How the times have changed. In January 2002, when Bharti Tele-ventures Ltd (BTL) made its initial public offering of shares through a book-building exercise, there were hardly any takers.

In fact, the retail portion of the issue remained under-subscribed and the book runners were working overtime to convince institutions to buy into the stock.

The rest of course, is history. Today, Bharti Tele is the market leader in the Indian telecom space with an enviable 21.5 per cent share and a market-capitalisation of Rs 73,000 crore (Rs 730 billion).

But playing catch up is Reliance Communication Ventures (RCVL), now owned by the Anil Ambani group, which listed on the stock exchanges last week at a price of Rs 291.

RCVL is a player in the CDMA space, unlike BTL which operates on a GSM platform. Though a late entrant to the telecom arena, RCVL has in just about four years, managed to build up an impressive subscriber base and boasts one of the largest CDMA deployments in the world.

At the current price, RCVL's market capitalisation is approximately Rs 36,690 crore (Rs 366.90 billion). However, this number does not capture the entire value of the telecom business housed in RCVL, because it does not own the entire stake in its three subsidiaries.

If one were to estimate the value of the telecom business owned by the ADA group, it would be approximately Rs 55,000 crore (Rs 550 billion). But according to analysts' estimate, the equity value of RCVL should be in the region of Rs 47,000 crore (Rs 470 billion) or Rs 385 per share, based on the current equity.

The fair value for Bharti is estimated at around Rs 68,000 crore (Rs 680 billion).

Based on current prices, however, the market is according a discount of 33 per cent to RCVL for a business that is more or less similar in size. In terms of EV/EBITDA, the discount would be around 8-10 per cent, while on an EV/Subscriber basis the discount is around 15-20 per cent.

The reason for the discount could lie in BTL's greater operating efficiency--BTL's operating profit margin for Q3FY06 is far higher at 37 per cent compared with 26 per cent for RCVL. The not so large discount builds in expectations of improving margins for RCVL.

In fact, RCVL's operating margins have been improving over the quarters --it was 6.6 per cent in Q1FY06 and 14.9 in Q2FY06. On the other hand, BTL's margins have stagnated at these levels. However, despite some pressure from lifetime pre-paid plans, analysts believe there is room for an expansion in BTL's margins.

RCVL's overall financials are improving --- the company posted a net profit of Rs 310 crore (Rs 3.10 billion) for December quarter compared with losses in the previous two quarters.

However, it must be remembered that the infocomm business has written-off Rs 4,400 crore (Rs 44 billion) -- a staggering amount by any yardstick. The management has indicated that these losses are on account of bad debts, handsets and penalties paid to the government.

As a result of this, the net worth of the company will be reduced to Rs 11,000 crore (Rs 110 billion). In March last year, the company undertook a major clean-up of its subscriber base.

The market is probably waiting for a simpler corporate structure to emerge, something that RCVL chairman, Anil Ambani, has indicated would happen in the near future. What would be ideal is for RCVL to own 100 pr cent of all three businesss, but that could also mean some equity dilution which in turn would dilute the earnings.

Currently, The ADA group holds 37 per cent in RCVL apart from stakes in the three subsidiary companies. A restructuring would mean that the promoter could exchange shares in subsidiary companies for those in the holding company i e RCVL.

This could result in the promoter ending up with a considerably higher stake in RCVL. Analysts estimate that the equity dilution could be as much as 60 per cent and the equity capital would stand at nearly 200 crore (Rs 2 billion) shares, up from 122.3 crore (Rs 1.223 billion) shares currently.

Currently, RCVL has stakes in three subsidiaries, Reliance Communications [Get Quote] Infrastructure, Reliance Infocomm Ltd and Reliance Telecom Ltd. The public holding in RCVL is 63 per cent with the ADAG group holding the remaining 37 per cent.

The effective public holding in RCIL, which holds the entire network excluding the mobile network, is 28.3 per cent. The public holding in Reliance Infocomm, which operates in the wireless, consumer and enterprise broadband spaces is 41.4 per cent while the public shareholding in Reliance Telecom, is 22.5 per cent.

