1 June 2016

4QFY16 Results Update | Sector: Telecom

Reliance Communications
BSE SENSEX S&P CNX
26,668 8,160
CMP: INR47 TP: INR40 (-14%) Sell
Bloomberg RCOM IN Revenue/EBITDA beat led by lumpy optic fiber sale
Equity Shares (m) 2,382.0
M.Cap.(INRb)/(USDb) 157.2 / 2.3 Tax-write back keeps bottom-line in black; Net debt up by INR5.7b
52-Week Range (INR) 92/46 4Q revenue/EBITDA beat estimates led by IRU sale: RCOMs 4QFY16 revenue
1, 6, 12 Rel. Per (%) -21/-42/-26 grew 12% QoQ to INR59.19b (13% above estimates), led by higher India as well
Avg Val, INR m 898 as global revenues. EBITDA grew 8.6% QoQ to INR19.6b (vs est: INR17.5b).
Free float (%) 41.2 India/Global segment EBITDA grew ~9% QoQ each to INR17.6b/INR1.99b
(11.6%/15% above estimates respectively). 4QFY16 Revenue/EBITDA beat was
Financials & Valuation (INR b) primarily led by IRU optic fiber sale which is lumpy in nature.
Y/E Mar 2016 2017E 2018E Tax-write back keeps bottom-line in the black: RCom reported a negative PBT
Net Sales 221.1 229.7 239.2 of INR0.73b (vs est: INR0.4b) as higher-than-expected depreciation expense
EBITDA 74.2 81.0 85.0 more than washed away the EBITDA beat. We believe, the company writes off
Adj. Net Profit 7.0 4.3 5.3 the fiber assets associated with the aforementioned optic fiber sale leading to
Adj. EPS (INR) 2.8 1.7 2.1 a spike in depreciation. Finance cost increased ~14% QoQ to INR7.7b (our
Adj. EPS Gr. (%) 13.5 -39.0 23.7 estimate: INR6.9b). A tax write back prevented Rcom from reporting a negative
BV/Sh (INR) 127.7 129.5 131.6 bottom-line. 4QFY16 PAT stood at INR1.77b (vs an estimated loss of -INR4m).
RoE (%) 2.2 1.3 1.6
India KPIs outdo expectations: Voice traffic grew 1.2% QoQ to 101.6b minutes
RoCE (%) 3.4 3.1 3.2
(vs est: 98b minutes) in-line with Idea but lagging Bhartis 6% QoQ growth.
P/E (x) 16.7 27.3 22.1
Voice RPM remained flat QoQ at 32.6p. Data traffic growth remained soft at
P/BV (x) 0.4 0.4 0.4
1.5% (104.7m MBs)
Net debt up by INR5.7b QoQ: Net debt increased from INR404.7b in 3QFY16 to
INR410.5b in 4QFY16. Net debt/annualized EBITDA stood at 5.2x. Current
Estimate change liabilities grew 31% to INR195.6b and include spectrum related payments of
~INR33b.
TP change
Valuation and view: The stock trades at EV/EBITDA of 6.7x FY17E and 6.1x
Rating change FY18E. We largely maintain our EBITDA estimates and our Sell rating with a
target price of INR40 (unchanged) based on FY18 EV/EBITDA of 6x for core
business (ex Reliance JIO contract) and INR40b for upside from signed
contracts with Reliance JIO (~5x steady-state EBITDA).

