RCom: Spate of good news

The equity stake dilution is likely to improve balance sheet strength, but operational efficiency will also be required

The Reliance Communications scrip is seeing a flurry of interest after struggling for the better part of the year. The news of equity dilution and scrapping of Reliance Industries’ right of first refusal for such a stake sale has seen the share price rise 14 per cent last week. For the past one year, the stock has taken a beating and underperformed the Sensex by 65 per cent.

The super-charged competitive scenario pulled down tariffs, average revenues per user, margins and market share. Revenue grew only 1.7 per cent sequentially during the March quarter, lower than peers. Moreover, average monthly minutes of usage per subscriber dipped 3.6 per cent. Also, RCom’s stretched balance sheet, with net debt at Rs 19,878 crore at the end of FY10 and high leverage levels (net debt to earnings before interest, tax, depreciation and amortisation ratio at 2.5x) dragged down the stock further. Given that it has a Rs 8,585-crore payout due for 3G spectrum slots in 13 circles, the net debt to Ebitda ratio will stretch further to 3.9 times, say analysts at Religare. The company is also bidding for broadband wireless spectrum. It has two large FCCB (foreign currency convertible bond) repayment tranches due in the next two years — $296 million and $925 million in FY11 and FY12, respectively.

The equity dilution, with a fresh issue of 711 million shares at Rs170-210 per share, will raise Rs 12,100-14,900 crore, according to analysts. This will improve 2010-11 net debt to Ebitda ratio to 1.7-2.2 times. The resultant balance-sheet strength will allow it to buffer its competitiveness in the current environment.

The tariff pressure is expected to drag down revenues and margins for the sector at large. But, analysts reckon the competitive pressures will peak and sanity will return. However, with a fresh lease of life from the potential equity raising, RCom may pose a renewed fight for subscribers, which could prolong the battle.