Buy Rel Comm with a target of Rs 385: Merrill Lynch

Merrill Lynch is bullish on Reliance Communications and has raised its price target to Rs 385.

The Merrill Lynch report on Reliance Communications:

Unambiguous capex focus on GSM

“We met with Reliance Communications (RCom) & understand that their capex strategy is now unambiguously focused on GSM. RCom indicated that only a small minority of their wireless capex will be towards CDMA, going forward. At this point RCom expects to keep its CDMA network, and will build further on CDMA only where it is most cost effective. The company expects its capex on GSM to be similar versus what it might have otherwise been on CDMA for supporting growth.”

Execution visibility is still some quarters away

“RCom expects to receive requisite GSM spectrum by early 2007. While GSM operations will require more cell-sites/base stations, the capex and opex impact is expected to be mitigated by the growing trend of co-location in the industry. Given that both BSNL and RCom currently have no tenants on their sites, there could be significant opportunity for infrastructure sharing between them. Overall, we think the execution of RCom’s GSM expansion will become visible 4-5 quarters hence.”

FALCON impact to kick in from 3Q FY07 onwards

“In the non-wireless segment, RCom commissioned its FALCON subsea cable in Sep ’06 & positive contribution from the same should fully kick-in from 3Q FY07 onwards. In the broadband biz, RCom continues to focus on enterprise services. While development work on IPTV is underway, the company is not looking to launch IPTV as a mere substitute for cable.”

Raising price target to Rs 385

“We are raising our price target on RCom to Rs385 (vs Rs345 earlier). While execution risks still remain, visibility on the company’s capex strategy is relatively better (unambiguously focused on GSM). Hence, we have narrowed our DCF discount to ~5% vs ~10% earlier. Bharti remains our top pick in the sector.”