Jay Gandhi (Jay.gandhi@MotilalOswal.com); +91 22 3982 6693

Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
1 June 2016
5.0
44

15
1QFY12 13,335 1QFY12 320 1QFY12 98

5.0
45

2QFY12 319

18
2QFY12 13,744 2QFY12 99
3QFY12 368
45

20
3QFY12 14,957 3QFY12 100
4QFY12 358
44

22
4QFY12 18,390 4QFY12 103
1QFY13 356
43

23
1QFY13 17,852 Exhibit 2: Leverage trend 1QFY13 105
2QFY13 367

28
43

2QFY13 15,582 2QFY13 102

Exhibit 3: Network cost trend

3QFY13 374
Exhibit 1: RPM and voice traffic

31
44

3QFY13 15,997 3QFY13 103

4QFY13 389

30
44

4QFY13 16,340 4QFY13 105

Net Debt (INR b)

1QFY14 385

26
42

1QFY14 17,610 1QFY14* 106

2QFY14 412

27
43

2QFY14 16,288 2QFY14* 101

Traffic (b min)

3QFY14 408

25
44

3QFY14 15,538 3QFY14* 102

4QFY14 402

29
Network operating expenses
43

4QFY14 16,119 4QFY14* 102

5.7 5.5 5.4 5.6 5.6 5.8 5.7 5.5 5.5 5.4 5.4

1QFY15 402

27
43

1QFY15 17,443 1QFY15* 103

2QFY15 363
RPM (p)

27
44

2QFY15 17,334 2QFY15* 102

3QFY15 368

30
3QFY15 17,833
45

4QFY15 367 3QFY15* 103

35
4QFY15 17,268
44

4QFY15* 108
5.0 5.0 4.6 5.1

1QFY16 386
% of revenue

34
1QFY16 17,527
43

1QFY16* 105
Net Debt/ Annualised EBITDA (x)

2QFY16 399
2QFY16 17,879
30 30 2QFY16 405 2QFY16* 103
44 44

3QFY16 16,832 3QFY16 405 3QFY16* 100

30
46

4QFY16 17,858
5.6 5.6 5.6 5.2

4QFY16 411 4QFY16* 102

2
Source: Company, MOSL
Reliance Communication
 Reliance Communication

Exhibit 4: RCOM - Segment wise summary (INR m)

4QFY15 3QFY16 4QFY16 YoY% QoQ% 4QFY16E vs Est (%)
Revenue
India - Telecom 48,030 45,450 48,472 0.9 6.6 44,973 7.8
India-Others 1,035 1,055 3,802 267.3 260.4 1,087 249.9
India-Total 49,065 46,505 52,270 6.5 12.4 46,059 13.5
Global 12,944 11,059 12,420 -4.0 12.3 10,957 13.3
Total Revenue 62,009 57,564 64,690 4.3 12.4 57,017 13.5
Inter-segment eliminations -4,975 -4,581 -5,500 10.6 20.1 -4,581 20.1
Consolidated Revenue 57,034 52,983 59,190 3.8 11.7 52,436 12.9
EBITDA
India 17,132 16,201 17,600 2.7 8.6 15,772 11.6
EBITDA Margin (%) 34.9 34.8 33.7 -125bps -117bps 34.2 -57bps
Global 2,632 1,832 1,990 -24.4 8.6 1,729 15.1
EBITDA Margin (%) 20.3 16.6 16.0 -431bps -55bps 15.8 24bps
Total EBITDA 19,764 18,033 19,590 -0.9 8.6 17,501 11.9
Corporate and others 0 0 0 0
Consolidated EBITDA 19,764 18,033 19,590 -0.9 8.6 17,501 11.9
Consolidated EBITDA margin (%) 34.7 34.0 33.1 -156bps -94bps 33.4 -28bps
Depreciation and amortization 9,952 8,897 12,590 26.5 41.5 10,167 23.8
Net finance cost 6,664 6,813 7,730 16.0 13.5 6,930 11.5
Profit Before Taxes (Adjusted) 3,148 2,323 -730 -123.2 -131.4 404 -280.6
Total Tax 3,057 344 -2,270 NA NA 137 NA
Effective Tax Rate (%) 97.1 14.8 311.0 21386bps 29615bps 34.0 27696bps
PAT before minority/extraordinaries (Adj.) 91 1,979 1,540 1583.4 -22.2 267 477.3
Extraordinary Expenses + Minority Interest -2,184 271 -230 271
Reported Net Profit 2,275 1,708 1,770 -22.2 3.6 -4 NA
Revenue Drivers
4QFY15 3QFY16 4QFY16 YoY% QoQ% 4QFY16E vs Est (%)
Wireless
Total Minutes of Use (b mins) 108 100 102 -5.9 1.3 98 4.2
Data traffic (b MB) 87 103 105 20.1 1.5 112 -6.5
Effective Wireless Rev. per Min.(INR) 43.7 44.0 47.7 9.2 8.3 44.6 6.9
Source: Company, MOSL

