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Buy Reliance communications – IDBI Capital

August 29, 2007

IDBI Capital has initiated coverage on Reliance Communications with a Target Price of Rs 669.

The domestic telecom market grew by 58% YoY in FY07 itself, where-in 66.51m subscribers were added, taking the total subscriber base to 225.21m. RCOM, which has 17.2% market-share currently, is targeting a 21% market-share by FY09. Acquisition of Yipes Communications for Global Expansion.

Controversial hiving off of its tower subsidiary into a separate division in April 2007. Recently it sold a 5% stake in its tower subsidiary at US$ 337.5m to a consortium of 7 investors. This puts valuation of the subsidiary at Rs.270,000m. RCOM also plans to list its global subsidiary FLAG in a couple of quarters. FLAG is the largest private
submarine cable system in the world.

Sum Of the Parts Valuation [SOTP]
RCOM’s core business on DCF basis and the tower business on EV/subscriber basis. DCF valuation gives the core business value at Rs.534/share. Adding to this the value of tower business at Rs.135/share, we arrive at a fair value of Rs.669/share, upside of 35% from the current price of Rs.495. At the CMP Rs.495, the stock is trading at a PE multiple of 20.4x on FY08E EPS of Rs.24.3 and 15.8x of FY09E EPS of Rs.31.4/share.

Kindly note that Citigroup analysts valued the tower business at a price much below the Rs 135 / share which IDBI is valuing it at.

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