Reliance Communications Ltd., India's second-largest mobile-phone operator, reported the slowest profit growth in nine quarters after adding less profitable customers in rural areas.

Net income rose 24 percent to 15.1 billion rupees ($355 million) in the three months ended June 30, Mumbai-based Reliance said today. Profit missed the 15.5 billion rupee median estimate of seven analysts surveyed by Bloomberg. Sales rose 24 percent to 53.2 billion rupees.

Reliance, controlled by billionaire Anil Ambani, signed up customers at a slower pace than top-ranked Bharti Airtel Ltd. and Vodafone Group Plc's unit. Reliance and Bharti failed in separate bids to merge with South Africa's MTN Group Ltd., forcing them to compete in India's villages and towns to bolster profit growth.

``You are going into smaller towns and the villages, where obviously paying capacity as well as consuming capacity would be lower,'' Bangalore-based Romal Shetty, executive director for telecommunications at accounting and audit firm KPMG LLP's Indian unit, said before the earnings announcement. ``Obviously you don't expect a villager to make as many calls as someone in'' Mumbai.

Doubling Villages

Reliance doubled the number of villages covered by its network to 600,000 in the nine months ended March 31, according to a statement on its Web site.

Reliance Communications fell 0.5 percent to 500.05 rupees before the earnings announcement. The stock has declined 33 percent this year, compared with Bharti's 20 percent loss and the benchmark Sensitive Index's 29 percent drop.

Bharti Airtel last week beat analyst estimates by reporting first-quarter profit rose 34 percent to 20.3 billion rupees. The carrier added almost 50 percent more subscribers than Reliance last quarter, gaining 7.4 million users to its rival's 5 million.

Ambani's global expansion plans stalled after ending talks with MTN, Africa's largest wireless carrier, on July 18. Ambani, the world's sixth-richest man according to Forbes magazine, failed to resolve a dispute with elder brother Mukesh Ambani, whose Reliance Industries Ltd. claimed the first right of refusal in any stake sale by Reliance Communications.

`On Track'

Reliance, which mainly offers code division multiple access or CDMA services, had 50.8 million subscribers at the end of June. Bharti had 69.4 million customers while Vodafone's unit had 49.2 million, all of them on the global system for mobile communications or GSM platform.

Reliance, which is building a nationwide GSM network, spent $1.6 billion in the quarter and is ``on track'' to spend a total of $6 billion for the year ending March 31, 2009, the company said today. Ambani said in April he may spend as much as $6.5 billion this year to increase coverage.

New wireless providers, who are likely to start operations in nine months to a year, may undercut prices to gain market share leading to a ``tremendous squeeze on margins'' for existing operators, KPMG's Shetty said.

AT&T Inc., the biggest U.S. phone company, in March said it will be ``aggressive'' in its plans to enter India's mobile- phone industry to add customers in the world's second-biggest market for wireless services.

Russian billionaire Vladimir Yevtushenkov's AFK Sistema in January said its Shyam Telelink Ltd. unit will pay $630 million for phone licenses in 21 areas. Sistema plans to spend as much as $7 billion with partners to expand its network in India.

Mobile-Phone Market

India overtook the U.S. this year to become the world's largest mobile-phone market after China, according to the nation's telecom regulator. The South Asian country had 287 million wireless subscribers at the end of June, or about one in four people in the nation of more than 1.1 billion.

India's mobile users will increase to 737 million by 2012, a 21 percent annual compounded growth from 2008, analysts Madhusudan Gupta and Nick Ingelbrecht at researcher Gartner Inc. said in a report dated July 2. Sales will grow 18 percent compounded annually to exceed $37 billion, they said.

``Before penetration really starts to plateau, I think there's quite a long way to go,'' said Waj Hashmi, a London- based fund manager at Schroders Plc, who helps manage $25 billion of emerging-market assets, including Reliance Communications shares.

Infratel, Globalcom IPOs

Reliance has received approvals for an initial public share sale for the company's telecommunications towers unit Reliance Infratel Ltd., Ambani told analysts today. He agreed in July to sell a 5 percent stake for about $338 million to seven investors. The sale valued that division at about $9 billion, Reliance said.

The company may also list its Globalcom division on the London Stock Exchange this fiscal year, Ambani said in April. The division includes the operator's submarine cable business, FLAG Telecom Group Ltd. and Yipes Holdings Inc., an Ethernet- service provider.

``The volatility in the Indian capital markets as well as the global capital markets is what we are watching. And when we find an appropriate time I'm sure that we will proceed both with Globalcom as well as with Infratel,'' Ambani said.

Source:Bloomberg