With the Street worried about a possible equity dilution as also the high debt and interest costs, Reliance Communications (RCom) continues to underperform peers. Since the start of the year, the stock has lost 71 per cent while Bharti has lost just 25 per cent. The company’s net debt /EBITDA (earnings before interest, depreciation and tax), estimated by a leading brokerage, stood at 2.7 at the end of September 2008, and could increase to 3.2 by the end of March 2009.
Should the company bid for a 3G licence, the expense could be even higher, pushing up the net debt/EBITDA to 4 by March 2010. The net debt on RCom’s books is expected to increase to a little over Rs 30,000 crore by the end of March 2009, while the EBITDA is estimated at just over Rs 9,500 crore. At the end of September, nearly 46 per cent of the debt was in foreign currency — around Rs 15,700 crore — while most of the cash is in local currency. Credit Suisse estimates that the next two quarters could see negative free cash flows.
The Rs 19,068 crore RCom needs to spend both on its existing CDMA and new GSM networks and also on 3G licences, which will be auctioned early next year. Unless it does that, it will lose out to competition. Already, RCom seems to be short on capital and could prune the allocation for the current year. According to Credit Suisse, the spends in 2008-09 will be close to Rs 18,000 crore compared with Rs 24,000 crore guided by the management. The company is understood to have neogitiated long-term funding of $1.5 billion though it is not clear whether the funds have been used. But, with debt becoming costlier over the last six months, whether in foreign or local currency, the management may consider the option of issuing shares.
Given the relatively high debt-equity ratio, the company may not want to opt for very competitive pricing for the GSM network, point out analysts, because that could hurt the operating profit further. The company’s performance in the September 2008 quarter was a tad below expectations, with ARPUS falling 4 per cent sequentially, the revenue per minute down 3 per cent sequentially and higher network costs resulting in an operating profit of Rs 2,300 crore, up just 2.3 per cent q-o-q.
