Sunday, September 04, 2016

Reliance Communications Ltd: Should We Buy...?
CMP: Rs.49.20
In a move seen as aggressive, Reliance Jio has announced free voice calls across network and data charges that are 30-50% lower than that charged by incumbents including Vodafone and Airtel. A number of brokerage houses cut the price targets of incumbent telecom players Bharti Airtel and Idea Cellular fering that Jio's launch would disrupt the $28-billion Indian telecom market.

Influential foreign brokerages Goldman Sachs, Credit Suisse and JP Morgan have cut their 12-month price targets for Airtel and Idea by as much as 19%. Jio's commercial launch will be on September 5, 2016, but it plans to offer unlimited data, voice, video and SMS until December, 2016 as part of its 'welcome offer'. The newest telecom entrant is targeting 100 million customers in 'shortest possible time'.

Therefore, while an entire spectrum of telecom-analysts are getting heebie-jeebies over Reliance Jio's 4G launch and its potential negative effects on the revenue/earnings on the top four operators -- Bharti Airtel Ltd, Idea Cellular Ltd, Vodafone Ltd and Reliance Communications Ltd,  let us focus our attention primarily on Reliance Communications Ltd Vis-a-Vis Reliance Jio's historical launch. It is pertinent to mention here that most investors are probably missing out on the other key developments that can offset the impact of slower industry revenue growth, following Jio's launch; at least partially.

(i) Jio offerings are restricted to 4G handset subscribers, therefore, the impact on existing telcos will be gradual while it would be interesting to see how they cope up with the new challenges. 

(ii) Reliance Communications has already started to move its five million CDMA customers to Jio's 4G LTE network from May 4, 2016. While the users will continue to be RCom subscribers, the network will be powered by Jio's all-IP based next generation network. 

(iii) If Reliance Jio (RJio) garners Rs.200-250 average revenue per user (ARPU) while switching offerings from voice to data, incumbents’ ARPU base could be protected given their current ARPU base of Rs sub-200, wrote Motilal Oswal in their recently published research report. 

(viii) Reliance Jio announced its tariff (rate) plans starting at Rs.149 for 28 days, offering unlimited voice - - this is higher than the voice average revenue per user (Arpu) of Bharti and Idea, at Rs.138 and Rs.130, respectively.

(xi) Equinomics Research & Advisory wrote: "Post RIL AGM, Bharti Infratel stock price fell about 4% from its intra-day peak. We feel the fear is unwarranted. The aggressive launch of 3G and 4G services, and also pressure on the existing players to improve the transparency will lead to increase the demand for telecom towers. Ultimately Bharti Infratel would be a major beneficiary of expanding scope of mobile telecom services". Or in other words, the impact (if any) has either been factored in the prices of the shares of the incumbents or will play only for the short to to medium term (As RJio's unlimited offerings and free usage are valid only till December 2016). 

(xii) Ahead of the impending launch of Reliance Jio’s 4G services, telecom operator Reliance Communications recently announced app-to-app 4G calling dubbed as Calling Ka Naya Tareeka' for subscribers across India and worldwide at Re 1. The Anil Ambani-led firm will bundle 300 minutes of app- to-app talking, valid for 30 days at Re 1, translating into 10 minutes usage per day under the limited period offer. Users will get a daily data credit of 7 MB into their accounts that can be used to make these calls.

(xiv) Reliance has always been big on promises but poor on deliveries. A company that lacks a general direction of customer service and rates extremely low on the customer satisfaction index. Reliance is operating the JIO offer without an actual go ahead from the Government, this offer in which you the user, are using the services which allow Reliance Industries to do business without really paying the government spectrum charges and other fees that a commercially launched network has to pay. So each of the 1.5 million users are accomplices in a scam of a colossal scale. Cellular Operators’ Association of India (COAI), the network industry body, accused Reliance of falsely claiming that it is in testing mode...... it seems that things are already sketchy before launch, fake promises of launch among  an already poor infrastructure of voice services.

There are fears that Jio may not be able to attract new subscribers as there are numerous issues that are currently preventing penetration.

(xxiii) According to a report by ICICI Securities, domestic telecom players are likely to gain from Norwegian telecom company Telenor's exit and winding up of CDMA services. 

"In our view, the top three operators would be major beneficiaries of Telenor's exit from the Indian market. The potential buyer will have an opportunity to retain entire subscribers, though all major incumbent operators will benefit from the exit," it said. 

At present, Telenor India operates in seven circles viz: Maharashtra, Gujarat, AP, UP (west and east), Bihar and Assam, contributing 36% to industry's adjusted gross revenue - - which when taken in simple terms means in the likely event of Telenor exiting India, it would throw Rs.3,400 crore adjusted gross revenue (AGR) up for grabs. However, Telenor exit is unlikely to bring in too much benefits for Reliance Communication Ltd. 

Faced with the impending commercial launch of RJio’s 4G services, telecom operators, including Bharti Airtel and Vodafone are also wooing users through higher data speeds, high definition quality and superior experience on their networks. Recently, Reliance Communications claimed that its 4G LTE network on 850 Mhz spectrum band will provide high-definition quality, instant connectivity and blazing data speeds.

(xxvi) In June, 2016, the rating agency ICRA upgraded its outlook for Reliance Communications Ltd to stable from negative on the long term rating 'BBB+' of the company.  

Conclusion: Considering the above points, I maintain a CONTRARIAN BUY on the stock of Reliance Communications Ltd at the CMP of Rs.49.20, for short term targets of Rs.57-61. Please keep a SL of Rs.45, in case of any short term play. 

Note: I will be off the air for a few days due to shifting of my location in Bombay. However, my Premium Members, can call me on my mobile number, in case of any suggestion. 

So, during these day play safe using strict stop losses, for short term plays - - all the best and wish you a "Happy Ganesh Chathurthi", in advance. 
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