RCom's 2G exit is a step in right direction but uncertainty lingers

While RCom has done the right thing by closing down its loss-making 2G business, investors should cut their losses in the stock as the outlook remains clouded

With Reliance Communications (RCom) announcing the closure of a major part of its wireless business within the next 30 days, its stock plummeted to near 52-week low of Rs 16.05. Given the company's weak fundamentals and high competitive intensity within the telecom business, existing investors would be better off exiting it, say experts.

Weak business fundamentals

RCom was one of the earliest entrants into the 2G business but remained a marginal player while competitive intensity kept increasing within the sector. Jio's entry created a massive disruption. Last year, at the time of its launch, it made calls free. RCom, which earns a predominant portion of its revenue and profits from calls, was hit in a big way.

Of its total subscriber base of 75 million, around 50 per cent are from 2G. The industry has moved to 3G and 4G and prices have crashed. Other players are currently offering highly attractive plans, which has left the 2G business unattractive. People using older phones still use 2G. But in this business, the cost for RCom is around double the ARPU (average revenue per user), which means that the company loses money on servicing its 2G clients every month. Hence, it has done the right thing by shutting down its 2G business.  

However, RCom's 3G and 4G businesses will continue as they have a spectrum licence till 2021. Whether RCom will be able to retain its 2G customers remains questionable with people having options such as migration to rival companies. However, people may also not upgrade to 3G, 4G as it requires a different handset. 

Debt-ridden RCom may find it difficult to renew its licence as the cost of renewal will be high.

In an attempt to reduce its debt, the company is trying to monetise some of its assets, such as the tower business, which are profitable. It is in talks with private equity players to sell a minority stake in that business and reduce its debt. It also owns valuable real estate which it plans to sell.

Worsening financials

The company's net sales for FY17 stood at Rs 22,149 crore, having grown at a compounded annual growth rate (CAGR) of barely 1.4 per cent over the past three years. Its adjusted profit after tax (PAT) plummeted from Rs 1,087 crore in FY14 to a loss of Rs 1,484 crore in FY17. Total debt rose from Rs 41,978 crore in FY14 to Rs 49,061 crore in FY17, growing at a CAGR of 5.28 per cent.

In the first quarter of FY18, the stock recorded net sale of Rs 1,643 crore and a PAT of Rs -963 crore.   

Plummeting stock price 

The stock has lost about 71.8 per cent of its value over the past five years, falling from Rs 57 (on October 26, 2012) to Rs 16 currently. Over this period, its market cap has declined from Rs 14,113 crore to Rs 3,970 crore.        

Experts suggest that investors should exit the stock. "Fundamental investors should sell and exit this stock as there is a lot of uncertainty. RCom is a marginal player in a capital-intensive and highly competitive industry. It lacks balance sheet strength at present. The investor should treat whatever he has lost in this stock as sunk cost and he should cut his losses and exit," says Jatin Khemani, founder and chief executive officer, Stalwart Advisors, a Sebi-registered independent equity research firm.