diversification of reliance group

2

Index

Reliance Industries & Reliance Communications ....................................... Pages 3 - 4

Rationale For Diversification .................................................................... Pages 5 - 10

Modalities And Effectiveness Of Diversification ..................................... Pages 10 - 15

Current Market Scenario .................................................................................. Page 16

Conclusion:

Market Forecast ....................................................................................... Pages 17 - 18

Future Of Reliance Communications ............................................................... Page 19

Annexure ................................................................................................. Pages 20 – 30

3

A Brief Introduction To The Companies

The Reliance Group – Reliance Industries Limited

The Reliance Group, founded by Dhirubhai H. Ambani (1932-

2002) in 1966, is India's largest private sector enterprise, with

businesses in the energy and materials value chain. The Group's

operations can be classified into three segments namely:

Petroleum Refining and Marketing business

Petrochemicals business

Others (including Crude Oil and Natural Gas Exploration & Production business.

The Reliance group of companies expanded into textiles in 1975. Since its initial

public offering in 1977, the group has expanded rapidly and integrated backwards -

its major products and brands, from oil and gas to textiles are tightly integrated and

benefit from synergies across the Company.

Group's annual revenues are in excess of Rs. 1,12,500 crore. The flagship company,

Reliance Industries Limited, is a Fortune Global 500 company and is the largest

private sector company in India with market capitalization of Rs 2,39,084 crore (as on

5th

July 2007).It has more than 25,000 employees on its rolls. Major Group

Companies are Reliance Industries Limited (including main subsidiaries Reliance

Petroleum Limited and Reliance Retail Limited), Indian Petrochemicals Corporation

Limited and Reliance Industrial Infrastructure Limited.

The group has followed a policy of timely diversification into other unrelated but

profitable industries. After its foray into telecom in 2002 (Reliance Infocomm), in

January 2006, it has now in the process of establishing a retail business through a

subsidiary Reliance Retail Limited. The groups' subsidiary Reliance Infrastructure

Ltd. is currently establishing infrastructure facilities such as roads and buildings for

the proposed Special Economic Zone (SEZ) at Jamnagar, Gujarat.

Reliance Industries Share @ a glance (as on 5th

September 2007)

Snapshot Profile

Current Price (Rs.) 1957.45 Sector Energy

Face Value (Rs.) 10.00 Industry Crude Oil & Natural Gas

Incorporation Year 1966 Market Capitalisation (Rs. Crore) 274730.11

Daily High (Rs.) 1999.30 PE Ratio 23.63

Daily Low (Rs.) 1946.20 PB Ratio 4.75

52 Week High (Rs.) 1775.25 Year To Date Return (%) 120.02

52 Week Low (Rs.) 1087.65 Source: www.valuesearchonline.com

4

Reliance Communications

Reliance Infocomm was launched in 2002 as a part of the

undivided Reliance Group. Its founding philosophy was based on

Dhirubhai Ambani's vision -“Make a telephone call cheaper than a

postcard”. Reliance Infocomm started laying out 60,000 route

kilometers of a pan-India fibre optic backbone. The company was

soft launched on 28th December 2002, the occasion of the Late

Dhirubhai’s 70th birthday.

In 2005, the Reliance empire split and Anil Ambani got control of erstwhile Reliance

Infocomm , Reliance Energy and Reliance Capital whereas Mukesh Ambani got

control of Reliance Industries Limited and Indian Petrochemicals Corporation

Limited (IPCL). Anil Ambani immediately unveiled the 'Anil Dhirubhai Ambani

Group' (ADAG). Reliance Infocomm was transformed into Reliance Communications

which became the flagship company of ADAG of companies.

Reliance Communications is India's largest private sector

information and communications company, with over 35

million subscribers and market capitalization of Rs.

1,10,807 crore (as on 5th

July 2007). It has established a

pan-India, high-capacity, integrated (wireless and wireline), convergent (voice, data

and video) digital network, to offer services. The company has a reliable, high-

capacity, integrated (both wireless and wireline) and convergent (voice, data and

video) digital network. It is capable of delivering a range of services spanning the

entire infocomm (information and communication) value chain, including

infrastructure and services - for enterprises as well as individuals, applications, and

consulting.

Reliance Communications Share @ a glance (as on 5th

September 2007)

Snapshot Profile

Current Price (Rs.) 538.80 Sector Technology

Face Value (Rs.) 5.00 Industry Telecom. Services

Incorporation Year 2004 Market Capitalization (Rs. Crore) 110756.79

Daily High (Rs.) 545.50 PE Ratio 39.86

Daily Low (Rs.) 535.20 PB Ratio 5.18

52 Week High (Rs.) 552.35

52 Week Low (Rs.) 301.45 Source: www.valuesearchonline.com

(Please refer to Annexure 1 for “Background: History Of Cellular Telephony In India

With Focus On Growth Of Reliance As A Telecom Major”)

Source: www.ril.com / www.reliancecommunications.co.in

http://www.valuesearchonline.com/

5

Rationale for Diversification

The foray of the Reliance Group into the telecom sector was based on its founder’s

vision – Dhirubhai Ambani had ambitiously stated in 1999; “Make a telephone call

cheaper than a postcard”. The following lists the rationale for their diversification

into an unrelated industry such as telecom from their core businesses of textile and

petrochemicals.

1. New National Telecom Policy’99

2. Growing Importance Of Service Sector In The Economy (GDP) And Increasing

Contribution Of Telecom Industry To The Service Sector

3. Growing Middle Class With Increasing Disposable Income

4. Deep Pockets

5. Sunshine Sector - Potential For Growth

1. New National Telecom Policy’99:

National Telecom Policy '94

The first step towards opening the telecom services sector took place with cellular

licenses for the four metros being awarded to private companies in 1994. In the same

year, the government formulated the National Telecom Policy of 1994 (NTP 94) with the

objective of encouraging private sector participation in telecom services. As per NTP 94,

one private company per circle was to be allowed entry into basic services while two

operators were to be allowed to compete in providing cellular services in each of the

circles. Subsequently, cellular services became operational in four metros and 18 state

circles and basic services, too, commenced in a few circles. However, high license fee

bids, tariff distortions, unattractive interconnection and revenue sharing arrangements

between DOT and new private licensees resulted in most service providers finding

themselves in financially unviable situations.

