 "RCom: Some deleveraging done, more needed")
The Street’s concern on Reliance Communications (RCom)’s debt and weak operating metrics is weighing on the stock. The company’s shares have declined 37 per cent through the past year, underperforming the company’s larger peers (6-21 per cent gain), as well as the broader markets (up 33 per cent).
While the company has been losing subscribers and revenue market share, investors’ key concern remains the debt on its books. As of the June 2014 quarter, the company had net debt of Rs 40,222 crore. For 2013-14, the net debt-to-earnings before interest, tax, depreciation and amortisation (Ebitda) ratio was 5.2, compared with 2.3-2.4 for Bharti and Idea Cellular. This has been a key problem, as the company’s profits are barely enough (interest coverage ratio at 0.9 times) to pay for interest costs (Rs 3,191 crore in 2013-14).
The deleveraging process, however, is picking up. Recently, the company raised Rs 6,100 crore through a qualified institutional placement and warrant issuance to promoters. Following this, the net debt stands at Rs 35,500 crore; this should help save Rs 600 crore in annual interest costs. Through the next year, RCom might reduce its debt to Rs 25,000 crore through securitisation of tower proceeds, stake sale in Global Cloud Xchange (formerly Reliance Globalcom) and monetisation of real estate. At the company’s recent annual general meeting, Reliance Group chief Anil Ambani indicated debt would be cut to less than Rs 20,000 crore through the next two years.
IIFL analysts say the company can raise Rs 5,500 crore from the stake sale, Rs 4,000 crore from tower-related deals and Rs 3,000 crore from real estate deals. If these materialise, the company’s net debt-to-Ebitda ratio will to a manageable 2.9 by 2015-16.
Another area in which the Street wants the company to see traction is operating metrics. For the June quarter, both voice traffic (up 0.8 per cent sequentially) and voice revenue per minute (up 0.3 paise sequentially) were below those of Bharti Airtel and Idea Cellular (rise of two-five per cent and by one paisa, respectively). This is reflected on voice revenues, which have stood at Rs 3,380-3,430 through the past five quarters, underperforming competition.
At 6.7 per cent, RCom’s revenue market share has fallen to about half since FY08. In the June quarter this year, the company’s market share dropped 50-90 basis points. At 110 million, its subscriber base has seen a fall of 12 per cent on an annual basis.
The company has indicated it has slowed the fall in growth of CDMA voice revenue by introducing dual-band (CDMA and GSM) smartphones. RCom expects this segment (30 per cent of revenue) to aid its growth.
On the operational front, the key is the company’s ability to increase revenue/minute, with minimum negative elasticity on voice usage. Deutsche Bank analysts believe the company will post 3.5 per cent/year growth in revenue/minute through FY14-17, driven by rate increases and an increase in data revenue. This should help the company improve its wireless Ebitda margins from 30.5 per cent in FY14 to 32 per cent by FY17. Also, unlike rivals, the company’s cash outgo in the coming auction is minimal.
The risk, however, is the pricing strategy adopted by Reliance Jio, as well as the impact of this on the sector. While the impact will not be RCom-specific, any pricing war will have a negative impact on the company’s financials.
The multiple deals RCom has signed with Reliance Jio for sharing infrastructure will essentially benefit RCom through the next few years. One of the deals, which allows Reliance Jio to use RCom’s mobile towers, will get fetch RCom about Rs 12,000 crore as rental through the next few years.
At the current price of Rs 96.1, the stock is trading at 14 times its FY16 earnings per share. Though the debt-reduction plan and an improvement in operating metrics should aid profitability and boost profits, most analysts continue to have a ‘sell’ rating on the stock, with target prices of about Rs 100. As of now, progress on asset monetisation and reduction in debt are the biggest triggers for the stock.
While the company has been losing subscribers and revenue market share, investors’ key concern remains the debt on its books. As of the June 2014 quarter, the company had net debt of Rs 40,222 crore. For 2013-14, the net debt-to-earnings before interest, tax, depreciation and amortisation (Ebitda) ratio was 5.2, compared with 2.3-2.4 for Bharti and Idea Cellular. This has been a key problem, as the company’s profits are barely enough (interest coverage ratio at 0.9 times) to pay for interest costs (Rs 3,191 crore in 2013-14).
The deleveraging process, however, is picking up. Recently, the company raised Rs 6,100 crore through a qualified institutional placement and warrant issuance to promoters. Following this, the net debt stands at Rs 35,500 crore; this should help save Rs 600 crore in annual interest costs. Through the next year, RCom might reduce its debt to Rs 25,000 crore through securitisation of tower proceeds, stake sale in Global Cloud Xchange (formerly Reliance Globalcom) and monetisation of real estate. At the company’s recent annual general meeting, Reliance Group chief Anil Ambani indicated debt would be cut to less than Rs 20,000 crore through the next two years.
IIFL analysts say the company can raise Rs 5,500 crore from the stake sale, Rs 4,000 crore from tower-related deals and Rs 3,000 crore from real estate deals. If these materialise, the company’s net debt-to-Ebitda ratio will to a manageable 2.9 by 2015-16.
Another area in which the Street wants the company to see traction is operating metrics. For the June quarter, both voice traffic (up 0.8 per cent sequentially) and voice revenue per minute (up 0.3 paise sequentially) were below those of Bharti Airtel and Idea Cellular (rise of two-five per cent and by one paisa, respectively). This is reflected on voice revenues, which have stood at Rs 3,380-3,430 through the past five quarters, underperforming competition.
At 6.7 per cent, RCom’s revenue market share has fallen to about half since FY08. In the June quarter this year, the company’s market share dropped 50-90 basis points. At 110 million, its subscriber base has seen a fall of 12 per cent on an annual basis.
The company has indicated it has slowed the fall in growth of CDMA voice revenue by introducing dual-band (CDMA and GSM) smartphones. RCom expects this segment (30 per cent of revenue) to aid its growth.
On the operational front, the key is the company’s ability to increase revenue/minute, with minimum negative elasticity on voice usage. Deutsche Bank analysts believe the company will post 3.5 per cent/year growth in revenue/minute through FY14-17, driven by rate increases and an increase in data revenue. This should help the company improve its wireless Ebitda margins from 30.5 per cent in FY14 to 32 per cent by FY17. Also, unlike rivals, the company’s cash outgo in the coming auction is minimal.
The risk, however, is the pricing strategy adopted by Reliance Jio, as well as the impact of this on the sector. While the impact will not be RCom-specific, any pricing war will have a negative impact on the company’s financials.
The multiple deals RCom has signed with Reliance Jio for sharing infrastructure will essentially benefit RCom through the next few years. One of the deals, which allows Reliance Jio to use RCom’s mobile towers, will get fetch RCom about Rs 12,000 crore as rental through the next few years.
At the current price of Rs 96.1, the stock is trading at 14 times its FY16 earnings per share. Though the debt-reduction plan and an improvement in operating metrics should aid profitability and boost profits, most analysts continue to have a ‘sell’ rating on the stock, with target prices of about Rs 100. As of now, progress on asset monetisation and reduction in debt are the biggest triggers for the stock.