RCom stock falls 14% in a week

Loses Rs 2,775 cr of market value after September quarter results; debt load a big investor worry

The stock of Reliance Communications (RCom), part of the Anil Ambani fell 14.4 per cent and lost market value worth Rs 2,775 crore in a week as brokerages cut the wireless telephony company’s earnings estimate for the rest of the financial year. The stock fell seven per cent on Friday to Rs 66 a share, with a total market value of Rs 16,460 crore (see chart).

The fall in market value would be bad news for Russian telecom company Sistema, which announced an all-stock merger with RCom early this month. Under the deal, Sistema was to hold 10 per per cent equity in RCom’s increased equity capital. Since it was announced, the RCom stock is down 17 per cent, upsetting all Sistems’s deal calculations. It had been banking on a competitive position for the combined entity, hastening the growth of LTE technology in India.

Analysts said the tepid September quarter, with a miss on revenue and profit expectations, and a 3.1 per cent decline in sales over the earlier quarter, are the main reasons for the stock's fall. Investors are particularly worried over the company’s debt. Including deferred spectrum liability of Rs 3,200 crore, it was Rs 43,100 crore as on end-September. Even excluding this liability, net debt has gone up by Rs 3,200 crore from th close of 2014-15, a reflection of the sharp increase in loans and advances, and sustained cash burn in the core business.

“The weak earnings print drives a 2-2.5 per cent cut in top line estimates and four to six per cent cut in earnings before interest, tax, depreciation and amortisation. We have also increased capital expenditure in line with the company’s guidance (forecast) of Rs 3,000 crore. All of this drives a 19-27 per cent cut in EPS (earnings per share) estimates,” said Kotak Institutional analysts while downgrading the company’s stock to Rs 60 a share.

In the coming months, it is looking forward to a nationwide partnership with Mukesh Ambani's Reliance Jio to better its fortune. The company has applied for liberalizing 800 MHz spectrum in 19 of the 22 telecom circles, in two tranches – the first being an application for eight circles and the second one for 11.

Analysts said the eight circles of the first tranche might map Sistema’s ‘liberalised spectrum’ circles and RCom could utilise Sistema’s spectrum for continuing its current CDMA business. And, RCom’s spectrum could be traded to RJio without any business disruption.

Another milestone would be sale of assets to reduce its debt. The management indicated it was close to finalising the stake sale in Reliance Infratel, the company’s tower subsidiary. However, it gave no estimate of when this might be done.