 "Analysts cross fingers as RCom's rating hinges on stake sale")
The Reliance Communications (RCom) stock jumped 13.5 per cent on Monday to close at Rs 97.7, after the company confirmed it was in talks to sell its global communications services business unit to a private equity consortium led by Canada-based Samena Capital. The deal for the unit, which accounts for a third of RCom’s consolidated revenues, is expected to close by the end of May, the company says.
The valuations for the unit seem to have declined a tad. Analysts expect the latest deal could be valued at about $1.2 billion, compared with up to $1.5 billion in its earlier talks with Bahrain’s Batelco. An analyst with a domestic brokerage says the company is not getting the valuations it is seeking, and therefore, has had to tone down its expectations. But what’s more important is if the deal is sealed and followed up with sale of other assets such as towers, it could act as a trigger for the stock. For instance, if the company sells a 50 per cent share in the global communications unit (Rs 3,000 crore), as well as about 25 per cent in its tower business (estimated value of Rs 38 lakh a tower for about 45,000 towers), it could fetch the company about Rs 7,300 crore and reduce debt by about a fifth. Ankita Somani of Angel Broking says, “If the sale of undersea cable and tower assets materialises, it would be a sentiment positive for the stock. Given the current cash flows, the sale of the assets is crucial for RCom.”
In addition to debt and the consequent interest payout, RCom has also been under pressure operationally, losing out to rivals. This limits its options, both in terms of acquiring customers and expanding network. In a report earlier this month, J P Morgan analysts led by Viju K George said the company had consistently lost subscriber and revenue market shares through the last three to four years; margins had also contracted materially. Its balance sheet is highly leveraged, with net debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio of 5.6, which limits its ability to invest for growth and market share expansion.
While this is positive and the company says peak capital expenditure is behind it, analysts believe it needs to invest, especially in expanding its 3G network. All this only underlines the importance of the deal and why investors are eagerly awaiting one.
The RCom stock has been on fire through the last few weeks on hopes a sale would fructify and action would follow on the tower assets front, too. If Monday’s gains are taken into account, the stock has risen about 70 per cent since the beginning of this month. Despite the spurt in prices (a large part of it after the April 2, Rs 1,200-crore fibre-sharing deal with Reliance Jio), analysts await clarity on negotiations for the sale of the global communications unit and the money realised from this. Given the high debt of Rs 37,000 crore and the fact that the company is losing market share, most analysts aren’t too positive on the stock. About 50 per cent of analysts, according to Bloomberg, have a ‘sell’ rating, with a consensus target of Rs 70, about 28 per cent lower than the current price. This, however, could change if the company is able to seal a couple of deals.
The valuations for the unit seem to have declined a tad. Analysts expect the latest deal could be valued at about $1.2 billion, compared with up to $1.5 billion in its earlier talks with Bahrain’s Batelco. An analyst with a domestic brokerage says the company is not getting the valuations it is seeking, and therefore, has had to tone down its expectations. But what’s more important is if the deal is sealed and followed up with sale of other assets such as towers, it could act as a trigger for the stock. For instance, if the company sells a 50 per cent share in the global communications unit (Rs 3,000 crore), as well as about 25 per cent in its tower business (estimated value of Rs 38 lakh a tower for about 45,000 towers), it could fetch the company about Rs 7,300 crore and reduce debt by about a fifth. Ankita Somani of Angel Broking says, “If the sale of undersea cable and tower assets materialises, it would be a sentiment positive for the stock. Given the current cash flows, the sale of the assets is crucial for RCom.”
In addition to debt and the consequent interest payout, RCom has also been under pressure operationally, losing out to rivals. This limits its options, both in terms of acquiring customers and expanding network. In a report earlier this month, J P Morgan analysts led by Viju K George said the company had consistently lost subscriber and revenue market shares through the last three to four years; margins had also contracted materially. Its balance sheet is highly leveraged, with net debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio of 5.6, which limits its ability to invest for growth and market share expansion.
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However, lately, the company’s operating matrix has stabilised---its Ebitda margins have held on to 31 per cent levels in the last few quarters. Wireless revenue per minute rose a paisa sequentially to Re 0.44 in the quarter ended December, after being stable at Re 0.43 in the last few quarters.
While this is positive and the company says peak capital expenditure is behind it, analysts believe it needs to invest, especially in expanding its 3G network. All this only underlines the importance of the deal and why investors are eagerly awaiting one.
The RCom stock has been on fire through the last few weeks on hopes a sale would fructify and action would follow on the tower assets front, too. If Monday’s gains are taken into account, the stock has risen about 70 per cent since the beginning of this month. Despite the spurt in prices (a large part of it after the April 2, Rs 1,200-crore fibre-sharing deal with Reliance Jio), analysts await clarity on negotiations for the sale of the global communications unit and the money realised from this. Given the high debt of Rs 37,000 crore and the fact that the company is losing market share, most analysts aren’t too positive on the stock. About 50 per cent of analysts, according to Bloomberg, have a ‘sell’ rating, with a consensus target of Rs 70, about 28 per cent lower than the current price. This, however, could change if the company is able to seal a couple of deals.