IBS Hyderabad

Sec – B

Project On Communication Industry

Reliance Vs Tata
Financial Management

Presented By:
Amit Agarwal
Deepinder Gogna
Sharad Soni
Vanshaj anand
Vivek Bansal
 Contents

1. Introduction
2. About the Companies
a. Reliance Communication Ltd
b. Tata Communications Ltd
3. Financial Data
a. Executive Summary
b. Equity Holding Pattern
c. Capital History Summary
4. Theoretical Concepts
5. Application of Concepts for Analysis
6. Observation and Analysis
7. Conclusion
8. Sources of Information
1.0 Introduction

The communication sector is amongst the fastest growing in the country. The
communication sector is predicted to emerge as the single largest sector of India's
economy with a 15 percent share of GDP by 2014-15. In India's transformation from an
agrarian to a services economy, communication is recognized as the fastest growing sector,
growing by 25.7 percent during 2001-08.

Seeing this communication revolution in India, we were inspired to select this sector for
our analysis. We have selected two major players in the communication sector in India,
namely, Reliance Communications Limited (ADAG) and Tata Communications Limited
(TGI). Another reason for selection of these two companies for our analysis is that both of
them control maximum market share in CDMA phones and also provide GSM services to a
wide range of consumers spread across the country. However, other major players in this
sector make their presence felt only in one of these areas.

The following report aims at understanding the concepts of Financial Management with
reference to calculation of risks, returns and cost of capital. We have prepared the report
with the following objectives in mind:

 Find out which among the two companies is riskier to invest

 Calculate the cost of Equity
 Relate the riskiness to the company-specific risk factors
 Calculate the Weighted average cost of capital
2.1 Reliance Communications Limited

About the Company

Reliance Communications was set up as Reliance Infocomm in 1999 and from 2000
onwards laying of optical fibers started in Maharashtra, Gujarat and Andhra Pradesh.
Reliance Infocomm was inaugurated in 2002 and first of interconnect (POI) was
established in New Delhi in same year. Also in that year, Reliance Communications
commissioned their 1st optic fiber backbone. In 2005, this company launched global
roaming facility and CDMA services. Reliance Communications was formed in 2006 and
listed in Bombay and National stock exchanges.

Reliance Communications is the flagship company of the Anil Dhirubhai Ambani Group
(ADAG) of companies. Listed on the National Stock Exchange and the Bombay Stock
Exchange, it is India’s leading integrated telecommunication company with over 85 million
customers.

RCOM has established a pan-India, next generation, integrated (wireless and wireline),
convergent (voice, data and video) digital network that is capable of supporting best-of-
class services spanning the entire communications value chain, covering over 20,000 towns
and 450,000 villages, and growing.

Reliance’s constant endeavour is to achieve customer delight by enhancing the productivity

of the enterprises and individuals it serve. Reliance was instrumental in harnessing the
true power of information and communication, by bestowing it in the hands of the common
man at affordable rates.

Vision

“We will leverage our strengths to execute complex global-scale projects to facilitate
leading-edge information and communication services affordable to all individual
consumers and businesses in India.
We will offer unparalleled value to create customer delight and enhance business
productivity.
We will also generate value for our capabilities beyond Indian borders and enable millions
of India's knowledge workers to deliver their services globally.”
Services

Reliance’s business encompasses a complete range of telecom services covering mobile and
fixed line telephony. It includes broadband, national and international long distance
services and data services along with an exhaustive range of value-added services and
applications. The Company’s operations are classified into four business segments:

 Wireless
 Global
 Broadband
 Others (unallocated)

Performance

Reliance Communications Company's total revenue amounted to Rs.35, 260 million in

2005- 2006 and the next year, this figure stood at Rs.45, 785 million. The net profit of the
company amounted to Rs.7, 023 million and the next year, this figure increased to Rs.13,
046 million. This shows that the company Reliance Communications Limited's total
revenue and net profit has registered a significant growth in one year. The company is
listed on the Bombay Stock Exchange and National Stock Exchange. The company Reliance
Communications Limited added a record number of subscribers in December 2006 that is
1.4 million.