New Telecom Policy '99

In an attempt to remove the defects of the old policy and provide a new direction to the

telecom sector, the government came out with NTP’99. The highlights of NTP’99 were::

Three types of Service Providers:

Cellular Mobile Service Providers (CMSPs) : “Right to provide all types

of mobile services”

Fixed Service Providers : “Right to provide all types of Fixed services”

Cable Service Providers

Recognizes convergence, makes licenses technology neutral but service specific

Increasing power of Regulator: Talks about strengthening TRAI’s competition

management functions

6

Shift away from Monopoly/Duopoly: Assured level playing field as a promise of

the policy

Introduction of a 1 time Entry Fee (Rs. 400 Crores) + revenue share arrangement

for payment of license fees.

Extension of license period to 20 years.

Opening up of Domestic Long Distance by January 1, 2000.

Restructuring of the Department of Telecommunications.

Transparent, effective & efficient management of spectrum.

Imposition of a universal service levy on all operators to fulfill universal service

obligations.

Migration from NTP’94 to NTP’99: The Settlement

The Industry got:

Migration to revenue share

Six months waiver of license fee

Extension of license term

Promise of strengthened regulatory framework

The Industry accepted:

No duopoly status. Review every 2 years

Introduction of competition under NTP ’99 / TRAI Act

Sharp reductions in tariffs and rentals

Withdrawal of court cases (claims of Rs.10,000 crores)

2. Growing Importance Of The Service Sector In The Economy

Post liberalization (1991), the economy had turned the corner with an impressive growth

rate in GDP (6% and over per annum). The percentage contribution of the Tertiary Sector

(i.e. Service Sector) to the GDP increased at a much faster pace as compared to the

Secondary and Primary Sector. Reliance Group was traditionally focused on

Manufacturing (their biggest revenue generators being Petrochemicals and Textiles), i.e.

the Secondary Sector, and hence it made sound business sense for them to venture into

the Service Industries which held the promise of an ever-increasing and sustainable

return.

The contribution of the Telecom Sector to the Service Sector was also steadily increasing.

Its contribution towards GDP at factor cost was 1.2% of the Service Sector in 1993-94

and in 1999-00 it registered a growth rate of 25%, with its contribution rising to

1.6%.This was the highest growth by any industry under Tertiary Sector second to only

the Hospitality Industry. The growth rate of Total Tertiary Sector towards GDP at factor

cost in the same period was 12% (Please Refer to Annexure 1 – Fig 1.1)

7

3. Growing Middle Class With Increasing Disposable Income

The disposable income of the Bourgeois i.e. the Indian Middle Class was showing an

upward trend. This can be inferred from the following two factors:

i. Increasing Gross Domestic Savings: The Gross Domestic Saving was steadily rising.

The rate at which Gross Domestic Savings had increased in 2000-01 from 1995-99 was

23.4%. The share of Household savings in GDS went up from 79% in 1985-89 to 85.1%

in 2000-01. (Please Refer to Annexure 1 – Fig 1.2)

ii. Increasing Private Final Consumption Expenditure: Per Capita Private Final

Consumption Expenditure has shown a consistent upward trend from (1993-94 to 2004-

05) which indicates a growing demand for normal goods. In the year 2002-03, PFCE rose

by 3.9%; in 2003-2004 it rose by 8.3%. (Please Refer to Annexure 1 – Fig 1.3)

4. Deep Pockets

In 2000-01, Reliance was the largest, fastest growing, and the most valuable business

group, in India .Reliance Group’s leadership position in the Indian economy was

reflected by the following statistics:

3% of India’s GDP

5% of India’s total exports

9% of government’s indirect tax revenues

2.3% of the gross capital formation in the country, in the past 5 years

The company’s financials spoke for itself.

Rs. Crore $ Billion Rank

Sales 59,000 12.6 1

Exports 9,400 2.0 1

Cash Flow 6,200 1.3 1

Net Profit 4,100 0.9 1

Assets 46,400 9.9 1

Market Capitalization 63,000 13.5 1

Reliance group’s pre-eminent role in the Indian corporate sector at the time was evident

from the following statistics:

30% of the total profits of the private sector

10% of the profits of the entire corporate sector

Over 12% of total market capitalization

Weightage of 24% in the Sensex (Highest of any company)

Weightage of 21% in the Nifty

1 out of every 4 investors in India was a Reliance shareholder

8

RIL and RPL were, at the time, the top 2 companies in India on all major financial

parameters. Clearly the Reliance group had deep pockets, which was just as well since

the Telecom Industry was a highly capital intensive industry. Apart from the prohibitive

entry barrier in the form of a very high license fee (Rs. 400 crore), the telecom sector also

required a large infrastructure investment and had a relatively long break-even period.

The cost intensive nature of the Indian Cellular Industry was highlighted by T V

Ramachandran, Director General, COAI in October 2002. According to him, the high

cost structure of the industry was due to the following reasons:

Indian Cellular Market had lowest tariffs, but highest costs.

Only country in world to have High cost of entry + high annual license fee.

Sub-optimal allocation of spectrum – at less than half of international average, also

added to cost & affected quality of services.

High customs’ duties - as much as 25% on equipment, formed a significant

component of costs.

The Telecom Industry had High Recurring Costs - 35-42 % of a company’s revenues

were being passed on by way License Fee, Interconnection charges, Spectrum Usage

Charges & Service Tax. This meant that the Break-even period for any player was

relatively long.

