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RELIANCE

COMMUNICATIONS LTD

India Resea

Neera j Mon

nmo nga@veritasc orp.c

Jaisha nkar Krishna mur

ja i@ve ritasa isa .c

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A House of Cards

Delayed Release

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TABLE OF CONTENTS

A House of Cards .................................................................................................................................................. 1

Ve rita s Rec ommend atio n .................................................................................................................................. 3

Fina nc ia l Sta te ments are Unre liab le ................................................................................................................. 3

Reve nue and EBITDA Past Untrustworthy , Future Uncerta in ...................................................................... 6

Interest Coverage Ra tio to Worsen .................................................................................................................. 7

Ac co unting to the Resc ue in the Past .............................................................................................................. 8

Lowe r Ca p ita l Expe nd itures Co mp romise Co mp et itive Position ................................................................. 9

Asset Dive stiture Va luing Ov erseas Operations ......................................................................................... 11

Flag Irela nd Sub sidiary of Flag Telec om Has Qua lified Aud it Op inion ................................................................ 13

Va lua tion of Flag Tele com Best C ase Estima te ...................................................................................................... 13

Flag IPO will Prov ide Relie f On ly to Sec ured Cred ito rs ............................................................................................. 14

Sale o f Tower Assets no t Immine nt .................................................................................................................. 15

Too Many Sellers on the Bloc k ...................................................................................................................................... 15

Likely Scenario Sa le o f Partia l Sta ke a t a Dimin ished Va lua tion o f $U.S.2.4 Billion ............................................ 16

Divestitu re of M ajority Sta ke in Towe r Assets will Result in Lowe ring EBITDA by 20% ............................................. 17

Un-Hed ge d Expo sure Increa sed Loa n Rep ayment Ob liga tions by Over $U.S.1.02 BN ....................................... 17

Competitive Position is Wea k in All Business Segments ............................................................................... 18

Why the Disc rep anc y in Sub sc ribe r Co unt? ............................................................................................................... 20RCO M Disadva ntaged on GSM Spec trum Hold ings ............................................................................................. 22

Lower Reve nue from Rural Are as ................................................................................................................................. 22

Diffic ult to Inc rea se Revenue without Incurring Ca pex ........................................................................................... 23

3G Ad option Ra tes are Quite Low; Sub sc ribe r Base Less 2% .................................................................................. 23

One Bright Spot: Wirele ss Broa dband is Sho wing Excellent Grow th ....................................................................... 23

RIL s 4G Plans Pose a Serious Threa t to RCo m`s Growing Revenue from Wireless Broa dband ......................... 24

Globa l Ente rprise Busine ss Unit ......................................................................................................................... 24

NLD Neg a tive Revenue Gro wth and Ma rket-sha re ............................................................................................... 24

Ac quisition of Yipe s Holding : No Headwa y in ILD or Ente rprise Broadband ......................................................... 25

Flag Telecom ................................................................................................................................................................... 25

Conc lusion ........................................................................................................................................................... 27

Append ic es .................................................................................................................................................. 28-34

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June 8, 2012 v

AHOUSE OF CARDS

Relianc e C omm unic ations Limited (RCom or the Com pa ny) is entering aphase of maximum uncertainty. In our view, macro-economic conditions inIndia are deteriorating at a rapid rate. Fractured policy making, high inflation,an uncontrollable fiscal deficit, in addition to a hyper-competitivetelec om munica tion business, are highly de trime ntal to the prospec ts of RCom.

Exceedingly high financial leverage, accompanied with debt repaymentob liga tions of a pproximate ly $U.S. 2.2B ove r the ne xt twenty-four months, a t atime when EBITDA in c ore b usiness op era tions is sta gnating, is a significa ntcha llenge for the mana gem ent team.

In order to tide o ver the c ash c runch, we be lieve that RCom has be en sc alingback its capital expenditures (capex) and has put assets on the block.Howe ver, given the we ak c omp etitive p osition of the Com pa ny in the Indianwireless sector, we believe that curtailed capex will be detrimental to theCompanys prospects going forward. We believe that RCom is at ad isadva nta ge in terms of its GSM spec trum position in most of its foo tp rint

compared to its peers, and to tide over its spectrum deficit the Companyneeds to incur higher capex to maintain quality of service. RCom has beendisproportionally affected by the entry of new players in the market and itsARPU has suffered mo re than its pee rs.

Som e o f our findings are a s follows:

1. Managements admission of a soft market for tower assetssubstantiates our assertion that buyers for Indian telecom assets aresc arce. We d o no t foresee any signific ant imp rovem ent in the to werma rket over the next 12-18 months, given the stamp ed e b y all playersin the telecommunication tower market in India to monetize assets.Moreover, we estimate that at best the Company can monetize itsRelianc e Infra tel ( RIF ) tow er asset a t a d iminished va lue of INR

12,500C ($U.S. 2.36B), co mp ared t o rumo rs in the m arketp lac easc ribing a va lua tion upwa rds of INR 22,500C ($U.S. 4.2B).

2. We are also skeptical of the Companys ability to reduce its financialleverage meaningfully by undertaking an IPO of FlagTelec om municat ion ( FLAG ), given tha t eq uity of RelianceGlobalcom Bermuda whose only assets is FLAG as per FederalCommunications Commission (FCC) Filings has been pledged byits holding company, Reliance Globalcom BV Netherlands, to securedeb t o f $U.S. 500M. There fore, our estima te of Flag s en terp rise va lueof $U.S. 891M, leaves very little deleveraging room for the ultimatepa rent RCom . As rep orted in the me dia the Com pa ny is planning tooff-load a 75% stake in FLAG, for which it will receive $U.S. 668M andthose proc eed s will be utilized to rep ay sec ured de bt.

3. We believe that the Companys accounting policies are whimsicaland do not provide a clear picture of the underlying operating andbusiness trends. We neither believe in the repo rted b oo k eq uity of theCo mp any nor in its repo rted fixed asset b ase.

4. Given significant exposure to un-hedged foreign currencydenominated loans, we find the risk management and governancepractices of the Company sub-optimal. Moreover, the write-off INR

Atimeof

maximumrisk

Towersalenot

imminent

FlagIPOnota

Panacea

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v June 8, 2012

950C ($U.S. 179.2M) in F11, which was advanced to a supplier,sugg ests either inco mp etenc e or c hic anery.

5. For F12 the Company reported a profit before tax profit of INR 882C($U.S. 166M), whereas in our norma lized estima te w e b elieve theCo mp any inc urred loss befo re ta x of INR 1,529C ($U.S. 288M)

Inco rpo rating a 50% go vernance disc ount to o ur ap proxima te eq uity value ofINR 30/sha re, we va lue the core business a t INR 15/ share, suggesting 77%do wnside from c urrent levels. The Co mp any ha s a te nde nc y to repo rt highlevels of o ther income which is not sustainable o n a long te rm ba sis, given thesignificant drop in its current cash balance. Furthermore, based on theCompanys inclination to book expenses to reserves and include otherincom e in its EBITDA, rep orted EBITDA is an unreliab le ind ica tor o f theComp anys op erating p rowess. Therefore we igno re other inc om e in ourvaluation.

RCom is a house o f Ca rds. Since our last repo rt on the Co mp any, the stoc k isdo wn a pproxima tely 32%. We b elieve there is significa nt ad ditiona l do wnside.

SELL.

Significantdebt

refinanceobligations

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