RELIANCE COMMUNICATIONS

CORPORATE ANALYSIS
Team Members: Gaurav Bansal Prachi Khaitan Raghvendra Raghao Piyush Upadhyay A006 A035 A045 A061

RELIANCE COMMUNICATIONS
Dual Technology Advantage (GSM + CDMA) Dual Technology Advantage (GSM + CDMA) Pan India Voice and Data network 3G license in 13 circles (highest number of circles by single operator) Data leadership (3G HSD & 1x) Data leadership (3G, HSD & 1x) Widest footprint ofwireless broadband Widest footprint of wireless broadband 50k Towers & 200k+ slots, unique ability to provide space & connectivity

Wireless

Global

Largest Fiber Optic cable footprint (190,000 KMs) Blue-chip global clients One stop shop for all large corporates and SMBs for communications, networking and IT infrastructure needs Amongst Top 10 Data Centers in the world and # 1 in India

SUSTAINABILITY ANALYSIS(1/2)

100% resolution of stakeholder complaints and 99% resolution of customer complaints

The Company strictly do not hire Child labour, forced labour or involuntary
labour.

No case reported of Sexual harassment . No discrimination reported in the recruitment process of the Company. It has launched initiatives for reduction of Carbon Emission by deploying High Efficient Batteries and Energy Conservation measures such as Sourcing Power through Green resource.

It has supported community development, education, healthcare, livelihood

support, rural development, environment safety initiatives . Total expenses incurred in these activities was Rs. 2.59 cr during the year 2012-13.

SUSTAINABILITY ANALYSIS(2/2)
CSR Initiatives by RCOM

PRAYAG-Providing Grassroot Advancement to Youth Aspiring Growth Project Swavlambhan Reliance ASHA Blood Donation Campaigns Little Genius

Green Mile
Employee Volunteering Social Awareness Campaign

MD&A AND DIRECTORS REPORT ANALYSIS

Positive Aspects Negative Aspect
Mobile Number Portability (MNP) Threat Increase in tariffs Massive growth of smart phones Rising Power and fuel cost, High Landing access charges Higher activity of cable MSO Changes in foreign currency exchange rate and interest rates Rapid Technological Changes, 4G roll out Rural Penetration Increasing CAPEX

Launch of new initiatives -Launch of All Share Post-paid Plan , Launch of New Reliance 3G Tab Partnership with Lenovo for launch of Smart Tablets and Phones supporting CDMA and GSM Launch of exclusive Whatsapp plan Due to cancellation of 122 licenses , 8 players have either shut down or reduced operations. So competition has reduced Massive growth of smart phones Data and Wireless Broadband Global Enterprise Business Mandatory Digitalization

CORPORATE GOVERNANCE REPORT

Chairmans Role has been separated from executive in managing day to day business affairs The Board members are periodically given formal orientation and training with respect to the Companys vision, strategic direction, core values including ethics, corporate governance practices, financial matters and business operations. None of the directors is related to any other director. None of the directors has any business relationship with the Company. As per the Company, None of the directors has received any loans and advances from the Company during the year. More or less in every board meeting and in AGM all the directors were present. None of the directors hold directorships in more than 15 public limited companies. It complies with the listing requirements of Luxembourg Stock Exchange and Indian Exchanges. It has functional Risk Management , Internal Audit Committee, and has formulated Whistle Blower Policy.

A critical Observation : Every Important committee has the same set of personnels with rotating chairman power.

KEY FINANCIAL
Particulars Total Income from Operations Expenses Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) Depreciation Finance Costs Other income Exceptional items PBT Tax PAT (before Minority Interest and share of Associates) Profit/ (loss) attributable to Minority Interest Share of profit / (loss) of Associates Consolidated Profit / (Loss) for the year Consolidated FY 2009 FY 2010 22,250.55 13,650.98 8,599.57 3,607.70 -506.95 697.9 6,196.72 -51.79 6,248.51 205.17 -1.59 6,044.93 21,496.38 14,311.79 7,184.59 3,746.52 -1,186.33 635.9 37.47 5,222.83 445.39 4,777.44 119.25 3.19 4,655.00 FY 2011 22,430.35 14,019.33 8,411.02 6,503.83 1,072.23 677.28 -5.37 1,517.61 11.79 1,505.82 150.27 9.9 1,345.65 FY 2012 19,677.00 13,892.00 5,785.00 3,978.00 1,630.00 705 882 -106 988 61 -1 928 INR Cr. FY 2013 20,561.00 14,619.00 5,942.00 3,845.00 2,499.00 1,217.00 815 71 744 73 -1 672