Foreign shareholders currently hold 30 per cent stake in RCVL which could ideally go up to 74 per cent. However, since the analysts estimate that post restructuring, the public shareholding could stand reduced to 40 per cent, there would be limited scope for an increase in the foreign holding.

While foreign shareholders can pick up more shares given the larger equity base, their proportion of the total shareholding would stand reduced. Analysts say that the liquidity overhang may depress share prices temporarily.

Wireless: Both firms have a pan-Indian exposure and are building up their subscriber bases at a fast pace. In February, for instance, Reliance Infocomm added 0.8mn subscribers whereas BTL added 1.07mn.

However, compared with Bharti, RCVL's gross and net ARPUs are at a discount of 12 per cent and 19 per cent as of Q3FY06. Also, while the minutes of use (MoU) for RCVL is 33 per cent higher, the revenue per minute is lower by 34 per cent.

Revenues for RCVL are a trifle higher but it is not immediately clear, how handset sales are accounted for and whether there is a cash subsidy for handsets at the entry level. Besides, Bharti's enterprise business today is larger.

However, there is ample scope for RCVL to scale up since it's network can accommodate 30mn subscribers. Ambani has observed that margins for the wireless business, which are currently at around 31 per cent, should settle at mid-30 levels as the operations are scaled up further.

Analysts believe that both Bharti and RCVL will consolidate their businesses in FY07 and hold on to their market shares though Bharti's margins would still be higher.

Broadband: RCVL has built up a network of 60,000 km of optic fibre and will offer metro ethernet connectivity for it's broadband initiative. It is also looking to offer IP- based connectivity and provide high-end content.

The broadband business offers enormous potential given that penetration in the country today is just ten per cent of internet connections. RCVL will of course have to contend with competition not just from Bharti, which also has big plans, but also from other telcos such as BSNL and MTNL [Get Quote] which have rolled out broadband products, bundling subscriptions with PCs at attractive rates. Ambani believes that margins should sustain at the current levels of 19-20 per cent.

Global business: RCVL claims to have a 46 per cent share of the total international long distance business. RCVL's long distance revenues are far higher than that of Bharti's.

Ambani observes that the margins at 11 per cent are high and globally comparable and should remain at these levels. RCVL houses Flag Telecom, which has a 52,000 km global network and makes profits at the operating profit level.

What we said Can shareholders rely on the Ambanis? November 29, 2004 ". . . if the issue of management control has to be sorted out, businesses may have to be divided in a manner acceptable to both the brothers. The ownership may have to be realigned in tune with the businesses they manage. The ownership and management restructuring, if it does materialise, could unlock value for shareholders eventually. According to analysts' estimates, a fair value of Reliance's share, based on a sum-of-the-parts analysis, should be around Rs 600-675. The value of other businesses � which include the gas and telecom businesses, apart from treasury and investments � is reckoned to be around Rs 250-300... "Studies show that stocks of spun-off companies and those of their former parent companies significantly and consistently outperform market averages. RIL's [Get Quote] mega plans August 8, 2005 ".....the spin-off of RIL's stakes in the group's telecom, power utility and financial services businesses will unlock value for shareholders. Even as the RIL share price has already run up substantially in the anticipation of the news, there could be more upsides, though it may or may not happen immediately.

What happened Pretty much in line with what we said, for the shareholders of Reliance Industries, the split in the company has proved to be really profitable. After hitting a low of Rs 480 in mid-December 2004, exactly a month after the elder Ambani brother Mukesh went public with the ownership issue, the stock has risen 136 per cent. During the same period, the stock market barometer Sensex gained 68 per cent. Since every shareholder of RIL has now got an equal number of shares held in RIL in the four new companies � Reliance Communications, Reliance Capital [Get Quote] Ventures, Reliance Energy [Get Quote] Ventures and Reliance Natural Resources [Get Quote] � the value per share in RIL now stands at Rs 1,132, adding the five parts. RIL, combined with the four offsprings, now commands investors wealth of Rs 1,50,967 crore (Rs billion). Even since the immediate pre-split price of Rs 732, the stock has appreciated 22 per cent against the Sensex gain of 16 per cent.

Do you want to discuss stock tips? Do you know a hot one? Join the Stock Market Discussion Group.