A bad signal at RCom

Cash balance fell by 88%, to Rs 550 cr, primarily on account of servicing its debt

With several of its money-raising efforts unsuccessful, its cash reserves diminishing and its debt levels high, RCom needs a magic pill to emerge from the doldrums.

The Anil Ambani magic doesn’t seem to be working for Reliance Communications (RCom). India’s second-largest telecom services provider has been third-time unlucky — it recently failed to list its sub-sea cable assets, Flag Telecom, in Singapore.

Flag’s fortunes may have ominous overtones for RCom. It is the latest asset that the company has tried to monetise unsuccessfully due to adverse market conditions, dashing its hopes for an injection of an estimated, and sorely needed $1 billion (around Rs 5,600 crore).

Earlier, RCom had tried to raise funds by hiving off its telecom tower business, Reliance Infratel (RInfratel), and tried selling a 26-per-cent stake in it to a strategic partner. RInfratel has a portfolio of more than 45,000 towers across all telecom circles. It had started operating as an independent tower company, providing passive infrastructure after tower-sharing was allowed by the government.

Both those efforts — to segment the tower business and sell a stake in it — ultimately didn’t fructify. While the attempts to sell the tower business have failed four times, RCom’s talks with foreign companies for a stake sale, too, have not gone beyond the discussion stage. "We are in advanced stages of negotiations with a number of consortia that have expressed great interest in this very valuable asset. I am sure that we will be able to move forward expeditiously. When we, hopefully, conclude the RInfratel transaction, it will be the largest private-equity transaction in the history of this country," Anil Ambani had told shareholders at the company's annual general meeting last year.

Whether or not this prediction will come true is anybody’s guess. The company had submitted draft versions of the red-herring prospectus for the tower company twice. An initial public offering could not go through due to adverse market conditions. The telecom operator did manage to strike a deal with an independent telecom-tower company, GTL Infrastructure, but it fell apart as the latter could not raise enough money to pay for the deal. GTL is now in the process of corporate debt restructuring. Later, Ambani announced plans to rope in private-equity players into the company.

The company did not respond to e-mailed queries. But, Daryl Philip, senior research analyst at stock broking firm, Finquest, says: “This is a very negative signal for the investors.”

Here’s why: The failed deals meant that RCom's debt remains at Rs 35,600 crore, almost three times its market capitalisation of around Rs 12,000 crore. The resulting equity from fund-raising was meant to be used for paring debt.

It doesn’t help that RCom’s cash balance, according to its latest annual report, has fallen sharply by a whopping 88 per cent to Rs 550 crore as of March 31, 2012. This is primarily due to servicing of the debt. In the same period, rival Bharti Airtel’s cash balance doubled to Rs 2,030 crore. High debt and low cash mean RCom does not have much time for either selling assets or raising equity from investors to repay debt. Both look difficult at this stage, bad enough for rating agency ICRA to revise its outlook on the company to negative from stable, that is, from 'A+' to 'A-.’ A few analysts say that this rating cut might impact its ability to refinance. Besides the fallout from a depreciating rupee, the rating agency is also worried about the operating environment of the company.

RCom, which started off as one of the first CDMA providers in India, under the name Reliance Infocomm, was then part of the undivided Reliance Industries. Anil Ambani took over the company after the group was divided between his brother Mukesh and him in 2006. The company had broken into a telecom market that was still in its infancy, and did so with one of the cheapest offers around — one that came with a free handset.

The junior Ambani diversified the company by adding GSM services in late 2008. The cost of expansion, coupled with a 3G-ready network that he had set up, added to the pile of debt for RCom.

The subsequent launch of Tata DOCOMO around a year later brought with it price wars: This did not help the margins of the company, or of the rest of the industry. RCom went on to spend Rs 8,583 crore for 13 circles in the 3G auction in 2010.

RCom today has around 154 million subscribers, around 66.5 per cent of them active on the networks, according to the Telecom Regulatory Authority of India. The rate per minute, or RPM, of the company has stabilised to 44 paise over the past few quarters. But, the minutes of usage, or the MoU, reported a decline to 230 minutes a user in 2011-12 from 262 a year ago. This resulted in a corresponding decline in the average revenue per user to Rs 102, from Rs 116 a year ago. This is owing to the increasing number of multiple-SIM users and the low usage among incremental subscribers, says the ICRA report.

“Bharti Airtel's debt is much higher than that of RCom. But, the latter has high-usage, premium subscribers from the metro and 'A' circles, who could easily switch to 3G and 4G data services as and when those are launched,” says Philip. “On the other hand, RCom's subscribers are voice-only, coming mostly from 'B' and 'C ' circles. Thus, RCom does not have the opportunity to ramp up its 3G and 4G data services. So, I do not think there would be an operational turnaround for RCom in the immediate term,” he adds.

Another sectoral analyst of a foreign brokerage, who refuses to be identified, says the company should look at selling a controlling stake —around 55-60 per cent. “It might be easier to find a buyer, like a foreign company, if they sell a majority stake. As debt and interest pressures ease, the new owners can concentrate on the operational performance. Investors have lost confidence in the current management: When that happens, the management should change,” he says.

Even as it grapples with its stake-sale plans, RCom is planning to seek the shareholders’ nod at its annual general meet, scheduled for September 4, for raising an estimated Rs 15,000 crore at current valuations, through equity dilution of up to 25 per cent in four of its companies: RCom, Reliance Power, Reliance Infrastructure and Reliance Capital. These together command a cumulative market value of about Rs 60,000 crore.