The company Reliance Communications Limited's market capitalization reached the top
with Rs.1 lakh crore on the Bombay Stock Exchange in February 2007. The company has
bagged the E- Governance project of the West Bengal government in May 2007. The
company Reliance Communications has won the Frost and Sullivan Market Leadership
Award in October 2005 and also the CDMA Industry Achievement Award for International
Leadership in October 2004. This shows that Reliance Communications has been doing
very good work that has been recognized by the industry. And this is the reason that the
company has received so many awards.
Rating information

Ratin Agenc Rating

Month Instrument g y Amount Grade status
(Rs.
Crore)
-
Investmen Initial
Jun 2008 Bank Loan LAAA ICRA t Rating
Investmen Initial
Jun 2008 Bank Loan A 1+ ICRA t Rating
Apr Bank limit - Non-Fund Investmen Initial
2008 based LAAA ICRA 20156 t Rating
Apr Bank limit - Non-Fund Investmen Initial
2008 based A 1+ ICRA 7408 t Rating
Nov Investmen Reaffirme
2007 Short Term Debt A 1+ ICRA 2000 t d
Nov Investmen Reaffirme
2006 Short Term Debt A 1+ ICRA 1000 t d

Subsidiaries

Reliance Communications Infrastructure Ltd.

Reliance Gateway Net Ltd.
Reliance Infocomm Infrastructure Pvt. Ltd.
Gateway Systems (India) Ltd.
Reliance Infoinvestments Ltd. [Merged]
Reliance Webstore Pvt. Ltd.
Reliance Telecom Ltd.
Reliance Infocom B V.
Champion Properties Pvt. Ltd.
Reliable Internet Services Ltd. [Merged]
Reliance Infocomm Ltd. [Merged]
Netizen Rajasthan Pvt. Ltd.
Reliance Mobile Ltd.
Reliance Infratel Ltd.
Matrix Innovations Pvt. Ltd.
Reliance Infocom Inc.
Reliance Communications (U K) Ltd.
Reliance Communications Inc.
Reliance Communications Intl. Inc.
Yipes Holding Inc.
2.2 Tata Communications Limited

About the Company

Tata Communications Limited, formerly known as Videsh Sanchar Nigam Limited or VSNL,
is India's largest telecommunication company in international long distance, enterprise
data and internet services. Part of the Tata Group, Tata Communications is based in
Mumbai and has operations in over 80 cities spread across 40 countries.

In 1986, VSNL was formed as a Government of India-owned company. In 2000, Tata Group
acquired controlling stake in VSNL which was later expanded to 46%. In February 2008,
VSNL was renamed as Tata Communications Limited.

Tata Communications is a leading global provider of a new world of communications. With

a leadership position in emerging markets, Tata Communications leverages its advanced
solutions capabilities and domain expertise across its global and pan-India network to
deliver managed solutions to multi-national enterprises, service providers and Indian
consumers.

Through its subsidiary Tyco Global Network, it is also one of the world's largest submarine
cable bandwidth providers and has the world's largest network of submarine cables. Other
subsidiaries of Tata Communications include VSNL International Canada, formerly known
as Teleglobe while it is the majority share-holder of Neotel, South Africa's second national
operator (SNO) for fixed line telecommunication services.

Tata Communications Limited is listed on the Bombay Stock Exchange and the National
Stock Exchange of India and its ADRs are listed on the New York Stock Exchange. (NYSE:
TCL).

Vision

Deliver a new world of communications to advance the reach and leadership of our
customers.

Invest in building long-lasting relationships with customers and partners and lead the
industry in responsiveness and flexibility.
Services

Tata Communications Limited and its subsidiaries provide integrated telecommunications

solutions in India and internationally. The company operates in three segments:

 Wholesale Voice
 Enterprise and Carrier Data
 Other Services.