In the 2000-01 Annual Report of RIL, the Investment Plan for Reliance Infocomm was

spelt out as listed here under:

Planned investment of Rs. 25,000 crores (US$ 5 billion) envisaged over the next 3-5

years

Project was proposed to be financed with 2:1 debt equity - total equity requirement

for the project Rs. 8,000 crores (US$ 1.7 billion)

RIL would be the lead investor with 45% equity stake: 10% ESOP, and balance

equity would be by other Reliance group companies and promoters.

Reliance invested Rs 10,500 crore in the 1st phase in Reliance Infocomm. Thus the

Reliance group had paved the way ringing in a new wave of telecom revolution in India.

Why did Reliance choose CDMA over GSM:

The following are the 3 reasons for Reliance choosing CDMA over GSM.

Bandwidth (Spectrum) Optimization:

In GSM, the total frequency band has to be divided for the purpose of transmission,

however, CDMA uses a spread spectrum where there is no division of the frequency

band, i.e. , the same frequency band is used over and over again .

9

Cost of infrastructure is lower than GSM due to low equipment cost:

At that time, the custom duty of importing CDMA equipment was much lower than that

of GSM. They also had strategic tie ups with LG and Samsung as hand set manufacturers.

Assurance in NTP’99 of WiLL (Wireless in Local Loop):

In 2001, Reliance gathered other basic services operators and lobbied successfully with

the Department of Telecommunications (DoT), the Union Communications Ministry,

TRAI and the apex tribunal to allow limited mobility within a short distance. Until then

WiLL was perceived only as a solution to bridge the "last mile" problem in the telecom

network. Reliance had licenses for basic telecom operations in 18 basic circles, but did

not bid for any cellular license other than the seven licenses that it had from the initial

foray in the first round of license auctions. Instead, it placed its bets rather early on the

CDMA platform. Reliance ushered in the CDMA technology and re-entered the cellular

telephony market with a license only for limited mobility service under WLL telecom

network.

However, Reliance could leverage on technology and provide competitive cellular

services at much cheaper tariff than the existing GSM players. TRAI noted that Reliance

had converted its services into an almost an all-India roaming- done by registering the

subscribers almost all over the country by using call-forwarding and multiple registration.

Thus Reliance could ‘bend the rules’ to its advantage which caused an uproar from the

existing GSM players laying ground for the Unified License scheme, introduced in

November 2003. Under this, a service provider could offer both fixed and mobile

services under one license. Thus, while cellular operators could offer basic services,

WiLL operators could offer cellular services.

5. Sunshine Sector – Potential For Growth

In the first fifty years of independence, India had a dismal teledensity of 0.80%. Post the

telecom sector opening up to private players, the teledensity had shown an upward trend.

The teledensity in 2001 was 3.58%. Where as average teledensity of developed

economies was around 65 to 75%. This provided ample scope for a new player to enter

the market and compete with the existing players.

Despite India having crossed the 100-million telephone mark on April 13, 2005 to

become the fifth largest telecom network in the world after China, the US, Japan and

Germany, (Teledensity in the US, Japan and Germany is 100%. China has a teledensity

of 55%) there is huge potential for growth in the telecom sector especially in the rural

market. This is because the urban teledensity has increased exponentially since 1997 and

the rural teledensity has shown a comparatively marginal growth, (Please Refer to

Annexure 1 – Fig 1.4) The current teledensity is 19.80% (July’07) and it is expected to

touch 22% by the end of the year.

10

In 2000, DoT projected that Mobile telephones will rule the Indian Telecom market in the

next 5 years and it would become a necessity rather than a luxury. The DOT annual

report 2005-05 also highlighted the growth of mobile telephony in India and decline of

fixed line telephony. In 2002, mobile telephony grew by an astounding 160% to 33.7

million subscribers (as compared to 13 million in 2001) where as the fixed line telephony

saw a decline of 16% with the number of subscribers falling to 35.25 million (as

compared to 41.31 million in 2001). Reliance had clearly timed their move well. The

CAGR of mobile telephony was 86% compared to only 11% in case of fixed line

telephony for the period 1996 - 2004. (Please Refer to Annexure 1 – Fig 1.5)

The market scenario of the telecom sector in December 2001 is shown in Fig 1.6 in

Annexure 1.

The Growth Predictions for the telecom sector in 2001 were:

Mobile subscriber base will grow up to 200 million by 2010 (CAGR 33.7%)

Mobile market value will be $ 24 billion by 2009

Indian cellular market would account for 11% of overall Asia-Pacific and Japan

market by 2009

India would become third largest mobile user-base behind China and US, by 2007

Revenues would reach as high as $ 10 billion, by 2010

Sources: Economic Intelligence Unit – Gartner | TRAI | COAI | Lehman Brothers |

Zinnov Research & Consultanting

11

Modalities and the Effectiveness of Diversification

The Reliance Communication Story can be narrated in four parts:

Phase One – The Big Bang Theory

Phase Two – A Bigger Bang

Phase Three – A New Star Is Born

Phase Four – The Shooting Star

Phase One – The Big Bang Theory

On December 18th

2002, on the late Dhirubhai Ambani’s 70th

birth anniversary, Reliance

Infocomm was ‘soft launched’ and was later commercially launched in May 2003 as a

Pan India effort across 1,100 cities and towns. It had Optical Fibre Cable network

backbone of 60,000 route kilometers. Value added Services was launched through R-

World mobile portals that provided 70 applications (including news, TV guides, movie

clips).An aggressive expansion plan was formulated to cover an additional 3,800 towns

within FY08 to cater to 140 million customers.

The company followed an aggressive marketing strategy through a Multi Channel Pan

India distribution and Customer Care network. The network included 230 WebWorlds

(Retail Broadband centers), 7,100 Point of Sales Outlets,1,000 Direct Sales Agents, 4,800

Independent Sales Agents,195 Distributors covering 50,000 merchants, Enterprise Sales

Team (300 + 1,000 FoS),and 4,800 Customer Care executives. Initially only Post Paid

Schemes which were high risk and high gain were introduced; with innovative pricing to

drive penetration and a 3 year lock in period for guaranteeing customer loyalty.

