Recent tower deals, lower capex and higher subscriber additions augur well for Reliance Communications.
After putting up 50,000 towers and supporting infrastructure for its CDMA and GSM mobile services, Reliance Communications (Rcom) is putting them to good use. India’s second largest wireless company recently signed deals with a clutch of telecom service providers, which is aimed at improving infrastructure utilisation and at the same create a source of revenue for the company. Though the company has signed deals with Tata Tele, Aircel, Shyam-Sistema, the biggest has been its 10-year, Rs 10,000 crore deal with Etisalat DB Telecom.
Sweating assets
The deal with Etisalat involves providing end-to-end support services involving sharing of 30,000 towers across 15 circles. Rcom’s 95 per cent subsidiary, Reliance Infratel (RITL), will receive Rs 10,000 crore over the contract period. RITL has also inked a deal with STel for sharing about 10,000 towers in six Category C circles, which includes providing connectivity, transmission and roaming services as well.
The deal with STel is expected to bring RITL revenues of about Rs 1,000 crore. New operators are opting for the sharing of infrastructure instead of building one on their own as it helps them rollout their network faster, while for the service providers such as RITL this helps bring in much needed cash to fund expansion and improve asset utilisation.
Benefits
For RITL, which has a debt of Rs 15,000 crore on its books including the Rs 7,000 crore on account of transfer of the optic fibre business, these deals should improve its cashflow.
Analysts estimate that RITL would be able to garner revenues of Rs 10,000 crore from rentals and services by 2011-12 and maintain it at that level going ahead from about Rs 5,000 crore currently. At the EBIDTA level, margins have declined from about 70 per cent to 55 per cent currently, which should sustain going forward.
The sharing of assets is also expected to improve the tenancy ratio (service providers per tower) on RITL’s sites.
From about 1.6 times after the GSM launch, the company expects the tower capacity to move gradually to about three times post the recent deals by 2011-12. The towers have a maximum tenancy capacity of four times.
RITL’s largest competitor, Indus Towers, a joint venture between Bharti Airtel, Vodafone and Idea has a tenancy ratio of less than 2 with about 1 lakh towers. Considering that demand on the back of 3G and Wimax rollout and expansion of existing and new operators in the 2G space, the infrastructure slots (total number of tenants on the country’s tower network) should more than double to 7 lakh from about 3 lakh now. This augurs well for end-to-end provider such as RITL.
Unlocking value
The last time RITL sold a part of its equity (5 per cent) in 2008 it garnered about Rs 1,400 thus giving it a valuation of Rs 28,000 crore. Analysts estimate the enterprise value of the infrastructure arm currently at around Rs 30,000 crore, which indicates the value of the tower business hasn’t improved much even as the tower portfolio has increased.
| MAKING ASSETS WORK | ||
| Etisalat DB Telecom | S Tel | |
| Circles (nos) | 15 | 6 |
| Tower sites (nos) | 30,000 | 10,000 |
| Revenue (Rs crore) | 10,000 | 800-1,000 |
| Period (years) | 10 | 10 |
The recent deals and those in the offing should however help support valuations going ahead. Moreover, an IPO expected this fiscal should provide funds for expansion and debt repayment for Rcom as well as RITL besides, unlock value for Rcom’s shareholders.
Financials
On the back of its GSM launch, Rcom has been adding customers faster than the industry average with just under 3 million users per month (CDMA plus GSM) between January to July 2009 and has a 19 per cent market share. IIFL estimates that the company will see subscriber growth at about 33 per cent over the next two years vis-à-vis industry growth of about 27 per cent.
Despite robust subscriber numbers, revenues per user have been on the decline. In the June quarter, there was a decline of about 6 per cent y-o-y to Rs 210 due to a reduction of mobile termination charge. Cut throat competition and new schemes to improve its GSM subscriber base would mean further pressure on the ARPU front.
| THE TOWER SURGE | |||||
| in Rs crore | FY08 | FY09 | FY10E | FY11E | FY12E |
| Number of towers | 36,000.00 | 48,000.00 | 51,000.00 | 54,000.00 | 56,000.00 |
| Reliance Infratel (tower) revenues | 1,457.00 | 4,934.00 | 6,500.00 | 8,376.00 | 10,285.00 |
| Tower as a % of total revenues | 7.64 | 21.50 | 24.23 | 26.42 | 27.26 |
| Consolidated numbers | |||||
| Net sales | 19,068.00 | 22,948.00 | 26,822.00 | 31,708.00 | 37,733.00 |
| Operating profit | 8,199.00 | 9,305.00 | 10,594.00 | 12,998.00 | 15,093.00 |
| Net profit | 5,400.00 | 6,044.00 | 5,739.00 | 6,585.00 | 7,924.00 |
| P/E (x) | – | – | 11.30 | 9.87 | 8.21 |
| E: Estimates, Source: Analyst reports, Company | |||||
However, reduction in capex going ahead (capex guidance cut by 33 per cent to Rs 10,000 crore for FY10) and the pre payment of term of loan of Rs 5,000 crore should improve leverage and cashflow.
At Rs 306.60, the stock is trading at 11.3 times its 2009-10 earnings estimate of Rs 27. While it is adequately priced as far as 2009-10 earnings are concerned (an average of 12 times one year forward P/E over the last three years gives a target of Rs 324), a waiting period of 15 months could fetch about 20 per cent return.