FINANCIAL TRENDS(1/2)
Profitability Analysis
45 40 35 30 25 20 15 10 5 0 Operating Profit Margin Ratio Net Profit Margin Ratio

FY 2009 38.65 28.08

FY 2010 33.42 22.22

FY 2011 37.5 6.71

FY 2012 29.4 5.02

FY 2013 28.9 3.6

Efficiency Analysis
16 14 12 10 8 6 4 2 0 FY 2009 10.47 14.3 FY 2010 9.74 10.74 FY 2011 13.87 3.72 FY 2012 8.61 2.69 FY 2013 5.2 2

ROCE ROE / RONW

FINANCIAL TRENDS(2/2)
Liquidity Analysis and Credit Analysis
7 6 5 4 3 2 1 0 Current ratio Interest coverage Debt to equity ratio

FY 2009 0.7 5.9 0.5

FY 2010 0.6 5.6 0.4

FY 2011 0.5 2.3 0.5

FY 2012 0.6 1.5 0.8

FY 2013 0.5 1.3 0.8

Valuation Analysis
45 40 35 30 25 20 15 10 5 0

Earnings Per Share Basic Earning Per Share - Diluted Price to Earnings

FY 2009 28.05 28.05 6.22

FY 2010 22.55 21.62 7.9

FY 2011 6.52 6.25 27.94

FY 2012 4.5 4.41 39.59

FY 2013 3.25 3.25 16.98

PEER COMPARISON(1/2)
Market Cap (Rs. in Cr.)
140,000.00 60 50 40 30 20

P/E

120,000.00
100,000.00 80,000.00 60,000.00 40,000.00

10
20,000.00 0.00 Bharti Airtel Idea Cellular Rel. Comm Tata Comm 0 Bharti Airtel Idea Cellular Rel. Comm Tata Comm

EPS (INR)
7 6 5 2.5 4 3 2 1 0 Bharti Airtel Idea Cellular Rel. Comm Tata Comm 4 3.5 3

P/BV

2
1.5 1 0.5 0 Bharti Airtel Idea Cellular Rel. Comm Tata Comm

PEER COMPARISON(2/2)
D/E
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Bharti Airtel Idea Cellular Rel. Comm Tata Comm 12 10 8 6 4 2

ROE (%)

0
Bharti Airtel Idea Cellular Rel. Comm Tata Comm

EV/EBITDA
12 10 8 6

ROCE (%)
14 12 10 8 6 4

4
2 0 Bharti Airtel Idea Cellular Rel. Comm Tata Comm

2
0 Bharti Airtel Idea Cellular Rel. Comm Tata Comm

CRITICAL OBSERVATIONS (1/6)

AS 5 : Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
Amount Withdrawn from general reserves Pending Clarification from ICAI Emphasized by the independent auditor

Particulars INR Cr 672 -1857

Items
Exchange rate variations Feul Cost Depreciation on Exchange losses Capital Work in progress written off Amortization of foreign currency monetary Items Transalation Difference Account(FCMITDA) Deffered Tax liability Total Amount Withdrawn from General Reserves

INR Cr
203 62 275 325

Reported PAT Impact of Withdrawal

Actual PAT

-1185

638

EPS
Reported

INR
3.26 -5.74

354

Actual

1857

Unhealthy corporate practice as the company is window-dressing to present a rosy picture

CRITICAL OBSERVATIONS (2/6)

Observation on Investigations by CBI on a litigation against a director of companys subsidiary and the subsidiary company
Auditors opinion is not qualified in respect of this matter The disclosure has been given in Note 2.35 Contingent Liabilities A writ petition in Honble High Court of Delhi Objection by CBI in Honble Supreme Court

No quantification of any amount

The same has not been qualified by the auditor

A disclosure for non-quantification has not been given

CRITICAL OBSERVATIONS (3/6)

AS 29 Provisions, Contingent Liabilities and Contingent Assets

Access Deficit Charges The Honble Telecom Disputes Settlement and Appellate Tribunal (TDSAT) confirmed a liability.

The Company created a provision of Rs 540 Cr

The company has correctly accounted this item as a provision instead of a contingent liability.

