While implementation of number portability and focus on profitability are positives, deleveraging the balance sheet is key.
The stock of Reliance Communications (RCom) is down seven per cent since August (as of September 17) on negative news flow related to the sale of its tower assets and on equity stake to a strategic investor. The decline looks worse when compared to the 10-16 per cent rise in the share price of Bharti Airtel and Idea Cellular. The company has for some time been wanting to sell its tower assets to help take care of its debt pile, which jumped post the 3G and BWA auctions. Most analysts have revised their price targets downwards but feel a re-rating is possible if RCom is able to cut its debt meaningfully.
Debt’s the key concern
RCom is sitting on a debt pile (net) of Rs 33,500 crore, five times its June quarter annualised Ebitda (earnings before interest, tax, depreciation and amortisation). Of this , a big part is repayable in next one year. An Anand Rathi report says that as of June, of the Rs 38,200 crore of gross debt, 44 per cent (Rs 16,600 crore) is due within the next year. In addition, FCCBs to the tune of Rs 1,600 crore and Rs 5,300 crore are to be redeemed by May 2011 and May 2012, respectively. While an estimated operating cash flow for the next two financial years in the region of Rs 11,000 crore is comforting, 3G-related capital expenditure (among others) would mean that raising additional capital to fund expansion would become necessary. It is in this context that the company would want to monetise its tower assets and sell a strategic stake. The company, however, says its capex on the rollout of 3G services will be minimal.
| RCOM: BEST VALUE? | |||
| FY12 Estimates | Rcom | Bharti | Idea |
| Price/Earnings (x) | 14.5 | 15.6 | 32.9 |
| EV/Ebitda (x) | 8.6 | 6.1 | 6.8 |
| Price/Sales (x) | 1.3 | 2.1 | 1.4 |
| Price/Book (x) | 0.8 | 2.4 | 1.9 |
| Bloomberg consensus estimates All figures are as on September 17, 2010 | |||
Favourable macro environment
While competitive pricing continues in select markets, with players looking to increase their share, analysts believe that integrated telecom plays such as RCom and Bharti Airtel are best placed to survive this period of hyper-competition. An HSBC report says significant pressures on rates has led to average revenues per minute (ARPMs) for the sector declining by 23 per cent over the past year. Existing players have been able to maintain their market share in recent quarters and are expected to enhance margins a year hence, when the competitive intensity is likely to lessen. Analysts say that consolidation over the next 18 months will result in the number of national players halving to 7-8. Analysts at Elara Securities believe RCom will benefit the most from implementation of the mobile number portability regime. It is also one of only three companies to get licences in 13 of the 3G circles. While these are positives, analysts believe the major upside for the stock will happen once the deleveraging plan goes through.
| STABILISING MARGINS | |||
| In Rs crore | FY10 | FY11E | FY12E |
| Revenues | 22,132 | 22,682 | 25,586 |
| % chg y-o-y | -3.6 | 2.5 | 12.8 |
| Ebitda | 7,820 | 7,290 | 8,388 |
| Ebitda (%) | 35.3 | 32.1 | 32.8 |
| Net profit | 2,047* | 2,116 | 2,484 |
| *Adjusted E: Estimates Source: Company, analyst reports, Bloomberg consensus estimates | |||
Profitability focus
RCom in the past couple of quarters has been focussing on improving its profitability by reducing its free minutes and improving paid minutes usage. For the June quarter, RComm reduced its free minutes by half. With this strategy, RComm, which saw its ARPM fall by about 30 per cent since March, is looking at stabilising its revenues per minute at 44-45 paise. It believes its current RPMs, at 44p, are in line with those of other players as compared to the situation a few quarters earlier, when its RPMs were about 10p less than the industry average.
Valuations
Despite a five per cent surge in its stock price each on Friday and Monday, the RCom stock is trading at a discount to its peers. This is likely to continue, say analysts, till the debt concerns persist. The stock is trading at a 15.2 times its 2011-12 earnings and can be considered from a two-year perspective.