Deleveraging, merger with smaller telcos key triggers for RCom

The company is trailing peers on the operational front

Reliance Communications’ (RCom’s) stock was up five per cent on Wednesday and another 2.8 per cent on Thursday. This was due to buying by foreign institutional investors and expectations that integration with MTS, the merger with Aircel and towers sale would help reduce debt by 75 per cent.

Debt has been a worry in recent years, up about 13 per cent (net basis) over the past year to Rs 41,362 crore; the net debt to equity ratio was 1.32. While a meaningful cut in debt will be positive, other issues also need attention.

On the operational front, a merger with MTS and a spectrum sharing/trading deal with Reliance Jio will allow RCom to be aggressive in offering fourth-generation technology (4G) services. The company has already migrated a large portion of its subscribers from its CDMA base to 4G, with the rest likely to follow over the next couple of months.

Analysts, however, continue to retain a ‘sell’ rating, given the debt issues and under-performance at the operating level, and as RCom has lost share to peers. CLSA recently downgraded the stock due to debt and poor operating performance; Bank of America Merrill Lynch retained its under-perform rating due to muted core revenues. Both brokerages cut their price target to Rs 43.

In the March quarter, while RCom’s voice minutes were down six per cent year-on-year and data usage was up 20 per cent. This was lower than peers Bharti and Idea, indicating pressure on revenue market share, says Sanjesh Jain of ICICI Securities. On a sequential basis, however, its voice traffic growth (1.2 per cent) was in line with Idea Cellular but short of Bharti’s six per cent growth.

Revenue and operating earnings were ahead of estimates due to sale of right-of-use of its optic fibre capacity, lumpy in nature. Higher depreciation and finance charges meant the company reported a loss before tax. Had it not been for a tax write-back, it would probably have posted a loss, instead of a net profit of Rs 177 crore. Given the increase in debt in the quarter, volatile revenue streams, non-operational boost to profits and the looming RJio launch, an improvement in business fundamentals is crucial, as well as significant debt reduction.