We upgrade Reliance Communication (RCom) to ?equal-weight? from ?underweight? with a price target of R56 per share. We believe that the company will benefit from the overall improving sector dynamics, as average revenue per minute (ARPMs) and data volumes rise, competitive intensity reduces and capex comes under control.

RCom?s valuations are attractive after the 40% underperformance in the last 12 months with FY14e EV/Ebitda of 6.1x and P/CEPS of 2.3x, and is also the least impacted among the telcos from regulatory payments for spectrum renewal and excess spectrum. Its capex is the lowest in the sector at ~7% of revenues. However, its high gearing at ~5x net debt to Ebitda remains a key concern.

In our view, trends in ARPMs in the industry have reversed over the last few quarters as all operators have started increasing the tariffs in their promotional packages across various circles in a staggered manner.

RCom, too, increased its base tariff by 25% to 1.5 paise per second from 1.2 paise per second in September 2012. Moreover, strong data volume growth and reduction in competitive intensity will also benefit RCom. Telewings, Aircel, Sistema, and Tata have reduced coverage, implying a boost to voice traffic growth and a bigger slice of revenue for the bigger players.

The management has guided for a capex of R1,500 crore for FY13, which equates to only ~7% of revenues and is down from a peak of 113% in FY08. Thus, we believe that the peak capex for the company is now behind us. Spectrum payment is far away and staggered. There is still a lot of time for licence renewal for RCom, with only seven circles coming up for renewal in December 2015. Moreover, the excess spectrum charges for RCom are quite meagre, which we estimate at only R140 crore or R1 per share compared to other incumbents.

Recent reports suggest RCom is in the process of discussions with RIL for sharing of its tower infrastructure. If such a deal materialises, we believe that it will be a significant positive for RCom. In our bull case, we have assumed an EV/tower of $106,000 per tower, in line with our base case assumptions for Bharti Infratel. This increases RCcom?s value by R49 per share.

Reliance Communication, revenue, spectrum