The Wholesale Voice segment provides international long distance and national long
distance voice services.
The Enterprise and Carrier Data segment offers corporate data transmission services. It
also offers mobile signaling services, such as signal conversion and managed roaming
services; ethernet services; and Internet protocol and managed services, including Internet
telephony, multi protocol label switching based virtual private networks, Internet access,
managed hosting, collaboration and conferencing services, managed security services, and
other professional services.
The Other Services segment provides global roaming, Internet, virtual private network, and
data centre services. This segment offers various Internet services, such as connectivity,
messaging, Internet telephony, and a range of content services.

Performance

During the year, 2007-08, the Company earned a total revenue of Rs. 34.65 billion
compared to Rs. 39.58 billion during the previous year. Profit before tax for the year was
Rs. 4.49 billion, against Rs. 7.12 billion in the previous year. Profit after tax was Rs. 3.04
billion compared to Rs. 4.68 billion in the previous year.

On a consolidated basis, for 2007-08, the Company’s total income was Rs. 85.37 billion,
with an EBIDTA of Rs. 8.45 billion and profit before tax and exceptional items of Rs. 1.60
billlion.

During the year 2007-08, the Company completed the integration of its major international
acquisitions, TGN and Teleglobe, giving the Company expanded global reach and ability to
deliver IP-leveraged communications solutions to businesses and consumers worldwide.
On 13 February 2008, the Company launched its new identity and the brand “Tata
Communications” integrating the former VSNL, VSNL International, Teleglobe and CIPRIS
brands worldwide.

Rating Information
 Month Instrument Rating Agency Amount Grade Rating status
(Rs. Crore)
Jun 2009 Short Term Debt P1+ CRISIL 250Investment Reaffirmed
Apr 2009 Pass Through Certificates P1+(SO) CRISIL 400Investment Initial Rating
Apr 2009 Pass Through Certificates P1+(SO) CRISIL 38.09Investment Initial Rating
Nov 2008 Pass Through Certificates P1+(SO) CRISIL 2.81Investment Initial Rating
Nov 2008 Pass Through Certificates P1+(SO) CRISIL 25.23Investment Initial Rating
Nov 2008 Pass Through Certificates P1+(SO) CRISIL 5.62Investment Initial Rating
Nov 2008 Pass Through Certificates P1+(SO) CRISIL 50.47Investment Initial Rating
Oct 2007 Short Term Debt P1+ CRISIL 250Investment Reaffirmed
Sep 2007 Short Term Debt P1+ CRISIL 100Investment Initial Rating
Jun 1998 Commercial Papers P1+ CRISIL Investment
May 1998 NCD (Fixed Interest Rate) AAA CRISIL 100 Investment
Dec 1997 NCD (Fixed Interest Rate) AAA CRISIL 100 Investment
Dec 1996 Commercial Papers P1+ CRISIL 112.5 Investment

Subsidiaries

VSNL Lanka Ltd.

VSNL International Pte. Ltd.
VSNL America Inc.
VSNL Snospv Pte. Ltd.
VSNL Broadband Ltd.
Direct Internet Ltd. [Merged]
VSNL Internet Services Ltd.
VSNL Global Services Ltd.
3.0 Financial Data

3.1 Executive Summary

Executive Summary Reliance Communications Ltd. Tata Communications Ltd.

