RCom's debt-free plan may be a tough ask for the company

Reliance Communications (RCom) has as much debt on its balance sheet as its market cap. While its market cap stands at Rs 36,522 crore, net debt, four times of its earnings before interest, tax, depreciation and amortisation, is around Rs 33,000 crore.

Its stock performance has been muted, with its shares hovering between Rs 157 and Rs 170 for the last two months. Even on September 21, when stock markets rallied and the Sensex touched the 20,000-mark, the company’s shares went down 2.8 per cent.

RCom is caught between a rock and a hard place because it has to reduce its debt to win back investors’ confidence, and investors’ interest has to rise before they can get good valuation to strike profitable deals.

At the annual general meeting of the company, Chairman Anil Ambani said he planned to make RCom debt-free in three years. He talked of a number of fund raising plans — 26 per cent stake sale, a proposed qualified institutional placement, possible initial public offer of Reliance Infratel in combination with monetising its 55,000 telecom tower assets.

In the last few months, RCom had tried its hand at all these methods of equity raising. It signed an agreement with GTL Infra to transfer its 55,000 telecom towers in exchange for cash and stock in a new joint venture. But the deal fell apart and the company is again talking to private equity players. Its talks with UAE-based Etisalat to sell stake met the same fate.

These no-shows have made analysts cautious. “Though we believe that the stake sale will result in deleveraging the balance sheet, we prefer to wait until further clarity emerges,” said a recent research report by Ambit.

“The company has made many statements in many forums, but we have not seen any deal happening. It does not seem as if there are any interested buyers, otherwise the company would have found buyers by now,” said a Mumbai-based research analyst.

At its current market cap, a stake sale of 26 per cent could fetch around Rs 9,496 crore. A telecom tower deal could fetch around Rs 18,000 crore (as calculated from GTL deal). These valuations indicate that deals will have to be done at a premium to cover the debt.

“It all boils down to the price at which the stake deal is sealed and how they plan to monetise their tower assets. Bringing down the entire debt may be challenging. It will also depend on how the telecom industry will shape up in the next one-two years,” said Jagannadham Thunuguntla, equity strategist, SMC Global Securities.

Telecom rates are stabilised. Last year, telecom companies’ margins were squeezed by regular rate cuts owing to competition. Though analysts see a silver lining, they refuse to give a timeline on when rates would increase.

The state of affairs in the Indian telecom industry could act as a barrier to foreign investments. “Right now, the telecom industry is not being fancied by foreign companies. We have seen cases of Telenor being under tremendous pressure in Norway because of increased gestation period in India,” said Thunuguntla.

Independent stock analyst S P Tulsian, however, feels it is quite possible that RCom’s attempts to strike deals might yield fruit in the next six months. “If they can go through both deals, they can become debt-free sooner than they claim. A stake sale deal could happen at over Rs 220 per share, and it would be better if they sell their tower business for all cash as opposed to cash and stock.”