RComm: Infratel sale a significant trigger

High debt a key overhang for the stock, which has underperformed peers and broader markets

Reliance Communications (RCom), which has been looking at ways to cut debt, has started monetising its tower and fibre assets. Monetisation of the assets (45,000 towers and 120,000 km of fibre) held by its subsidiary Reliance Infratel is expected to be completed this financial year. As part of an infrastructure-sharing deal with Reliance Industries Ltd (RIL) in 2013, the company had received a one-time fee of Rs 1,200 crore. This allowed RIL the right to use RCom’s inter-city fibre optics network. RCom had also signed a Rs 12,000-crore deal to share its towers with RIL.

Analysts estimate the valuation of Reliance Infratel at Rs 20,000 crore and a part or complete sale would help cut the company’s Rs 37,000 crore debt substantially. The company could also sell surplus land, which would fetch it Rs 5,000-6,000 crore, or stake in its global data communications arm, GCX. RCom is considering cutting its estimated FY15 net debt-to-Ebitda (earnings before interest, tax, depreciation and amortisation) ratio  from about five to three. This, it is expected, will largely be through asset monetisation and internal cash accruals.

 

Analysts say high debt has prevented the company from investing more aggressively in its network. Analysts at JPMorgan say consistently low capex, reluctance to expand footprint and nominal spectrum purchase by the company have resulted from financial pressures.

On the operational front, RCom is expected to post good numbers for the March quarter. India revenues are expected to grow four per cent year-on-year, largely due to an increase in revenue per minute, while volumes are expected to be flattish. A key positive is during the quarter, the company is estimated to have added the highest number of subscribers in the past seven quarters.

For the Street to re-rate the stock, results have to be seen on the ground. Of the 28 analysts tracking the stock, half have a ‘sell’ call, with only 18 per cent saying investors should buy the stock. In addition to threats such as the entry of Reliance Jio and a pricing war impacting profitability, analysts are bearish on the stock, given the consistent market share loss, high leverage and inability to invest in the network. At the current price, the stock is trading at 13 times its FY17 earnings estimates, while Bharti and Idea are available at 16 times. For a re-rating, RCom will have to cut debt and improve its operating metrics.