Advantage Reliance Communications

SPECIAL REPORT

While Tata Tea can be seen as a low risk low return player, Reliance Communications is a high beta stock with potential to outperform.

Come September 1, Anil Ambani owned Reliance Communications (RCom) will replace Tata Tea in the Nifty index. And index fund managers will be busy realigning their portfolios according to the revised listing and weightages.

As an independent active investor, should you follow the same rule too? Even as the tea major is being thrown out of the index for not meeting certain technical requirements, scores of analysts vouch for the sound fundamentals of the stock.

With steady growth in both the domestic and international markets, strong brands and a dynamic management, Tata Tea still remains a stock to hold for the long haul. But if you are looking for fast track growth, may be, Reliance Communications offers a better ringtone. 
 

WHO'S IN, WHO'S OUT
	Entry	Exit
CNX Nifty &CNX 100	Reliance Communications	Tata Tea
CNX Midcap	Reliance Capital	Bank of India
	Kotak Mahindra Bank	Industrial Development Bank of India
	Jaiprakash Associates	Patni Computers Systems
	Indian Hotels Company	Union Bank of India
CNX Service Sector	Andhra Bank	Reliance Communications

Growth=Reliance
"Between the two, I would definitely choose Reliance Communications," says Mitesh Shah, AVP sales, Brics PCG.

"There can be many other commodity players. I find Reliance Communications and Bharti Airtel as the only two good telecom players. This flagship company of Anil Ambani not only shows good subscriber numbers, but also shows potential for the future" he adds.

But Deepak Jasani, head-retail research, HDFC Securities says, "The two stocks can be seen in a different light. Tata Tea can be seen as a low risk, low return player.

Reliance Communications is a high beta stock but has the potential to outperform. The company is in a sector that grows at 6-10 per cent per month sequentially. Thus, people who love risk should buy Reliance Communications."

The total net additions, including both GSM and CDMA, were up 55 per cent in June to 10.3 lakh for Reliance Communications. The net additions in CDMA itself increased by 68 percent to 8.73 lakh.

This takes the total subscriber base to 2.25 crore. In terms of market share, the company shares a joint leadership position with Bharti Airtel. Both had a market share of 21 per cent in June.

In the CDMA space, Reliance Communications commands a 68 per cent share. "A growing subscriber base and average revenue per user augur well for the company," adds Jasani.

Analysts also see great value coming in from the IPTV business. The company has tied up with Microsoft to provide the platform for this venture. Analysts see improving financial disclosures and clarity on rollout of GSM networks as key re-rating triggers.

Tata Tea: slow yet steady
Tata Tea, until now, was part of a mature industry and thus did not show great growth rates. Also, tea consumption itself is witnessing single digit growth rates. But now the company is likely to display a complete turnaround.

The company is expanding both its geographic reach and product portfolio. Tata Tea is also making acquisitions which will enhance its current portfolio.

Around 88 per cent of Tata Tea's revenues comes from sale of branded tea. The company has divested its plantations business and the thrust is on branded and faster-growing herbal and green tea segment.

Tata Tea is investing in high-growth areas like flavoured teas and new product formats like liquid concentrates to reduce dependence on black tea and drive growth in Tetley. The company has acquired US-based Good Earth and a Czech company Jemca.

Jemca is the market leader with a share of 27 per cent. The company is eyeing other such acquisitions. About 9-10 percent sales come from the non-black tea segment and as per analysts this share will grow going forward. These teas are sold on the herbal health platform and are witnessing an increasing demand.

The realisations in this segment too are 2-3 times as compared with the realisations in black tea. Analysts also expect the new product mix to boost operating margins.

Recently, the company's 51 per cent subsidiary, Tata Coffee acquired US-based Eight O'clock Coffee. Eight O'clock will add a lot of brand value to the coffee business and enable the company to fetch better realisations, just as was the case with the acquisition of Tetley. 
 

SHARES PURCHASED IN JUNE
TATA TEA		RCOM
Fund House	No. of Shares	Fund House	No. of Shares
Reliance	7,64,571	Reliance	49,45,174
Sundaram	1,64,467	Templeton	41,00,000
Magnum	73,899	SBI	24,26,475
HDFC	70,257	HSBC	23,63,949
Tata	33,600	Magnum	15,21,450
ING Vysya	25,014	Sundaram	13,09,150
JM	5,073	UTI	7,40,410
Sahara	2,400	Franklin	6,44,960
UTI	2,108	Tata	6,05,001
Pru ICICI	278	DSP-ML	5,81,933

Valuations
As far as Reliance Communications is concerned, analysts feel that the stock is trading at highly attractive levels and is a good buy. Analysts feel that the stock can be an outperformer.

"The stock has the potential to reach Rs 340-350 within a year," says Sumeet Rohra, an analyst at Antique Stock Broking. "At Rs 220-225 the management increased their stake in the company by 3-4 per cent which further builds confidence," he adds.

Tata Tea is trading at 24.4 times its FY06 earnings. Based on SSKI estimates, the stock trades at 13.7 times and 12.2 times its expected FY07 and FY08 earnings respectively.

At the current price of Rs 258.6, Reliance Communications trades at 119.2 times its FY06 earnings. Based on CLSA estimates, the stock trades at 21.8 times and 13.2 times its expected earnings of FY07 and FY08.