Dec Mar Mar Mar Mar Mar
  2005 2007 2008 2006 2007 2008
Rs. Crore (Non-Annualised) 9 mths 15 mths 12 mths 12 mths 12 mths 12 mths
-            
Total income 13.26 13017.12 15312.63 4034.94 3975.9 3468.04
Sales 4.19 12767.05 14795.13 3791.17 3757.32 3283.3
Income from financial
services 6.79 245.95 516.29 94.33 72.77 80.31
             
Total expenses 7.61 10608.27 12726.18 3555.4 3507.34 3163.58
             
PBDITA 11.59 4763.45 5297.15 1047.9 1110.87 790.96
PBDTA 11.59 4257.31 4447.91 1046.1 1103.96 751.29
PBT 8.85 2421.19 2604.25 686.72 712.63 449.98
PAT 5.65 2408.85 2586.45 479.54 468.56 304.46
             
Net worth 15395.04 20525.54 24840.03 6061.17 6359.5 6547.34
Paid up equity capital* 0.05 1022.31 1032.01 285 285 285
Reserves & surplus 14783.42 19503.23 23808.02 5776.17 6074.5 6262.34
             
Total borrowings 0 14567.84 20286.43 123.13 197.61 836.4
Current liabilities &
provisions 3.62 10732.14 11238.16 1861.62 1856.12 2250
             
Total assets 15399.29 45825.52 56364.62 8227.53 8615.61 9844.01
Gross fixed assets 198.09 22811.42 28693.88 4247.44 4923.42 4896.42
Net fixed assets 166.24 20284.05 24005.19 3156.36 3494.61 3532.67
Investments 12074.09 5434.43 13844.14 2499.34 2680.85 2325.28
Current assets 27.54 3624.16 4853.94 2132.58 2252.48 3014.89
Loans & advances 3131.42 16482.87 13661.34 332.73 56.97 845.03
             

*Net of forfeited capital

3.2 Equity Holding Pattern

Equity holding by type of investors Reliance Communications Ltd. Tata Communications Ltd.
(No. of shares)    
  Mar 2008 Mar 2008
  In No. of shares In % In No. of shares In %
Total Shares 2,06,40,26,881 100 28,50,00,000 100
Promoters 1,36,48,11,060 66.12 21,72,72,076 76.24
Indian 1,36,48,11,060 66.12 21,72,72,076 76.24
Individuals & HUF 98,45,089 0.48    
Central & State Govt.     7,44,46,885 26.12
Corporate Bodies 1,35,49,65,971 65.65 14,28,25,191 50.11
Non-promoters 64,66,29,737 31.33 5,15,75,478 18.1
         
Institutions 39,17,53,211 18.98 4,19,13,897 14.71
Mutual Funds/UTI 6,43,54,925 3.12 66,28,848 2.33
Banks, FIs,Insurance Cos. 12,20,20,863 5.91 3,02,28,957 10.61
Insurance Companies 11,75,06,832 5.69 2,98,62,679 10.48
Financial Institutions & Banks 34,44,856 0.17 3,66,278 0.13
Central & State Government 10,69,175 0.05    
FIIs 20,53,77,423 9.95 50,56,092 1.77
Non-institutions 25,48,76,526 12.35 96,61,581 3.39
Corporate Bodies 4,08,69,654 1.98 26,17,031 0.92
Individuals 20,10,77,740 9.75 65,98,394 2.31
Nominal invest. Upto Rs. 1 lakh 18,46,63,949 8.95 60,14,996 2.11
Nominal invest. Over Rs. 1 lakh 1,64,13,791 0.8 5,83,398 0.2
Others 1,29,29,132 0.63 4,46,156 0.16
Custodians 5,25,86,084 2.55 1,61,52,446 5.67
3.3 Capital History Summary