1 June 2016 3
 Reliance Communication

Exhibit 5: RCOM - A Snapshot

Y/E March FY11 FY12 FY13 FY14 FY15E FY16 FY17E FY18E
Wireless
Subs (m) 136 153 123 112 111 104 112 117
YoY (%) 33 13 -20 -9 -1 -6 8 4
Average subs (m) 119 144 138 118 111 107 108 114
YoY (%) 36 21 -4 -14 -6 -4 1 6
Netadds per month (m) 2.77 1.4 -2.5 -0.9 -0.1 -0.6 0.7 0.4
YoY (%) 12 -48 -274 -64 -86 377 -219 -43
Total mobile traffic (b min) 375 399 416 412 417 409 404 420
YoY (%) 7 7 4 -1 1 -2 -1 4
Average Rev Per User (INR/month) 116 102 109 125 137 141 144 140
YoY (%) -28 -12 7 14 10 3 2 -3
Minutes of Use/Sub/Month 262 231 251 291 312 319 312 306
YoY (%) -21 -12 9 16 7 2 -2 -2
Wireless RPM (INR) 0.44 0.44 0.43 0.43 0.44 0.44 0.46 0.46
YoY (%) -8 0 -2 -1 2 1 4 -1
Y/E March FY11 FY12 FY13 FY14 FY15E FY16 FY17E FY18E
Global
Minutes carried
NLD minutes (b) 65 65 60 59 59 63 66 68
YoY (%) 26 0 -7 -2 0 7 4 4
ILD minutes (m) 15 20 21 20 20 20 21 22
YoY (%) 57.3 27.9 8.3 -8.7 0.2 3.2 5.0 4.5
Source: Company, MOSL

1 June 2016 4
 Reliance Communication

Financials and valuations

Income Statement (INR Million)
Y/E March 2011 2012 2013 2014 2015 2016 2017E 2018E
Revenues 205,627 203,424 210,035 218,800 220,981 221,139 229,664 239,160
Change (%) -7.6 -1.1 3.3 4.2 1.0 0.1 3.9 4.1
EBITDA 65,515 64,506 66,101 72,843 75,173 74,192 80,957 85,030
% of Gross Sales 31.9 31.7 31.5 33.3 34.0 33.5 35.3 35.6
Depn. & Amortization 39,739 39,783 38,452 45,338 38,166 40,462 43,636 46,449
EBIT 25,776 24,723 27,649 27,505 37,007 33,730 37,321 38,581
Net Interest and others -10,723 -15,901 -24,992 -30,192 -27,564 -28,696 -30,778 -30,538
PBT 15,053 8,822 2,657 -2,687 9,443 5,034 6,543 8,043
Tax 117 -1,062 712 -10,209 3,256 -1,990 2,256 2,773
Rate (%) 0.8 -12.0 26.8 379.9 34.5 -39.5 34.5 34.5
Adjusted PAT 14,936 9,884 1,945 7,522 6,187 7,024 4,287 5,270
Change (%) -69.4 -33.8 -80.3 286.7 -17.7 13.5 -39.0 22.9
PAT after EO 13,457 9,274 6,727 10,483 7,135 6,801 3,951 4,767

Balance Sheet (INR Million)