Reliance Infocomm carved out a niche for itself by starting operations with the

“Dhirubhai Ambani Pioneer Offer” – the company’s flagship offer with STD call rates

as low as 40p/min. (Mobile Handset partners were Samsung and LG) (Please Refer to

Annexure 2 – Fig 2.1).. In July 2003, the “Monsoon Hungama Scheme” launched .It

created history by lowering the entry barrier of going mobile to Rs. 501 as a result of

which one million customers applied for subscription within 10 days of its launch. At the

end of March’04 a subscriber base of almost 7 million customers had been acquired. The

“Reliance India Mobile” brand emerged as the ‘Most Trusted Telecom Brand’ in the

country (Source: A.C. Nielson, ORG – MARG). Also on offer for the 1st time in India

was high speed mobile data services through R-World mobile portal.

The overall capex was estimated to be around Rs. 18,000 crores compared to initially

announced Rs. 25,000 crores due to sharp fall in telecom equipment cost (especially

CDMA) as a result of the slowdown in the global telecom industry leading to lower

equipment and fibre costs. RIL’s exposure to Infocomm was US$ 1,043 million,

comprising of US$ 508 million in equity and US$ 535 million in debt. Additional

exposure was estimated to be at US$ 500 million in debt. However, Reliance Infocomm

had sufficient positive cash flows to prepay RIL debt ahead of maturity in the very first

year.

12

At this point, Reliance’s GSM cellular service was not faring as well as its CDMA

division. Subscriber base had touched only 600,000 by the end of August 2003.Services

were operational in 7 telecom circles comprising 118 cities in 15 states. The cellular

operations spanned 1/3rd of India’s geographical area and covered an area of nearly 400

million people. Its pre-paid services accounted for 95% of cellular revenues – this was a

low risk strategy. The GSM Network was successfully established only in the central and

eastern parts of the country.

Phase Two – A Bigger Bang

This Phase was sparked by the strategic acquisition of 100% of FLAG Telecom on

January 2004 for US $ 211 million through Reliance Gateway Net Ltd. ( a wholly owned

subsidiary of Reliance Infocomm).FLAG Telecom was a leading global telecom

company having 180 customers ,including a number of the world’s leading international

carriers. FLAG connected 16 of the world’s top 20 business centers and 75% of the world

population through its 55,000 Km Fibre Optic Network. (Please Refer to Annexure 2 –

Fig 2.2).FLAG also had project FALCON underway which was a new high capacity

resilient loop cable system providing multiple landings through out the Gulf region with

submarine link stretching to Egypt in the west and Hong Kong in the east. This

acquisition provided the company with an international gateway to global markets;

Reliance Infocomm now became a ‘carrier’s carriers’. The company now owned 112,000

Route Km internationally and started an 100 Mbps Ethernet link for broadband

connectivity (a 1st for any Indian Company). The Enterprise Broadband Service was

rolled out in 30 towns which was then extended to 200 towns and it garnered 50,00,000

Corporate Customers.

This phase was also marked by the introduction of Pre-paid schemes in February

2004.Services offered included FWP (Fixed Wireless Phones) using WiLL technology

and Lease Lines. Services like International Private Lease Circuits, Virtual Pvt.

Networks, Video Phones, Audio and Video Conferencing and ‘Netway’ were planned to

be introduced. Subscribers were given greater choice for handsets as Reliance partnered

with Motorola and Nokia(the Indian market favorite).These mobile sets were of light and

sleek design and offered enhanced services like Java enabled utilities, Polyphonic

ringtones, three-way conferencing, multimedia messaging and special lifestyle features

like organizers, calendars, etc. They also overcame the product deficiency of battery

overheating with Lithium Ion batteries that were more reliable.

Phase Three – A New Star Is Born

On June 18 2005, after seven months of intense and bitter power struggle, the Ambani

brothers resolved the "ownership dispute" amicably. This was marked by an

announcement regarding the settlement by their mother, Kokilaben through a statement,

making the separation official. The board of directors approved the RIL demerger plan.

According to this, Reliance Industries shareholding in Reliance Energy, Reliance Capital

and Reliance Infocomm would be put into a new holding company – a kind of a special

13

purpose vehicle (SPV). The demerger ensures that both brothers will have a clear line of

ownership and control.

Mukesh Ambani got RIL and IPCL and Anil was awarded Reliance Infocomm, Reliance

Energy and Reliance Capital. (Please Refer to Annexure 2 – Fig 2.3).In terms of market

capitalization, Mukesh seemingly had the edge. The combined market capitalization of

IPCL and RIL is close to Rs 88,000 crore, compared to the nearly Rs 15,000 crore of

Reliance Energy and Capital. However, Anil's prized catch and as some referred to it as

‘the jewel in the crown’, Reliance Infocomm could turnaround the younger Ambani's

fortunes. The big cash cow, which is not yet listed on the bourses was believed to be

valued anywhere from Rs 25,000 crore to Rs 45,000 crore by various market analysts.

Anil Ambani immediately unveiled 'Anil Dhirubhai Ambani Group' and committed an

investment of Rs 3,000 crores of his personal funds in Reliance Energy and Reliance

Capital. Thus Reliance Communication (previously Reliance Infocomm), India ’s leading

integrated telecom company was formed. It became the flagship company of the Anil

Dhirubhai Ambani Group (ADAG) of companies and was subsequently was listed on the

National Stock Exchange and the Bombay Stock Exchange.