Reliance Communications Limited

XIssue Issue Security Face Security Additional Increased
month type type value amount PUC PUC
      (Rs.) (Rs. Crore)    
Mar 05 OUTSTANDING CAPITAL Equity 10 0 0 0.01
Dec 05 OUTSTANDING CAPITAL Equity 5 0 0 0.05
Mar 06 OUTSTANDING CAPITAL Equity 5 0 0 611.56
Mar 06 EURO ISSUE ECB 5 2225 0 611.56
Sep 06 POST-AMALGAMATION Equity 5 0 410.74 1022.3
Oct 07 CONVERSIONS Equity 5 0 0.31 1022.62
Oct 07 CONVERSIONS Equity 5 0 0.11 1022.73
Oct 07 CONVERSIONS Equity 5 0 1.64 1024.38
Oct 07 CONVERSIONS Equity 5 0 0.32 1024.7
Oct 07 CONVERSIONS Equity 5 0 1.38 1026.09
Nov 07 CONVERSIONS Equity 5 0 2.33 1028.43
Nov 07 CONVERSIONS Equity 5 0 0.35 1028.79
Nov 07 CONVERSIONS Equity 5 0 0.48 1029.27
Nov 07 CONVERSIONS Equity 5 0 1.26 1030.54
Dec 07 CONVERSIONS Equity 5 0 0.1 1030.65
Dec 07 CONVERSIONS Equity 5 0 0.43 1031.08
Dec 07 CONVERSIONS Equity 5 0 0.34 1031.43
Jan 08 CONVERSIONS Equity 5 0 0.21 1031.64
Jan 08 CONVERSIONS Equity 5 0 0.35 1031.99
Jan 08 CONVERSIONS Equity 5 0 0.01 1032.01

*Fixed Interest Rate

Tata Communications Limited

Issue Issue Security Face Security Additional Increased

month type type value amount PUC PUC
(Rs.) (Rs.
Crore)
Mar 95 OTHER Equity 10 0 0 80
ISSUES
Mar 97 EURO ISSUE GDR 10 1245 15 95
Feb 99 OFFER GDR 10 784.3 0 95
Sep 99 OFFER Equity 10 75 0 95
Oct 00 BONUS Equity 10 0 190 285
Mar 02 OFFER Equity 10 1465.05 0 285
4.0 Theoretical Concepts

The following concepts have been used to derive the conclusions on the financial aspects of
the communication sector:

4.1 RISK AND RETURN:

RISK

Risk is the “possibility of loss or injury”, in financial terminology, risk means the chance
that an investor’s actual return varies from his expected return. This implies that higher the
variability between the actual and the expected return, the greater the risk.
Risk is the result of the presence of following factors:

 Interest rates
 Securities Market
 Inflation
 Business related factors
 Financial leverages
 Liquidity

Risks can be classified into diversifiable and non-diversifiable risk.

Risk is associated with the spread in the likely outcomes. This spread refers to variability in
returns. So an asset with no variability has zero risk. Every investor needs to know about
the variability of returns of the security in which he proposes to invest.
The spread can be calculated by considering either the range of returns, variance of returns
or standard deviation.

RETURN

Return are benefits received by an investor for making investments. An investor, while
making an investment decision evaluates the risks associated with the investments. So,
while determining his required rate of return, he analyses risks involved. His analysis helps
him in evaluating and selecting the best investment option out of the various investment
schemes available.

Components of Return

Return consists of two basic components, namely:

 Periodic incomes, in the form of interests, dividends etc.
 Capital gains(losses) due to appreciation(depreciation) in the prices of the
security.
 Measurement of Rate of Return

The rate of return is measured as the total returns calculated as a percentage of the value of
the investments made in the beginning of the holding period.

4.2 THE CAPITAL ASSET PRICING MODEL (CAPM):

The CAPM developed by William F Sharpe, John Lintner and Jan Mossin aims at establishing
a linear relationship between the rate of return of a security required by an investor and its
systematic (undiversifiable risk) or beta.

The Mathematical representation of CAPM is:

Kj= Rf + Bj (Km – Rf)
Where,
Kj = expected or required rate of return on security j
Rf = risk- free rate of return
Bj = beta coefficient of security j
Km = return on market portfolio

4.3 CONCEPT OF WEIGHTED AVERAGE COST OF CAPITAL:

For a Company, Cost of Capital raised by it is the minimum rate of return that it has to earn
from its operations to satisfy all the investors who have invested their money in the
company in form of shares, debentures or term loans.
For calculating the overall company-wide cost of capital (K C), first of all, we need to
compute cost of various individual sources from which the company has raised funds.

