Stock Review: Reliance Communications

With the cancellation of its `50,000-crore deal with GTL Infrastructure, Reliance Communications (RCom) has its task cut out to raise additional capital and deleverage its balance sheet as it gets ready to roll out 3G services over the next quarter. The company is in talks with investors to sell a part of its stake or transfer the tower assets to atower company or a strategic investor.

The RCom stock fell about two per cent before recovering and ending marginally lower. The deal was considered a positive one for the company, considering that – at `60 lakh a tower – it was higher by over 20 per cent than other recent deals.

More important, it would have helped RCom cut its debt burden significantly.

The failed deal, which would have made GTL the world's largest independent tower company controlling about a quarter of the Indian tower market, would, however, have increased its debt pile and led to significant equity dilution. GTL's stock, which fell by nearly three per cent initially, closed about a percentage point higher.

Asset monetisation is key  

 

The collapse of the deal is not good news for RCom as its 33,000-crore debt, half of which is on account of its tower subsidiary Reliance Infratel, would have halved its debt-to-equity levels to a more manageable 1.5 times and helped save interest costs.

The sharp rise in debt has largely been due to the competitive bidding for 3G and Broadband Wireless Access spectrum, forcing the company to fork out `11,600 crore in licence fees.

Now that the company has received spectrum, it would need to spend on the rollout of services as well as on the marketing of the 3G services.

Competitive pressures

While competition has reduced further in intensity with most market leaders making gains in recent months, new players like Videocon have been launching attractive tariffs for long distance calls.

Analysts say price wars are now limited to specific circles and are not a nationwide phenomenon as was the case a year ago.

Data from the Telecom Regulatory Authority of India also shows that, after two consecutive quarters of decline on a year-on-year (y-o-y) basis, adjusted gross revenues (AGR) were up 3.8 per cent in the June quarter.

In fact, AGR market shares for all the leading players were up on a sequential basis, according to an Anand Rathi report. On a y-o-y basis, however, RCom turned out to be the biggest loser as its market share fell 116 basis points.

While mobile number portability, which is likely to be implemented soon, should help the company acquire new customers, its ability to increase AGR will depend on upgrading its customers to higher tariffs and marketing of its 3G services.

Outlook

The RCom stock is down about 10 per cent over the last one month on the back of poor June quarter results, loss in market share and debt concerns.

At current price, the stock is trading 10 times its trailing 12month earnings per share. Most analysts have a sell on the stock and prefer Bharti Airtel, which is trading at 15.3 times its trailing 12-month earnings.

For GTL, while the upside is the higher revenues which will accrue from the renting of space for 3G services, the downsides are a possible levy of a six per cent licence fee and the high debt, which is the reason for the sell rating on the stock by analysts.