PS (|) 4.5 3.3 7.0 2.6

luation summary

FY12 FY13 FY14E FY15E

/E 30.2 41.7 19.4 51.4

arget P/E 32.2 44.5 20.6 54.7

V / EBITDA 11.1 11.2 8.9 8.3rice /BV 0.8 1.0 0.9 0.9

oNW (%) 2.5 2.3 4.8 1.8

oCE (%) 2.4 3.0 4.3 4.4

ock data

arket Capitalization (| Crore) 28,070.7

tal Debt (FY13) (| Crore) 40,145.8

sh and Investments (FY13) (| Crore) 1,392.9

(| Crore) 66,823.6

week H/L 147 / 48

uity capital 1,032.0

ce value | 5

F Holding (%) 9.4 Holding (%) 8.0

ce movement

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Jul-13Apr-13Jan-13Oct-12Jul-120

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7,000

Price (R.H.S) Nifty (L.H.S)

alysts namearan [email protected]

nil Shenoy

[email protected]


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ICICI Securities Ltd|Retail Equity Research Page 2

Real estate valuation

The company would be working with global partners to develop the realestate, which includes about 135 acres with saleable area of over 15million square feet in Navi Mumbai and about four acres in Connaughtplace, New Delhi. We discuss the valuation of each property separately.Overall, we have valued Reliance Property at | 6624 crore or | 32/share.We also highlight that we do not have details about the debt for RelianceProperty, which can drag our rough cut valuation and will remain the keyto risk to our valuation.

Dhirubhai Ambani Knowledge City: In order to value Dhirubhai AmbaniKnowledge City, we have assumed the lease rate of | 50 per month/sq ftand cap rate of 10%. Based on these assumptions, we have arrived at avalue of | 8100 crore for Dhirubhai Ambani Knowledge City.

Connaught Place: We have valued this four acre land parcel based on ourback of the envelope calculation. To do this calculation, we haveconsidered the lease rate of | 300 per month/sq ft, cap rate of 10%,

developers margin of ~40%, construction and other SG&A expenses of| 4000 psf and FSI of 3x. Based on these assumptions, we have arrived atland cost per acre of | 183/acre valuing this land parcel at | 732 crore.Exhibit 2:RCom - land valuationDhirubhai Ambai Knowledge City (A)

Developable Area (in mn sq ft) 15

Lease rate per month per sq ft (|) 50

Annual Lease income @ 90% occupancy (| crore) 810

Cap rate assumption (%) 10%

Value of Asset (| crore) - A 8100

Connaught Place land parcel - B 732

Total Real Estate NAV Valuation 8832

Discount to NAV 25%

Real Estate Target Valuation 6624

Number of Rcom shares 206.4

Valuation per share 32.1 Source: Company, ICICIdirect.com Research


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Profit and loss statement

(| Crore)

(Year-end March) FY12 FY13 FY14E FY15E

Total operating Income 19,677.0 20,561.4 22,233.6 23,615.3

Growth (%) -12.3 4.5 8.1 6.2

Employee Expenses 1,283.0 1,188.8 874.1 921.5

Administrative Expenses 2,957.0 3,061.1 3,549.4 3,709.7

Access Charges 9,652.0 2,676.0 2,913.8 3,145.7

License Fee 0.0 1,115.3 1,179.1 1,271.0

Network Expenses 0.0 6,577.1 6,775.2 7,562.5

Total Operating Expenditure 13,892.0 14,618.3 15,291.6 16,610.4

EBITDA 5,785.0 5,943.1 6,942.0 7,004.9

Growth (%) -31.2 2.7 16.8 0.9

Depreciation 3,978.0 3,845.2 4,052.5 4,144.1

Interest 1,630.0 2,499.2 2,530.2 2,320.2

Other Income 705.0 1,217.0 1,457.4 200.0

Extraordinary Expense - - - -PBT 882.0 815.7 1,816.7 740.6

MI/PAT from associates 60.0 71.8 76.3 60.7

Total Tax -106.0 71.2 290.7 133.3

PAT 928.0 672.7 1,449.8 546.5

Growth (%) -31.0 -27.5 115.5 -62.3

EPS (|) 4.5 3.3 7.0 2.6 Source: Company, ICICIdirect.com Research

Cash flow statement

(| Crore)