Y/E March 2011 2012 2013 2014 2015 2016 2017E 2018E
Share Capital 10,320 10,320 10,320 10,210 12,441 12,441 12,441 12,441
Additional Paid up Capital 90,306 90,306 90,306 90,306 149,266 149,266 149,266 149,266
Reserves 256,892 216,497 186,621 170,571 163,421 150,918 154,870 159,637
Net Worth 357,518 317,123 287,247 271,087 325,128 312,625 316,576 321,343
Loans 373,757 369,178 401,458 413,227 394,416 432,849 446,034 426,351
Minority Interest 8,245 8,602 7,253 7,435 5,124 5,197 5,532 6,033
Capital Employed 739,520 694,903 695,958 691,749 724,668 750,671 768,142 753,727

Gross Block 1,002,814 1,045,869 1,084,561 1,128,726 1,144,159 1,284,720 1,326,699 1,360,292
Less : Depreciation 273,406 331,091 392,041 464,297 521,139 572,419 616,055 662,503
Net Block 729,408 714,778 692,520 664,429 623,020 712,301 710,644 697,788
Investments 1,089 1,230 1,115 814 864 931 931 931

Curr. Assets 160,784 160,806 156,939 185,272 234,722 248,270 255,943 264,491
Inventories 5,172 5,663 4,967 4,147 4,006 2,076 2,156 2,245
Debtors 40,017 35,839 39,105 39,191 49,164 38,442 39,924 41,575
Cash & Bank Balance 53,272 10,785 12,814 11,451 27,159 22,341 22,341 22,341
Other Current Assets 62,323 108,519 100,053 130,483 154,393 185,411 191,522 198,330

Curr. Liab. & Prov. 151,761 181,911 154,616 158,766 133,938 210,831 199,377 209,483
Net Curr. Assets 9,023 -21,105 2,323 26,506 100,784 37,439 56,567 55,008
Appl. of Funds 739,520 694,903 695,958 691,749 724,668 750,671 768,142 753,727

1 June 2016 5
 Reliance Communication

Financials and valuations

Ratios
Y/E March 2011 2012 2013 2014 2015 2016 2017E 2018E
Basic (INR)
EPS 7.2 4.8 0.9 3.6 2.5 2.8 1.7 2.1
Cash EPS 26.5 24.1 19.6 25.6 17.8 19.1 19.3 20.8
Book Value 177.3 157.9 142.8 135.0 132.7 127.7 129.5 131.6
DPS 0.6 0.3 0.3 0.0 0.0 0.0 0.0 0.0
Payout %(Incl.Div.Taxes) 9.0 6.5 9.0 0.0 0.0 0.0 0.0 0.0

Valuation (x)
P/E 9.8 49.9 12.9 18.9 16.7 27.3 22.2
Cash P/E 2.0 2.4 1.8 2.6 2.5 2.4 2.3
EV/EBITDA 7.1 7.3 6.8 6.4 7.1 6.7 6.1
EV/Sales 2.2 2.3 2.3 2.2 2.4 2.4 2.2
Price/Book Value 0.3 0.3 0.3 0.4 0.4 0.4 0.4
Dividend Yield (%) 0.6 0.6 0.0 0.0 0.0 0.0 0.0

Profitability Ratios (%)

RoE 3.9 2.9 0.6 2.6 2.0 2.2 1.3 1.6
RoCE 2.9 2.7 3.3 4.3 3.5 3.4 3.1 3.2
RoIC 4.0 4.1 3.7 155.4 3.7 6.7 3.2 3.3
Turnover Ratios
Debtors (Days) 71 64 68 65 81 63 63 63
Asset Turnover (x) 0.32 0.30 0.31 0.32 0.32 0.31 0.31 0.32

Leverage Ratio
Debt/Equity Ratio(x) 1.0 1.1 1.4 1.5 1.2 1.4 1.4 1.3

Cash Flow Statement (INR Million)