Phase Four – The Shooting Star

Reliance Communications is now a strategic presence in all growth segments and is

uniquely positioned across the voice and data spectrum:

Wireless: CDMA+GSM voice, mobility, fixed wireless, internet access, multimedia,

data VPNs, PCO, payphone 65% Q1 FY07 Revenue

Global: National and international voice, virtual calling card, international capacity,

internet bandwidth, managed data services 28% Q1 FY07 Revenue

Broadband: Enterprise centrex, conferencing, leased lines, MPLS-VPN, data centers,

consumer access lines, broadband internet 7% Q1 FY07 Revenue

Reliance Communication: Dominant position across multiple segments

Wireless traffic – 350 million minutes/day

Public Call Office (PCO) lines – 48% market share

International Long Distance (ILD) voice – 45% market share

US-India retail voice carrier – 40% market share

Internet Data Center (IDC) services – 62% market share

Primary International bandwidth provider in Middle East and Asia

Internet bandwidth in India – 35% market share

The customers include-

Over 32 million subscribers in India

Over 7,00,000 global consumers

Over 200 major global carriers

14

Over 250 MNCs

Over 700/1000 Top Indian Large Enterprises

Over 10,000 Indian SMEs

The company offers a comprehensive international portfolio through a submarine cable

network that spans 4 continents and 40 countries. Its Domestic wireless network

currently spans more than 10,000 towns and 300,000 villages across the country,

providing coverage to over 60 per cent of India’s population. Reliance Infocomm

operates the largest, next generation long-distance network in the country, comprising

1,00,000 route Kilometers of OFC. In the current fiscal year, RCom will spend Rs

16,000 crore for further expansion and strengthening their network coverage, across

India and rest of the world. There are embedded opportunities for value creation by

leveraging assets within RCom’s integrated platform from the following: the 6000 seat

multi-location, multi lingual contact centre,1650 exclusive Reliance World outlets in 700

towns, largest distribution network in the industry, and passive infrastructure like

nationwide single occupied radio towers and fibre ducts, and Project FALCON.

The financial restructuring of Reliance Communications is the biggest turnaround story

in the history of corporate India – and in the shortest time. It was the first Indian telecom

services company in the private sector to recommend a dividend payout to its

shareowners. Market capitalization is up from Rs. 37,000 crore (us$9.5 billion) to over

Rs. 1,17,000 crore (US$ 29.3 billion).RCom crossed the Rs 1,000-crore mark in Net

Profit in one quarter in the last reported quarter of FY 2007 – the fifth Indian company to

do so, and by far the youngest.

FY 06-07 Financial Results

Revenue: Rs. 17,440 Crores

Operating Expenses: Rs. 10,812 Crores

Net Profit (PAT): Rs. 3,526 Crores Net Profit attributable to equity shareholder: 2,408 Crores (after more than Rs. 1000

crores written off due to de-merger)

EBDITA: Rs. 6,693 Crores | EBDITA margin: 38.38%

ROI: 5.23% ((EBIT-TAX)/Total Assets)

ROI: 6.84% (EBIT/Net Assets)

ROE: 11.73% (PBT/NW)

Return on net worth: 30%

EPS: 11.98

Reaches BEP in Dec’05 with quarterly profit of Rs. 5 Crores.

Time taken to reach BEP: 36 months (least time taken by any telecom player in India)

Net Debt: Rs. 1,824 Crores

Shareholders equity: Rs. 22,931 Crores

Debt-equity ratio: 0.09 (standard 2:1)

Net Cash flow: Rs. 6,231 Crores

Current ratio: 1.87 (Standard: 1.5 – 2)

Total Assets: Rs. 35,093 Crores

15

Reliance Communications is the largest CDMA player in India and has been the CDMA

market leader from the first full year of operations. It has been registering growth every

year. (Please Refer to Annexure 2 – Fig 2.4)Also from the first full year of operations, it

has out-performed its nearest competitor, Tata Tele Services Limited, and currently is

double its size in terms of subscriber base. The table shows the year on year growth of the

subscriber base of Reliance Communications and compares it with the total CDMA

subscribers. (Please Refer to Annexure 2 – Fig 2.5)

16

Current Market Scenario

There currently 14 players in the market. The Total Wireless Subscriber Base is 185.13

million out of which Total GSM Subscribers are 121.43 million and Total CDMA

Subscribers are 63.7 million. (Please Refer to Annexure 3 – Fig 3.1).Reliance

Communications is in 2nd

position in the Indian Cellular Market with a total (GSM +

CDMA) subscriber base of 32,077,442 as on 30th

July 2007. (Please Refer to Annexure 3

– Fig 3.2)

In the current market scenario, most circles show Oligopolistic nature. This can be

substantiated by using the HH1 index and CR3 ratio , which indicate the level of

computation computed for each circle(total number of players is 11).

An HHI (Herfindahl Hirschman)index of greater than 1,800 is considered oligopolistic in

nature by US DoJ while TRAI is more lenient and considers HHI index of greater than

2400 as oligopolistic market structure. Most of the circles (especially the C category

circles) show signs of oligopoly.( HHI index: 1650).

If CR3(concentration) ratio is used then almost all of the circles falls under tight

oligopoly. In the absence of any real differentiation, this means that each and every action

of single player, irrespective of its size, has bearing on all other players resulting in either

cut throat competition or tendency to cartelize making role of regulator important,

difficult and risky.( CR3 Ratio: 60.1).(Please Refer to Annexure 3 – Fig 3.3)

In terms of profitability, Indian telecom operators are world-leaders enjoying better

EBIDTA margin1 than their counterparts in developed countries.

A report by Merrill Lynch says that the Indian telecom industry’s EBIDTA margin stands

at 37.5 per cent, ahead of countries like the US (32), the UK (25.6) and Japan (26).This

is true for the last few years due to economies of scale, better pricing and lower

manpower deployment, better cost management, higher usage and rapid growth.

Moreover, unlike global companies like France Telecom and Vodafone, Indian

companies have not gone in for acquisitions which take time to register returns

The operating costs in India are much lower compared with that in developed nations.

For example, cost levels and overheads in the UK and the US are much higher , as

companies there are also not adequately compensated by way of subscriber additions.

The growth in revenues and profitability in India is due to the increase in volume, and

this is in spite of a fall in average revenue per user. The fall in tariffs was more than

offset by a growth in the subscriber base, with Indian service providers adding over 6

million users every month. (Please refer to annexure 3-Fig 3.4) India also has the world’s

second-highest usage statistics at around 400 minutes per month. Bharti Airtel, Reliance

Communications and Hutchison Essar lead the pack with EBITDA margins of more than

40 per cent. A UBS report predicts that both Bharti and Reliance Communications will

have 41.5 per cent EBIDTA margin when they announce their quarterly numbers this

month..

