Stock Review: Reliance Communications (RCom)

THE stock of Reliance Communications (RCom) has declined by 16% in the past month. It has lost over 12% in just about five trading sessions following its sluggish performance during the September 2010 quarter. Investors may have to wait to see a turnaround in the counter, since there seems to be no immediate positive trigger on the operational front. The RCom stock has so far not participated in the stock market rally. It has failed to earn meaningful returns in the past six months, in sharp contrast with the nearly 22% gains in the benchmark, Nifty. RCom's peers, Bharti Airtel and Idea Cellular, have gained 27% and 37%, respectively, during the said period. The lacklustre performance of the RCom stock reflects the Street's bleak expectations from the company. RCom has continued to report lower sales and profits for the past few quarters due to falling operating parameters such as minutes of usage (MoU) and average revenue per minute (ARPU). RCom was at the forefront of a tariff war in September 2009 after launching the cheapest tariffs in the industry then. It was believed that the strategy would adversely affect other incumbent operators. But, a year later, RCom appears to be the one on the losing end of the spectrum. On the contrary, Idea has been reporting gradual stability in its performance and Bharti is gearing up to benefit from growing overseas telecom markets in Africa and Asia.

   Unlike its peers, RCom has not been able to give a convincing future growth path to investors. Its Indian wireless business continues to report declining ARPU and MoU despite growing customer base. Also, a high debt burden restricts its ability to seek more financing to grow inorganically, the way its larger peer Bharti plans to grow. RCom has been looking for a stake sale to a strategic partner. A stake sale should help the company reduce its outstanding gross loan of 37,800 crore. However, there is no clarity on how long this will take. Its attempt to merge its tower entity with GTL Infrastructure a few months ago also failed.

   At the current stock price, RCom's stock is the cheapest in value among the listed telecom players. However, this is mainly on account of market's lower growth expectations from the company in the near term. Investors need to wait and watch how much benefit RCom can derive from the 3G opportunities and reduce its debt burden.