Y/E March 2011 2012 2013 2014 2015 2016 2017E 2018E
Op.Profit/(Loss) bef Tax 64,036 63,896 70,883 75,803 76,120 73,969 80,622 84,528
Other Income 0 0 0 0 0 0 0 0
Interest Paid -10,723 -15,901 -24,992 -30,192 -27,564 -28,696 -30,778 -30,538
Direct Taxes Paid -117 1,062 -712 10,209 -3,256 1,990 -2,256 -2,773
(Inc)/Dec in Wkg. Cap. -120,718 -61,424 -57,399 -52,078 -72,853 47,345 -19,129 1,558
CF from Op.Activity -67,522 -12,367 -12,220 3,742 -27,553 94,608 28,459 52,774

(inc)/Dec in FA + CWIP -53,752 -25,153 -16,194 -17,247 3,244 -129,743 -41,979 -33,593
Free Cash Flow -121,274 -37,520 -28,414 -13,505 -24,310 -35,135 -13,520 19,182
(Pur)/Sale of Investments 110 -141 115 301 -50 -67 0 0
CF from Inv.Activity -53,642 -25,294 -16,079 -16,946 3,194 -129,810 -41,979 -33,593

Issue of Shares 0 0 0 -110 61,190 0 0 0

Inc/(Dec) in Debt 126,284 -4,579 32,280 11,769 -18,811 38,433 13,185 -19,683
Dividends Paid 2 2 2 2 2 2 3 3
Other Financing Activities -434 -246 -1,952 182 -2,311 73 335 502
CF from Fin.Activity 125,852 -4,823 30,330 11,843 40,070 38,508 13,523 -19,179

Inc/(Dec) in Cash 4,687 -42,487 2,029 -1,363 15,708 3,304 3 3

Add: Opening Balance 48,585 53,272 10,785 12,814 11,451 27,159 22,341 22,341
Closing Balance 53,272 10,785 12,814 11,451 27,159 22,341 22,341 22,341

1 June 2016 6
 Reliance Communication

Corporate profile
Exhibit 1: Sensex rebased
Company description
Reliance Communications (RCOM) is an integrated
telecom operator, with presence in wireless
(CDMA+GSM), long distance (wholesale voice and
data), and broadband segments. 'Global Enterprise'
segment includes wholesale voice services, retail ILD
calling cards, network infrastructure based services
and also caters to data, video, Internet, and IT
infrastructure requirements of enterprises.

Source: MOSL/Bloomberg

Exhibit 2: Shareholding pattern (%) Exhibit 3: Top holders

Mar-16 Dec-15 Mar-15 Holder Name % Holding
Promoter 58.9 58.9 59.7 LIC of India 6.6
DII 9.0 8.3 8.4 Europacific Growth Fund 2.3
FII 21.1 22.4 21.4 New World Fund Inc 1.4
Others 11.1 10.4 10.5 Clsa (Mauritius) Ltd 1.7
Note: FII Includes depository receipts Source: Capitaline Vanguard Funds 1.3
Source: Capitaline

Exhibit 4: Top management Exhibit 5: Directors

Name Designation Name Name
Anil D Ambani Chairman A K Purwar Deepak Shourie
Prakash Shenoy Company Secretary J Ramachandran Manjari Kacker
R N Bhardwaj

Source: Capitaline *Independent

Exhibit 6: Auditors Exhibit 7: MOSL forecast v/s consensus

Name Type EPS MOSL Consensus Variation
BSR & Co LLP Statutory (INR) forecast forecast (%)
Chaturvedi & Shah Statutory FY17 1.7 3.2 -46.4
V J Talati & Co Cost Auditor FY18 2.1 4.4 -51.8

Source: Bloomberg
Source: Capitaline

1 June 2016 7
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Served as an officer, director or employee No
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absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons.
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document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be
engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by
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The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore,
may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a
subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the
Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun Kumar Kadambari Balachandran
Varun.kumar@motilaloswal.com kadambari.balachandran@motilaloswal.com
Contact : (+65) 68189232 (+65) 68189233 / 65249115
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1 June 2016 Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com 8