17

Conclusion

Market Forecast

In January 2007, study by the Center for Knowledge Societies (CKS) and commissioned

by Nokia reported that mobile communication was revolutionizing economic and social

life in rural India. With mobile phone ownership in India growing rapidly, the report

noted that one in five Indian’s would have a mobile phone service by the end of 2007;

and by the end of 2008, three quarters of India’s population would be covered by the

mobile network. Many of these new ‘mobile citizens’ live in poorer and rural areas with

limited infrastructure and facilities, high illiteracy levels, low PC and Internet

penetrations.

Pricing Forecast

As per the Sector Report - Batlivala & Karani Securities Research, ‘Price Wars’ in the

cellular industry may end soon: (Please Refer to Annexure 4 – Fig 4.1) Once the MoU

reaches a level of 550 to 600 minutes and ARPM falls to 45 to 55 paisa level, then a

further reduction in call rates may not result in corresponding increase in the usage. But

operators may be tempted to use free minutes as bundling strategy or in a stand alone way

to attract/poach subscriber in the future.

Market Share Forecast

According to the Sector Report - Batlivala & Karani Securities Research, several players

are seeking to improve the market share by 2012 time frame. Vodafone has based its

business case (while acquiring Hutch) at 20-25% market share by 2012. Similarly, Bharti

is targeting upwards of 25% market share by 2010-12 time-frame. Reliance

Communications would be re-launching GSM operation to improve its share. They

believe that given the structure and dynamics of industry, achieving this kind of

market share might be very challenging. B & K Securities Research expect that

Vodafone will improve market share the most in next six years (from 15.9% in December

2006 to 18.4% by December 2012). If MNP (mobile number portability) is not

implemented, then none of the operator’s subscriber base is expected to shrink in any of

the year (on y-o-y basis) till 2012. Implementation of MNP may significantly alter this

forecast.

However, in light of the Telecom Regulatory Authority of India's recommendations on

licensing and M&A conditions being likely to be accepted then Reliance

Communications remains the biggest gainer of the exercise (as pointed out by DNA

Money on July 31 and August 15.)

The Telecom Regulatory Authority of India (TRAI) has recommended tightening in

the existing mergers and acquisition laws governing telecom service providers. It

has said that a minimum of four operators should be left per circle post any merger.

At present, a minimum of only three operators per circle is required. It has also said that

18

the combined market power of the merged entity should not be more than 40 per

cent. This is considerably lower that the present definition of dominant market share

which is pegged at 67 per cent.

If this proposal is accepted, then any two large operators such as Bharti Airtel and

Vodafone Essar may not be able to merge as both have more than 20 per cent market

share each in some of the circles such as Delhi. However, TRAI has allowed the

merged entity to keep the spectrum which they jointly have. At present there is a cap

of 15 Mhz .The regulator has also suggested an increase in the existing cap of 10 per

cent on equity that one telecom player can acquire in another player in the same

service area. While the existing ceiling of 10 per cent can be acquired through the

automatic route, acquisition of anything beyond that and up to 20 per cent equity would

have to get approval on a case by case basis, subject to conforming to the M&A

guidelines recommended by the regulator.

Citigroup said Reliance Communications benefits the maximum though it will have to

have to pay an additional entry fee, referring to the TRAI recommendation on use of

combination technologies. The Anil Ambani firm, which has applied for GSM license

across the country, can now get spectrum for the remaining 15 circles where it does not

have GSM service but it has to pay an entry price equivalent to that paid by any universal

access player in a particular circle.

Credit Suisse co-heads of Asian telecoms research, Jeff Kahng and Colim McCallum also

said Reliance Communications will be the biggest beneficiary with its "clear

framework for launching GSM services". According to them, if the defense ministry

releases 20 mega hertz of spectrum to the telecom sector by the end of this year, it would

allow three to four new operators to come into play.

Our group feels that over the next 3-5 years, the market will become a near perfect

Oligopoly with major players being Bharti, Reliance, Vodafone and Tata (These

players would not be able to able to merge together as no player will be allowed to have

more than 40% market share as per latest TRAI regulations.) BSNL with its latest

infrastructure expansion move could also become a major player. Aircel, BPL, Spice

are likely to be taken over by the major players – Idea may or may not be taken over

(depending on the will of their promoters – The Birlas).Tariffs will fall but not

significantly. Despite this profitability will increase as all players will be optimally

utilizing their created idle capacity. Market offerings will increase which will benefit

the customers. The spectrum vacated by the Defense Dept. will help the GSM players to

consolidate market position and become market leaders. This will prompt Reliance

Communications to focus back on the GSM market and make significant

infrastructure investment.

19

The Future Of Reliance Communications

The present total GSM Subscriber Base is 121.43 Million of which Reliance has only – 4

Million (a dismal 3.3%!) Reliance Communications seems to be shifting focus to the

GSM business and has approached DoT for permission to offer GSM services in 21

circles. According to the market buzz, the company planned to start GSM operations in

Delhi and Mumbai with an estimated investment of over Rs. 1500 crore. Also, that

Reliance was already in talks with major equipment vendors like Nokia, ZTE, and

Motorola for rolling out GSM service.

The rationale behind their move can be attributed to the following reasons:

GSM would catalyze subscriber growth.

Can leverage its existing infrastructure.

Can leverage the scale offered by the technology, which is used by more than 70 per

cent of the global mobile operators.

Cheaper CDMA handsets not being made available in the market, which is hindering

its growth.

CDMA to miss the additional spectrum released by the Defense Dept. - if their GSM

license application is approved, RCom gets access an additional 5 Mhz of spectrum

GSM is an open standard, so that the company would not have to pay any sort of

royalty to Qualcomm. Currently, there has been a lot of heated debate on the royalty

charged by Qualcomm for CDMA. According to estimates, the average royalty per

CDMA handset turns out to be around $13. In fact, a few industry insiders hint at the

possibility of that Reliance is pressurizing Qualcomm by this move.

