)
The Reliance Commun-ications (RCom) stock was up six per cent intraday on Thursday, on news that the company was planning to sell a stake in its global communications services business unit to Bahrain’s Batelco. The RCom management confirmed they were in talks but that there was no certainty of a transaction.
While the move will help RCom lower its debt to an extent, there are signs of improvement in operational parameters (a trend likely to sustain in the near term), both of which should lead to higher profits. However, the Street is sceptical and believes a significant reversal in sentiment towards the stock is unlikely to happen soon, at least till there is a meaningful reduction in debt. The past few days has also seen the government asking CDMA entities (including RCom) to pay a one-time excess spectrum charge.
Hence, despite the stock (Rs 61.70) trading at 16 times its FY14 earnings estimates (discount to listed players such as Bharti Airtel and Idea), a majority of analysts polled by Bloomberg continue to have a sell rating, with target prices ranging from Rs 67 to Rs 75.
Hoping for a deal
Given the $1-1.5 billion valuation according to reports, if the company sells half of its stake, it can reduce debt by about Rs 3,000 crore. The global enterprise unit accounts for 34 per cent of consolidated revenues. Though the deal will not bring down RCom’s debt pile of Rs 37,000 crore substantially, analysts say it will be a positive development. “While RCom has other operational challenges such as maintaining revenue market share, given its high leverage, any deal that can reduce debt and interest cost is incrementally positive,” says a telecom analyst with a domestic brokerage house.
However, some are sceptical about the chances of any deal, given the company’s history of these falling through. The company has tried to monetise its tower assets and the undersea cable business but has been unable to achieve a breakthrough.
Higher revenue per minute
Meanwhile, the fall in discounted minutes is a big positive for the sector and should rub off positively on Reliance Communications as well. Deutsche Bank analysts Srinivas Rao and Amyn Pirani say revenue per minute (RPM) for the key players is likely to increase three per cent in the March quarter and by two to three per cent annually over the next two years. For RCom, their estimate is 45.2 paise in FY15. The company recorded an RPM of 44 paise at the end of the December 2012 quarter and is expected to close FY13 at 44.3p. Most of the gains in RPM typically flow through to Ebitda (earnings before interest, taxes, depreciation and amortisation) and likely result is an increase in profits.
In addition to the RPM metric, the company is looking to raise its revenue market share. According to UBS, it is targeting a revenue market share of 14-16 per cent over the long term (from 10-11 per cent currently).
Better margins
Given the increase upwards of five per cent in RPM over the next year or two, expect Ebitda to improve by about 10 per cent, a positive for RCom. Further, high-margin, non-voice revenues as a percentage of wireless revenues at over 20 per cent, the highest in the telecom space, coupled with good growth prospects, bode well for the company. Wireless Ebitda margins (currently 26.6 per cent) could be positively affected by higher rates and an increasing proportion of data, say Rao and Pirani.
Regulatory concerns
While the reduction in competitive intensity is critical for higher profitability, another factor which could plague the stock is the uncertainty on regulations. CDMA entities have been asked to pay a one-time fee of Rs 3,000 crore for excess spectrum. RCom’s share is estimated at about Rs 1,750 crore by analysts. While this is a negative, RCom, unlike its listed peers, does not have significant pay outs due to licence renewal in the short term. The earliest payout for its GSM licence is in December 2015, while payments for GSM majors start next year.
