High debt pulls down Anil Ambani group shares by a third

Analysts expect group companies to report flat sales in December 2014 quarter

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The share prices of key Anil Ambani group companies including Reliance Communications, Reliance Infrastructure and Reliance Power have lost one-third of their value in the past six months. This is  mainly due to the group firms’ high debt to the tune of Rs 1 lakh crore and expectation of flat revenues in the December 2014 quarter.

According to stock exchange data, Reliance Communications stock is down 39 per cent, Reliance Infrastructure scrip is down 37 per cent, and Reliance Power has lost 35 per cent of its value in the past six months. The stock price of the group’s financial services company, Reliance Capital, has also dropped 21 per cent  in the past six months. The group has lost a combined market capitalisation of Rs 31,674 crore, or 35 per cent, in the past six months. The BSE Sensex was up about 10 per cent in the same period.

For the December 2014 quarter, analysts expect the group’s wireless telephony arm, Reliance Communications, to report 2.8 per cent of revenue growth, backed by a four per cent volume growth.

“The management’s commentary on the plan for debt reduction, such as Global Cloud Xchange sale and securitisation of cash flows due from Reliance Jio, and the strategy for the upcoming spectrum auction will be key things to look for,” said an Edelweiss analyst.

Reliance Communications, whose debt stood at Rs 32,000 crore in September 2014, has said it will sell its assets to repay loans.

“There is not much change in the business anyway to warrant a buying. The fall in the share prices could be due to some funds unwinding their position due to year-end commitments and overall crash in commodities globally,” said an analyst. The firm’s plan to raise $225 million as dollar bonds was called off in December 2014 due to lack of response from investors.

When contacted, a Reliance spokesperson said the company was on track with the asset sales plans as announced by group chairman Anil Ambani in the annual general meeting (AGM) of shareholders held in September 2014.

During the AGM, Ambani had promised to bring down the company’s debt by Rs 15,000 crore by March 2016 by selling real estate, direct-to-home business and other assets.

Analysts say the sale of these assets and reduction of debt will remain the main trigger for the company’s valuation to improve.

In Reliance Infrastructure, analysts say declining order book, which has impacted revenue visibility, is a concern.

“The margin of the EPC (engineering, procurement and construction) division also needs to be tracked,” said an analyst with Edelweiss. Analysts at Motilal Oswal expect Reliance Infrastructure to report a revenue of Rs 2,430 crore for the December 2014 quarter, down four per cent on a year-on-year (y-o-y) basis.

“This is attributable to lower revenue from the EPC division. During the quarter, we expect Reliance Infrastructure to post lower EPC revenue of Rs 550 crore versus Rs 830 crore on a y-o-y basis. The PAT (profit after tax) for the quarter is expected to be down by 12 per cent at Rs 330 crore,” said a report by Motilal Oswal Securities.

It said the operating capacity at Sasan ultra mega power project (UMPP) reached 3.9 Mw as Unit-6 was synchronised recently and the good news for the company was that the coal blocks allotted to Sasan UMPP (Moher and Moher Amroli Extension) have not been cancelled.

Recently, the Attorney General recommended that the Delhi Metro Rail Corporation (DMRC) pay towards debt obligation for Delhi Airport Metro express, in lieu of termination announced by the company. “We expect Reliance Infrastructure to report standalone PAT of Rs 1,350 crore in FY15, down 15 per cent y-o-y, and Rs 1,620 crore in FY16, up 20 per cent y-o-y,” said the analyst.

The company’s financial services firm, Reliance Capital, sold 2.77 per cent stake in the company to Sumitomo Mitsui Bank for Rs 371 crore in December 2014. Another Japanese financial services giant, Nippon Life, recently signed an agreement with Reliance Capital Asset Management, a part of Reliance Capital, to raise its stake in the company from 26 per cent to 49 per cent in two or more tranches over the next two years.

Nippon Life also has a 26 per cent stake in Reliance Life, the life insurance arm of Reliance Capital. These asset sales have helped Reliance Capital shares remain flat in the past three months, say analysts.
 

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