 Cost of Equity (KE)

We have different methods of calculating cost of equity capital. Some of them are:

 Dividend Forecast Approach

 Capital Asset Pricing Approach
 Realized Yield Approach
 Earning-Price Ratio Approach
 Bond Yield plus Risk Premium Approach

Among the above mentioned methods, the most commonly used is the Dividend Forecast
Approach. The equation is as follows:

Ke = D1 + g
P0
 Where, D1 = expected dividend per share at the end of year 1
P0 =current market price per equity share
g = dividend growth rate

 Cost of Preference Shares (Kp)

The cost of a preference share (redeemable) is that discount rate at which the proceeds
from issue of preference capital is equal to the payments associated with it.

D+ (F-P)
KP = n
(F+P)/2

Where, D = annual preference dividend per share

F = redemption price
P = net amount realized per share
n = maturity period

 Cost of Debentures (KD)

The valuation methodology followed for calculating cost of debentures is same as that
followed in calculating Kp.

I (1-t) + (F-P)
KD = n
(F+P)/2

Where, D = annual interest payment per debenture

t = corporate tax rate
F = redemption price
P = net amount realized per debenture
n = maturity period

Now to compute the overall cost of capital of a company we calculate the cost of various
individual sources of funds as explained above and then take their weighted average as the
cost of capital.
Preferably, market values should be taken as the weights of the securities, but in absence of
the market values, book value can be considered for calculating the weights.
5.0 Application of Concepts

To derive at a fair conclusion, we have done the following analysis, using the concepts
discussed above.

1. We have taken historical monthly closing data of BSE Sensex and share prices of
Reliance Communications and Tata Communications from Prowess for 3 yrs starting
from April’05 to March’08
2. Then, we calculated the returns from the two securities and the market using the
formula:
Return = (Pt-Pt-1)/Pt-1

3. After this, we calculated average returns from the above mentioned data
4. Then we calculated, the co-variance between the security and market for both the
securities
5. Then we calculate the variance of market returns.
6. After this, we calculated Beta for both the companies taking the ratio of the
respective co-variances and the variance of the market.
7. The beta thus calculated gives us a fair picture as to which among the two securities
is riskier. The company with higher beta obviously carries greater risk compared to
the company with lower beta.
8. Then we calculated the cost of equity for both the securities using the CAPM model.
9. We have taken return on National Savings Certificate (NSC) which is 8%
compounded semi-annually as our risk free rate of return (R f). The effective risk free
rate of return compounded annually comes to 8.16%.
10. Cost of retained earnings (KR) has been taken as equal to cost of equity as per
established norms and procedures.
11. We have also calculated weighted average cost of capital as explained above.

6.0 Observations and Analysis

During analysis of Financial statements of both the companies, we made the following
observations

1. We found out that Reliance Communications is a leveraged company and which has
raised Long term funds by issuing FCCBs, where as Tata communications has no
long term obligations to third parties and is an equity-oriented company.

2. Tata Communications has maintained a stagnant dividend payout ratio in the past
two years. So, we have taken growth rate for it as zero, assuming that they
maintained the same payout ratio.

3. We calculated various ratios for both the companies and made the following
observations.

 As we can see that, since there is a significant difference between

PBDITA/Total Income and PBDTA/Total income of Reliance. Where as
for Tata, there is no such significant difference. This difference clearly
proves that Reliance is a leveraged entity.
 Net worth ratio of Tata is justifiably higher than that of Reliance.
 Similarly, borrowing of Reliance is comparatively higher than that of
Tata.
 Reliance compared to Tata has made heavy investments in capital
projects and this aspect is clearly reflected in its borrowing ratios.
 A comparison of Debt to Equity ratio of both the companies shows
that Reliance has entered into huge debt obligations.