Mobile additions to reach 10 million a month by Dec’07

With Mobile additions to reach 10 million a month by Dec’07 as per latest COAI

predictions, Reliance Communications is expected to gain market share from GSM

launch. (Please Refer to Annexure 4 – Fig 4.2)

However the following could be the possible threats to the company in the near future:

Entry of Vodafone

Money Muscle of Vodafone could lead to fresh price wars.

Cordial relationship of Vodafone with Bharti could lead to a mutually beneficially

deal (infrastructure sharing; mutually agreed upon tariff) between them.

BSNL recent announcement of expanding GSM business could make it a major

player in the market.

Implementation of Mobile Number Portability - will lead to greater customer churn.

Growing importance of GSM over CDMA – a worldwide phenomenon

Implementation of Carrier Access Code – would enable subscriber to choose their

NLD/ILD carrier.

New entrants in NLD/ILD segment

20

Annexure 1

Background: History Of Cellular Telephony In India With Focus On Growth Of

Reliance As A Telecom Major

Year Event

Till Mid

80s

Indian Telecom Market was a wholly Government owned public utility.

1986 MTNL (Mahanagar Telephone Nigam Limited) formed to take out

telecommunication services from the control of the Government in the cities

of Delhi and Mumbai.VSNL (Videsh Sanchar Nigam Limited) was created in

the ILD segment. At this point the market was a Government Monopoly.

(Bharat Sanchar Nigam Limited (BSNL) was formed on October 1, 2000 as a

telecom service provider in all other places.)

1992 Telecommunication sector in India liberalized to bridge the gap through

government spending & to provide additional resources for the nation’s

telecom target. Private sector allowed participating.

1994 National Telecom Policy (NTP’94) announced. License for providing

cellular mobile services granted by the government of India for the

Metropolitan cites of Delhi, Mumbai, Kolkata & Chennai. Cellular mobile

service was to be Duopoly (i.e. not more than two cellular mobile operators

could be licensed in each telecom circle), under a fixed license fee regime for

10 years. The Eight operators issued licenses to operate cellular mobile

services in the 4 metros were:

Delhi: Bharti Cellular Limited & Sterling Cellular Limited.

Mumbai: BPL Mobile Communications Limited & Hutchison Max

Telecom Limited

Calcutta: Modi Telstra & Usha Martin Telekom.

Chennai: RPG Cellular & SkyCell Communications

1995 20 more telecom circles got mobile licenses. The circles were roughly

analogous to the states of India and were divided into "A", "B" and "C"

categories based on their perceived business potential.

Cellular Operators Association of India (COAI) was set up to look after

the collective interests of the GSM players.

Modi Telstra launched the first cellular operation in the country in

Kolkata under the brand name "Modi Telstra".

1996 Reliance enters the Indian Cellular Telephony Market with “Reliance

Telecom” offering GSM services.

1997 Association of Unified Service Providers of India (AUSPI) constituted

as a body for CDMA players.

Telecom Regulatory Authority (TRAI) of India was set up

The entry of private service providers in 1992 brought with it the

inevitable need for independent regulation. The Telecom Regulatory

Authority of India (TRAI) was thus established with effect from 20

21

February 1997 by an Act of Parliament, called the Telecom Regulatory

Authority of India Act, 1997, to regulate telecom services, including

fixation/revision of tariffs for telecom services, which were earlier vested

in the Central Government.

1999 New National Telecom Policy (NTP’99) was announced.(NTP’99 described

in detail under “Rationale For Diversification”)

2000 National Long Distance (NLD) Sector opened up.

2002 Reliance introduced its CDMA services in the Indian Cellular Telephony

Market with the ‘soft-launch’ of “Reliance Infocomm.”

International Long Distance (ILD) Sector opened up.

2005 Reliance Group split – Anil Ambani got control of the cellular telephony

business – formed Reliance Communications as flagship company of his

new “Anil Dhirubhai Ambani Group”

Figure 1.1: Growing Importance Of The Service Sector In The Economy

Figure 1.2: Increasing Gross Domestic Savings

Gross domestic savings as % of GNI

0

5

10

15

20

25

30

35

1960-79 1970-79 1980-84 1985-89 1990-94 1995-99 2000-01

Year

% o

f G

NI

Gross domestic saving

Household Savings

Sectoral Distribution of GDP in India

0

10

20

30

40

50

60

70

1950-

52

1960-

62

1970-

72

1980-

82

1990-

92

1998-

00

2000-

01

2001-

02

2002-

03

Year

% c

on

trib

uti

on

Primary

Secondary

Tertiary

22

Figure 1.3: Increasing Private Final Consumption Expenditure

Figure 1.4: Growth Of Teledensity In India – Urban Vs. Rural

Private Final Consumption Expenditure (in Rs.)

0

2000

4000

6000

8000

10000

12000

1993-

94

1994-

95

1995-

96

1996-

97

1997-

98

1998-

99

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

2004-

05

Year

PF

CE

(in

Rs.)

