RIL deal not enough for RCom re-rating

RCom stock, which rose nearly 9% earlier in the day, gains 2% to end at Rs 64.50

Shares of Reliance Communications (RCom) extended gains on Wednesday, a day after it announced a deal with Reliance Industries Ltd (RIL) to share its fibre optic network. The stock, which rose as much as nine per cent during the day, ended about two per cent higher to end at Rs 64.50 as a sentence in RCom’s press release fired the imagination of Dalal Street traders.

The release said the deal “is the first in a comprehensive framework of intended business cooperation between RJIL (Reliance Jio Infocomm — the telecom arm of RIL) and RCom (Reliance Communications)”, raising hopes that the companies could announce a tower leasing deal.

According to analysts, this statement had a bearing on the stock than the fibre optic network sharing deal, because the proceeds from the agreement — Rs 1,200 crore — would do little to reduce the company’s huge debt of Rs 37,200 crore as on December 31, 2012. Analysts have ruled out any immediate re-rating of the stock. “The annual usage charge as well as potential tower sharing with RCom following the fibre deal would help accelerate the deleveraging, which is critical for the stock re-rating,” said Citigroup’s analysts Gaurav Malhotra and Arthur Pineda in a note to clients. RCom had risen almost 11 per cent yesterday.

RIL, which fell 2.2 per cent on Wednesday, erased the previous day’s gains. Shares of other telecom players dropped on worries the entry of cash-rich RIL into the telecom business would further squeeze the already debt-laden companies in the sector.

“…entry of the well-capitalised RIL could be detrimental for the already strained telecom sector,” said Religare Capital Markets’ analysts led by Ballabh Modani in a client note.

 

Bharti Airtel fell four per cent, while Idea Cellular declined 1.6 per cent on Wednesday. While technical analysts said there could a short-term rally in the stock, Kotak Institutional Equities, which has a price target of Rs 65 for RCom, recommends selling the stock on a rally.

A K Prabhakar, senior vice-president, Anand Rathi Securities, said the RCom stock could rise another 15 per cent from here on technical reasons.

“At this point, we see a tower leasing agreement between RJIL and RCom as the only further material business cooperation opportunity. With some fairly benign assumptions, we compute a potential upside of Rs 18/share for RCom from a tower lease transaction with RJIL – this was already baked into our target price,” said Kotak Institutional Equities’ Rohit Chordia and Shyam M in a client note.