4. Calculated required rate of return for both the companies using CAPM Model shows
the effect of Beta (which reflects the risk factors involved) on the required ROR. The
required ROR for Reliance and Tata are 20.5117 and 13.2729 respectively.

Calculation of Beta and Required ROR (Mar’06-July’09)

    Reliance Tata
 135.242366 55.9831753
Co-variance   9 6
95.1967518
Market Var 2    
Beta   1.42066157 0.58807863
Risk Free
Return 8.16    
Market
Returns 16.8543    
13.2729437
Required ROR   20.5116863 9

5. The Weighted Average Cost of Capital (WACC) computed are as follows:

 To derive the Cost of Equity, we are taking the CAPM model and gives us the cost
of equity on Reliance and Tata as 27.39% and 24.69% respectively.

Calculation of Beta and Required ROR (Mar’06-Mar’08)**

    Reliance Tata
73.7192965 63.3520605
Co-variance   7 1
50.8246509
Market Var 8    
1.24648294
Beta   1.45046341 3
Risk Free
Return 8.16    
Market
Returns 21.4239    
27.3988016
Required ROR   2 24.6932251

** Note: In absence of Capital Structure Information of Reliance communications

Limited as on 31st March’ 09, we have taken Capital Structure information as on 31st
March’08 for both the companies to calculate the weighted average cost of capital.

 In case of Tata Communications, there are no long term borrowings and hence
the weighted average cost of capital is equal to the cost of equity.

 In the case of Reliance, we found out that they raised $500 million (2225 crores
INR) by issuing 5 lakh zero coupon bonds at $1000/bond (44500 INR) on 22 nd
March, 2006 with a maturity of 5 years and to be converted at the
 predetermined share price of Rs. 480.68/ share, a premium of 50% to last
closing price.
And another $1 billion (around 4000 crores INR) by issuing 10000 zero coupon
bonds at $1 lakh each (40 lakh INR) in Feb, 2008 with a maturity of 5 years and
set at a conversion price of Rs. 661/ share, a premium of 30% to the prevailing
market price.

(Reliance has started buying back the FCCBs issues in two tranches, however
the buyback started after 31st March, 2008 and hence we are considering the
total FCCBs issued for our calculation. Also in the absence of the issue price per
bond, we are considering the issue price to be at 50% and 30% below the
redemption price for first and second issue respectively, as they are paid at a
premium of the above mentioned prices).

Calculation of WACC
Amts Amts
  Reliance (crores) Tata (crores)
No. of Shares (in
Crores) 206.40   28.50  
MV per sh 508.3   513.75  
Market Cap (in Crores) 104914.4864   14641.875  
         
         
Ke (including Kr) 0.273988016 104914.4864 0.24693225 14641.875
Kd (Bonds, FCCBs) 1st 0.08 2225 - -
Kd (Bonds, FCCBs) 2nd 0.052352438 4000 - -
         
Total Capitalization   111139.4864   14641.875
         
WACC 0.262127554   0.24693225  
  26.21%   24.69%  

Thus, we can infer from the above calculation that Reliance Communications will have to
perform better in terms of earnings to meet its cost of capital.
7.0 Conclusion and Recommendations

From the above analysis, it is clearly evident that Reliance Communications carries more
risk as compared to Tata Communications. So, a risk averse investor who wishes to invest
his money in one of these two companies should ideally choose Tata Communications,
where both required rate of return and risk element are lower. On the other hand, an
investor who is willing to take higher risk to get higher returns should invest in Reliance
Communications.

Also from the WACC perspective, we can say that Reliance Communication has to
effectively utilize its funds and generate better revenues to meet its cost of capital.
8.0 Sources of Information

 www.rcom.co.in
 www.tatacommunications.com
 www.moneycontrol.com
 www.bseindia.com
 www.financialexpress.com
 www.businessline.com
 Prowess