CRITICAL OBSERVATIONS (3/6)

The DOT has issue a demand of Rs 1932 Cr as Spectrum Charges for certain violations The company has filed a petition in Honble High Court of Kolkata The Notes to account does not disclose whether the legal advice states the incident as Probable or Not Probable

CRITICAL OBSERVATIONS (5/6)

Borrowing Cost AS16 4(e)

It covers exchange differences on the principal amount of foreign currency borrowings to the extent of the difference between interest rates on local currency borrowings and interest rates on foreign currency borrowing

This component of foreign exchange differences is considered to be in the nature of borrowing costs
The company has capitalized an amount of Rs 992 Cr from the General Reserves instead of the P&L, thus inflating the profit figure The auditor has not raised any point on this aspect

CRITICAL OBSERVATIONS (6/6)

Incorporation of Para 46A of AS 11 The effects of Changes in Foreign Exchange Rates

Exchange Differences arising on reporting of long term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they related to acquisition of depreciable capital assets, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset

IS THAT ALL???

The following items have ALSO been withdrawn from the General reserves
Items INR Cr

P rovision for business restructuring Additional depreciation arising on fair value of assets Additional depreciation of subsidiaries

99 1264 123

Total Profit inflation

1486

Addition of Provision of business restructuring

Other Income 550 Cr ????? Why not adjust it against the General Reserves now?

ACCOUNTING STANDARDS VIOLATION

Abused AS 21: In intra group asset sales, assigns higher fair value to its assets books revaluation gains subsequently allotted to general/specific reserves used to offset expenses, inflates value of Assets and boost up Book equity. Violated AS 12: Accounting for Gov Grants by following methods: Deduction from Asset Value Grants treated as deferred income Recognized the entire subsidy from the USOF as other operating income.(Source: Page 15, Annual Report FY07)

Violation of AS 9: FY11, boosted its EBITDA by R 2,530C, based on a legal opinion, and changed its policy of revenue recognition from a deferral basis over the term of the contract, to license income based on activation of circuits for IRU contracts (Source: Annual Reports. FY-11)

Change In Accounting Policy: RCom changed its accounting policy associated with depreciating its electronic equipment to 18 years, from 10 years earlier

OTHER OBSERVATIONS

In 2005 Demerger of RCom from RIL took place, ownership of promoters rose from 38.27% to 63% in RCom, under the guise of improving shareholder value. During the formation of RCom, RIL shareholders invested Rs 13,675Cr into the business, compared to Rs 186Cr by management, RIL minority shareholders declined to 37% from 61.73%

As per the cash flow statement for FY10 the Company incurred Rs.1,441Cr in interest expenses associated with its debt, on the P&L it magically turned into income of Rs.1,093Cr
Written off cash fuel expense from Non cash reserve To avoid paying capital gains taxes in India, the Company booked income on the sale of shares in a subsidiary RTIHL, through an offshore trust.

ACTIONS AFFECTING PERFORMANCE AND MARKET CAPITALIZATION

Rcom raised call rates - by an average about 4% in April-June quarter

Effect: Growth in revenue per minute (RPM) and average revenue per user (ARPU)

Rcom Ltd to demerge Real Estate Assets into a separate listed company called Reliance Properties. Shareholders will be allotted Reliance Properties shares for free in the ratio 1:1.

Effect: Share price 31.5 month high of Rs 148 on BSE

Completed full repayment of two syndicated ECB loan facilities of USD 500 million each, during the quarter ended June 30 2013,

Effect: Shares price rose 5.50 percent to touch an early high of Rs 124.60

RCOM & Reliance Jio entered into cooperation for tower sharing, Intercity fibre, Intra city fibre in return for Rs 1200 crores and access to optic fibre

AUDITORS REMUNERATION?
Bharti Airtel Rs 6.6 Crores

Reliance Communication

Rs 9 Crores
Tata Communication Rs 1.4 Crores Idea Cellular Rs 3.8 Crores

REFERENCES

Annual Report http://www.rcom.co.in/Rcom/aboutus/ir/ir_financials.html Investor Presentation http://www.rcom.co.in/Rcom/aboutus/ir/ir_presentations.html Business Sustainability Report http://www.rcom.co.in/Rcom/aboutus/ir/pdf/Business_Respons ibility_Report.pdf http://www.indiainfoline.com/ http://www.moneycontrol.com/stocksmarketsindia/ Outcome of AGM http://www.moneycontrol.com/livefeed_pdf/Aug2013/Reliance _Communications_Ltd_270813.pdf Capital Line Database Peer Annual Reports : http://www.bseindia.com/

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