Tower asset deal to improve RCom cash flow, asset utilisation

Debt reduction will depend on upfront payment and stake sale in globalcom and tower assets

Reliance Communication (RCom)’s Rs 12,000-crore deal with Reliance Jio is a positive one for the former and would have a twin impact on its financials and operations. While the deal’s cash flow would help improve its operating profits, the company would be able to able to milk its assets without substantial incremental spend. Though the time frame of the tenure is not mentioned, analysts estimate it at 15-17 years. Assuming this is the case, most research firms believe the revenues per tower, per month, would be Rs 10,000-12,000.

Edelweiss analysts, led by Sandip Agarwal, say the deal (if the time frame is 17 years) could generate incremental revenues of Rs 700 crore a year, which is decent, considering all the 45,000 towers wouldn’t be used from first year. The second area of impact would be asset utilisation, with tenancy expected to rise with another long-term tenant. Manish Sonthalia, vice-president and fund manager, Motilal Oswal AMC, says, “Given some of the tower assets are underutilised, the deal will improve tenancy.

Net debt to Ebitda (earnings before interest, tax, depreciation and amortisation), which is at 5.5, is likely to improve.” While valuations for the tower assets are expected to improve, analysts say listing the tower assets could face some hurdles. They cited the case of Bharti Infratel, which, after listing, saw its value fall 14 per cent.

While most analysts believe there could be a lump sum component, given RCom’s need and focus of reducing the Rs 38,864-crore net debt pile, the company has not divulged the tenure or the periodicity of the payments. Analysts say if the Rs 1,200-crore fibre assets deal with Reliance Jio is combined with the current tower asset deal yielding about Rs 700 crore a year, Ebitda, which stood at Rs 6,600 crore in FY13, could rise by about Rs 2,000 crore in FY14.

“There would be some maintenance capital expenditure for increasing coverage on account of 3G and 4G services. Bharti and Idea have annual capital expenditure of $1-2 billion on this account,” said an analyst with a foreign brokerage. While RCom has maintained it does not need to spend that much, analysts say the company has to spend Rs 2,000 crore a year.

The company is unlikely to reduce capital expenditure, as it would impact service quality. So, if the deal does not entail any upfront payment, stake sale in its Globalcom unit or its tower arm would be inevitable, analysts say.

The stock, which hit a 52-week high, might not react much, as most of the news flow is already factored into the price. The stock has more than doubled since the beginning of April, when the fibre optic deal was announced.

Given the sharp run-up, most analysts have a ‘hold’ rating, with price targets in the Rs 95-105 range.

“This deal is broadly on expected lines and is a positive for RCom, as it opens a new source of revenue for it. Since April 2, when the fibre optic network-sharing deal was announced, RCom shares have gained about 87 per cent — from Rs 63.3 to Rs 118 on June 6, on wide speculation of this kind of a deal. As of now, we continue to remain ‘neutral’ on the stock and wait for clarity on the nature of payments, rentals, etc, of the deal size, as for the lifetime of the contract, not yet disclosed by the companies,” said Ankita Somani, research analyst (telecom), Angel Broking.