RCom fund-raising: A positive; more needed

Further deleveraging needed to cut net debt and sustain operational improvement

First, Idea Cellular and now, Reliance Communications (RCom): Both have successfully raised money from equity markets. While Idea raised Rs 3,000 crore, RCom has reportedly raised Rs 6,100 crore, 80 per cent of which was through a qualified institutional placement and the rest from promoters. While intense competition continues in the telecom sector, especially in rural markets, and given the Reliance Jio overhang, analysts say investors are betting big on the upside from data growth. Of RCom's India telecom revenue, 23 per cent is from non-voice services. The company has additional capacity to capitalise on the rise in demand.

RCom is hoping its infrastructure deals with Reliance Jio and others, as well as adequate spectrum, will translate into lower costs (compared to peers) relating to capex and spectrum in the coming auction.

The capital-raising is a positive, as it will reduce RCom's consolidated net debt of Rs 40,177 crore (as of March-end) by 15 per cent. Analysts, however, say the company needs to do more, as its consolidated FY14 interest costs, at Rs 3,191 crore, were higher than its operating profit of Rs 2,108 crore. The company is expected to save about Rs 800 crore in interest costs, largely by repaying its high cost (12-13 per cent) rupee debt from the proceeds of the latest offering. While interest cost savings will offset the 15 per cent equity dilution, at current levels, operating profits will barely be enough to service the reduced interest outgo.

However, what could help the company is securitisation of tower assets (estimated at Rs 5,000 crore by analysts), stake sale in Globalcom (Rs 6,700 crore), real estate (Rs 6,000 crore) and sale of the DTH business (Rs 1,800 crore), which are pending despite many attempts. It is expected some of these will fructify this financial year.

While analysts are scaling up their target prices marginally, most continue to have 'sell' ratings on the stock. A re-rating will depend on the company reducing its debt further and, more importantly, improving its operational performance.

While its bigger peers have seen a rise in subscribers, RCom's subscriber numbers have fallen from 153 million in FY12 to 112 million in the March quarter. Further, its revenue share has more-than-halved - from 16 per cent in the first quarter of FY08 to 6.9 per cent in the March quarter.

ICICI Direct Research analysts say the company's deteriorating competitive position and operating performance are a concern. However, the fact that some operational parameters such as revenue per minute and margins have improved in the past few quarters provides comfort. If the trend sustains, it could provide confidence to the market.