Profit after Tax 928.0 672.7 1,449.8 546.5

Add: Depreciation 3,978.0 3,845.2 4,052.5 4,144.1

(Inc)/dec in Current Assets -396.6 -2,417.5 1,212.7 -331.0

Inc/(dec) in CL and Provisions 238.2 1,262.6 -525.4 2,414.5

Others 0.0 0.0 0.0 0.0

CF from operating activities 4,747.6 3,363.0 6,189.5 6,774.2

(Inc)/dec in Investments 436.8 133.0 0.0 0.0

(Inc)/dec in Fixed Assets -2,513.8 -1,620.6 -1,500.0 -2,500.0

Others -125.8 4,407.1 76.3 60.7

CF from investing activit ies -2,202.8 2,919.5 -1,423.7 -2,439.3

Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0

Inc/(dec) in loan funds -2,153.6 3,228.0 -4,000.0 -3,000.0

Dividend paid & dividend tax -60.0 0.0 -60.4 -60.4

Inc/(dec) in Sec. premium -534.5 0.0 0.0 0.0Others -4,111.4 -8,669.2 0.0 0.0

CF from financing activities -6,859.5 -5,441.2 -4,060.4 -3,060.4

Net Cash flow -4,314.7 841.4 705.5 1,274.5

Opening Cash 4,866.2 551.5 1,281.4 1,986.9

Closing Cash 551.5 1,392.9 1,986.9 3,261.4 Source: Company, ICICIdirect.com Research

Balance sheet

(| Crore)

(Year-end March) FY12 FY13 FY14E FY15ELiabilities

Equity Capital 1,032.0 1,032.0 1,032.0 1,032.0

Reserve and Surplus 35,689.2 27,692.7 29,082.1 29,568.3

Total Shareholders funds 36,721.2 28,724.7 30,114.1 30,600.3

Total Debt 36,917.8 40,145.8 36,145.8 33,145.8

Deferred Tax Liability 1,018.0 0.0 0.0 0.0

Minority Interest 860.0 725.3 801.6 862.3

Other Non Current Liabilities 2,974.2 - - -

Total Liabilities 78,491.2 69,595.8 67,061.5 64,608.4

Assets

Gross Block 99,561.2 104,592.4 107,956.1 110,456.1

Less: Acc Depreciation 33,110.6 39,204.1 43,256.6 47,400.7

Net Block 66,450.6 65,388.3 64,699.5 63,055.4

Capital WIP 5,026.0 3,863.7 2,000.0 2,000.0

Total Fixed Assets 71,476.6 69,252.0 66,699.5 65,055.4

Investments 133.0 111.5 111.5 111.5

Inventory 566.0 496.7 721.6 572.4

Debtors 3,584.0 3,910.5 4,252.0 4,417.8

Loans and Advances 4,988.0 7,791.8 5,548.4 5,787.0

Other Current Assets 2,857.0 2,213.5 2,677.9 2,753.6

Cash 551.5 1,281.4 1,986.9 3,261.4

Total Current Assets 12,546.5 15,693.9 15,186.7 16,792.2

Creditors 11,533.0 12,703.2 12,271.6 14,255.3

Provisions 2,666.0 2,758.4 2,664.7 3,095.4

Other Current Liabilities - - - -

Total Current Liabilities 14,199.0 15,461.6 14,936.2 17,350.7Net Current Assets -1,652.5 232.3 250.5 -558.5

Goodwill 8,534.0 0.0 0.0 0.0

Application of Funds 78,491.2 69,595.8 67,061.5 64,608.4 Source: Company, ICICIdirect.com Research

Key ratios


Per share data (|)EPS 4.5 3.3 7.0 2.6

Cash EPS 23.8 21.9 26.7 22.7

BV 177.9 139.2 145.9 148.3

DPS 0.3 0.0 0.3 0.3

Cash Per Share 2.7 6.2 9.6 15.8

Operating Ratios

EBITDA Margin (%) 29.4 28.9 31.2 29.7

PBT Margin (%) 4.5 4.0 8.2 3.1

PAT Margin (%) 4.7 3.3 6.5 2.3

Inventory days 10.0 9.4 10.0 10.0

Debtor days 66.5 69.4 67.0 67.0

Creditor days 213.9 225.5 205.0 205.0

Return Ratios (%)