0

5

10

15

20

25

30

35

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Urban Rural Total

Tele

density (

%)

Growth of Teledensity in India - Urban Vs. Rural

0

5

10

15

20

25

30

35

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Urban Rural Total

Tele

density (

%)

Growth of Teledensity in India - Urban Vs. Rural

23

Figure 1.5: Share of Mobile Telephony Vs Fixed Line Telephony

Figure 1.6: Market Scenario Dec’01

14.54

0.34

17.8

0.88

21.61

1.2

26.65

1.88

32.7

3.58

38.59

6.43

41.31

13

35.29

33.7

34.27

48.01

0

10

20

30

40

50

60

70

80

90

Subscribers in

millions

1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Share of Mobile Telephony vs Fixed Line Telephony

Mobile Phones

Fixed Phones

Market Share - Dec'01

4%

21%

11%

16%

1%8%

5%

1%

7%

1%

2%

6%

2%

7%

6%2%

Aircel Limited Bharti Telenet Birla Tata AT&T BPL Mobile

BTA Cellcom Escotel Fascel Hexacom

Hutchison Max Koshika MTNL Reliance Telecom

RPG Cellular Spice Comm. Sterling Cellular Usha Martin

24

Annexure 2:

Figure 2.1: Dhirubhai Ambani Pioneer Offer

25

Figure 2.2: FLAG Telecom Network

Figure 2.3: The Reliance Split

Figure 2.3: Project Falcon Network

26

Figure 2.4: Reliance CDMA Subscriber Growth

(Note: Figures include Wireless, Wireline and Digitial Mobile Subscribers)

Source: www.auspi.com

Figure 2.5: Reliance Vs TTSL Subscriber Growth

Year RCOM YoY

Growth

Growth

Rate

Total

CDMA Growth Rate

RCOM/Total

CDMA

Jul-02 1,000 - - 731,015 - 0%

Jul-03 2,914,522 2,913,522 291352% 4,400,732 502% 66%

Jul-04 8,334,570 5,420,048 186% 11,535,704 162% 72%

Jul-05 12,502,486 4,167,916 50% 18,777,693 63% 67%

Jul-06 21,432,268 8,929,782 71% 34,869,209 86% 61%

Jul-07 29,568,154 8,135,886 38% 50,823,643 46% 58%

Subscriber Growth - RCom Vs TTSL

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

2002 2003 2004 2005 2006 2007

Year

Su

bscri

bers

RCOM TTSL

27

Annexure 3:

Figure 3.1: Current Market Scenario (Figures as on 30/06/2007)

Group Company Total Subscribers

Airtel (GSM) 42,703,938

Reliance (CDMA + GSM) 32,077,442

BSNL(GSM) 28,423,283

Vodafone Essar (GSM) 24,934,570

Tata (CDMA) 17,326,249

IDEA(GSM) 16,126,396

Aircel (GSM) 6,775,238

Spice (GSM) 3,170,424

Hutchison Telecom (GSM) 3,151,256

Hutchison Essar (GSM) 2,665,691

MTNL(GSM) 2,608,811

BPL(GSM) 1,087,992

HFCL (CDMA) 150,347

Shyam (CDMA) 98,012

Others 3,830,351

Total 185,130,000

* CDMA figures include WLL services

(Source: www.indian-cellular.com)

GSM

66%

CDMA

34%

28

Fig 3.2: Indian Cellular Industry – Growth in Subscriber Base

Year

Subscriber Base Annual

Growth GSM CDMA Total

2002 10,480,400 750,000 11,230,400 105%

2003 21,991,700 6,450,000 28,441,700 153%

2004 37,378,900 10,876,000 48,254,900 70%

2005 58,503,100 19,130,800 77,633,900 58%

2006 105,430,000 44,190,000 149,620,000 93%

2007 121,430,000 63,700,000 185,130,000 124%

(Source: www.trai.gov.in)

Fig 3.3: Indian Cellular Industry – Circle Wise Market Share and Market Structure

Circle wise market share (in %) Market structure

Bharti RCom BSNL

MTNL Hutch Idea Aircel BPL Spice Tata

No of

Players HHI CR3

Delhi 24 17 10 19 12 17 6 1799 61

Mumbai 18 22 13 25 11 11 6 1834 65

Chennai 21 16 17 15 24 7 6 1846 62

Kolkata 19 28 11 24 17 5 2176 72

Maharashtra 20 19 16 9 23 13 6 1800 62

Gujarat 15 17 9 36 16 7 6 2199 69

A.P 26 22 14 11 14 13 6 1858 63

Karnataka 36 18 15 15 7 9 6 2216 69

Tamil 18 19 21 10 28 5 6 1996 67

Kerala 13 21 27 11 21 7 6 1943 69

Punjab 32 10 12 14 23 8 7 2054 69

Haryana 18 12 19 17 20 13 6 1715 57

UP(W) 13 19 17 20 21 10 6 1762 60

UP(E) 14 21 28 27 3 7 6 2206 76

Rajasthan 23 18 24 19 3 12 7 1938 66

MP 18 36 17 21 7 5 2447 76

W.B. 15 27 21 27 3 8 6 2156 74

Himachal 41 20 31 1 7 5 3099 92

Bihar 34 38 20 8 4 3030 92

Orissa 31 29 26 6 9 5 2574 86

Assam 28 18 27 26 4 2563 82

N.E. 23 14 38 25 4 2804 86

J&K 37 57 6 3 4663 100

India 22.9 17.4 19.3 16.4 8.5 3.1 0.7 1.7 9.3 11 1650 60.1

(Source: Sector Report - Batlivala & Karani Securities Research)

29

Fig 3.4: Telecom Industry Profitability – a Global Comparision

Name Ebitda margin (%)

Malaysia 48.2

Singapore 43.0

Canada 42.5

New Zealand 41.0

Belgium 40.7

Italy 40.2

China 39.7

India 37.5

Switzerland 37.3

Sweden 37.0

Austria 35.8

France 35.6

Germany 34.9

Korea 34.9

Ireland 33.5

US 32.0

Australia 30.5

Denmark 26.0

Japan 25.9

UK 25.6

(Source: Business Standard - July 23, 2007)

30

Annexure 4

Figure 4.1: ARPM vs MoU


Figure 4.2: Reliance Communications Projected Market Share


Projected Market share

21.1

21.6

2222.1

20.9

20.620.520.9

19.5

20

20.5

21

21.5

22

22.5

Dec ‘05 Dec’06 Dec’07 Dec’08 Dec’09 Dec’10 Dec’11 Dec’12

CY Ended

% M

ark

et

sh

are

Average call charges per minute

MoU / ARPU

ARPM

MoU

Inelasticity of MoUs to fall

in ARPM (tariffs)

High Low

diversification of reliance group

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