The Reliance Communications (RCom) stock has jumped nearly 20 per cent over the last two days on news of the company looking at raising money through equity and the asset sale route to fund its expansion plans and reduce debt. A deteriorating industry environment due to a price war saw the stock fall by half over a year.
While fundamentals have not changed much, the Street seems to believe a fund infusion – either from the stake sale of its infrastructure arm, or merger with rival firms, or a stake sale in Reliance Communications (RCom) itself, (or a combination of these) – could help ease concerns on its almost Rs 20,000-crore debt pile. What has also helped matters is the flexibility the company now has in relation to a stake sale, which was earlier entangled with the right-of-first-refusal dispute with Reliance Industries.
3G, BWA: More debt
RCom has been trying to raise money by listing its tower subsidiary, Reliance Infratel, and its international cable business, Flag Telecom, for some time now. With neither falling into place, the company is looking at other avenues of funding its growth plans. The paucity of spectrum and the need to stay ahead led it to bid aggressively, which resulted in a payout of Rs 8,600 crore for a right to run 3G services in 13 circles. Combining Broadband Wireless Access (BWA) investment of up to Rs 3,000 crore, the company is estimated to need roughly Rs 12,000 crore for licence fee and rollout of services — given that it will have to spend less than others on 3G.
| LOW RATES, HIGHER EXPENDITURE | ||||
| In Rs crore | FY09 | FY10 | FY11E | FY12E |
| Sales | 22,948 | 22,132 | 22,780 | 25,900 |
| Ebitda (%) | 41.10 | 35.30 | 35.00 | 35.80 |
| Net profit | 6,044 | 4,655 | 1,664 | 2,402 |
| NPM (%) | 26.30 | 21.00 | 7.30 | 9.30 |
| Free cash flow | -7,370 | 2,812 | -4,272 | -3,424 |
| P/E (x) | – | |||
Funding options
If the company takes the asset sale route, it can get roughly Rs 28,000 crore for its 95 per cent tower subsidiary, Reliance Infratel, which operates about 50,000 towers. On the other hand, if it were to offload a stake of about 25 per cent in itself to another investor at, say, a 50 per cent premium to the current price (given current market cap of Rs 34,000 crore), the deal could fetch it about Rs 10,500 crore. This should put RCom in a comfortable position to tackle the debt it would have after making the 3G and BWA licence payments and incurring rollout costs.
Higher debt, according to analysts, will mean that the net debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio will increase to three from 2.5 currently. Though higher interest outgo does hamper free cash flows, RCom should be able to manage it, unless the competitive landscape worsens further, which is unlikely as pricing is likely to stabilise.
Further, the market growth and RCom’s dual technology advantage, as well as its market share in most circles, should hold it in good stead when the mobile number portability is rolled out. However, while the finer modalities of any deal will only be known once the company lists the same in detail, at the current price, the markets seem to have already priced in the likely gains and there is little scope for appreciation.