RoE 2.5 2.3 4.8 1.8

RoCE 2.4 3.0 4.3 4.4

RoIC 2.6 3.1 4.4 4.7

Valuation Ratios (x)

P/E 30.2 41.7 19.4 51.4

EV / EBITDA 11.1 11.2 8.9 8.3

EV / Net Sales 3.3 3.2 2.8 2.4

Market Cap / Sales 1.4 1.4 1.3 1.2

Price to Book Value 0.8 1.0 0.9 0.9

Solvency Ratios

Debt/EBITDA 6.4 6.8 5.2 4.7

Debt / Equity 1.0 1.4 1.2 1.1

Current Ratio 0.9 1.0 1.0 1.0

Quick Ratio 0.8 0.9 0.9 0.8 Source: Company, ICICIdirect.com Research


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Company Description

Reliance Communication is a pan-India telecom service providerproviding voice and data service in GSM as well as CDMA platform. Thecompany also offers data services via 3G in 13 circles. Apart from thetraditional voice and data services, the company is also a strong player in

the enterprise data segment and offers national long distance (NLD) andinternational long distance (ILD) services for voice, data and internet toenterprises and other carriers. The company has over 14 crore individual,enterprise and carrier customers. RCom holds spectrum in both 1800MHz and 900 MHz band in the GSM space, 800 MHz band in the CDMAspace and 2100 MHz band in the 3G space.

Exhibit 3:Recommendation History

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Jul-13May-13Apr-13Feb-13Jan-13Nov-12Oct-12Aug-12Jul-12

Price Target Price

Source: Reuters, ICICIdirect.com Research

Exhibit 4:Recent ReleasesDate Event CMP Target Price Rating

5-Jul-12 Q1FY13 Result Preview 67 67 HOLD

14-Aug-12 Q1FY13 Result Update 56 50 SELL

8-Oct-12 Q2FY13 Result Preview 62 55 SELL

9-Nov-12 Q2FY13 Result Update 57 55 HOLD

8-Jan-13 Q3FY13 Result Preview 81 55 SELL

24-Jan-13 Q3FY13 Result Update 80 69 SELL

3-Apr-13 Company Update 63 75 BUY

8-Apr-13 Q4FY13 Result Preview 63 75 BUY

7-Jun-13 Q4FY13 Result Update 118 103 SELL

5-Jul-13 Q1FY14 Result Preview 134 113 SELL Source: ICICIdirect.com Research


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ICICIdirect.com coverage universe (Telecom)

CMP M Cap

(|) TP(|) Rating (| Cr) FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E

Bharti Airtel (BHATE) 296 385 SB* 118,263 11.2 6.0 11.0 26.4 49.4 26.8 7.8 7.4 6.0 8.4 7.3 9.0 8.4 4.5 7.2

Idea Cellular (IDECEL) 138 135 Hold 45,524 2.2 3.2 4.6 62.9 43.0 29.6 11.2 9.1 7.5 8.5 10.8 13.4 5.5 7.6 10.0

OnMobile (ONMGLO) 29 26 Hold 329 7.2 4.1 2.8 4.0 7.0 10.3 1.5 1.4 0.5 5.8 5.3 4.5 9.4 5.2 3.5

RCom (RELCOM) 136 145 Hold 28,009 4.5 3.3 7.0 30.2 41.6 19.3 11.1 11.2 8.9 2.4 3.0 4.3 2.5 2.3 4.8

Sector / Company

RoE (%)EPS (|) P/E (x) EV/EBITDA (x) RoCE (%)

* - STRONG BUY

Source: Company, ICICIdirect.com Research


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RATING RATIONALE

CICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

arget price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: > 10%/ 15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head Research [email protected]

ICICIdirect.com Research Desk,ICICI Securities Limited,1st Floor, Akruti Trade Centre,Road No 7, MIDC,Andheri (East)

Mumbai 400 [email protected]

ANALYST CERTIFICATIONWe /I,Karan Mittal MBA, Anil Shenoy MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our

ersonal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) oriew(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures:CICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leading

nderwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of

ompanies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securities

enerally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts

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he information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and

meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without

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mployees (ICICI Securities and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities

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ompensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investment

anking or other advisory services in a merger or specific transaction. It is confirmed that Karan Mittal MBA Anil Shenoy MBA research analysts and the authors of this report have not received any

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