We upgrade RCom to Neutral (from Underperform) with a target price of 199/sh. Contrary to the popular belief (including ours until now) about RCom being a price warrior, we witness signs in the marketplace that the company has taken steps to increase its prices. This is a significant positive for the industry and reinforces our view that pricing power is coming back to GSM operators (refer our report dated 24 Sept. 2010).
Due to improving realisation, RCom’s mobile business is likely to turn around. We now expect revenue per cell site to increase from 2.1mn in FY10 to ~ 2.7mn in FY13 led by improvement in realisation and load factor. However, high financial leverage (Net debt/EBITDA at 4.7x in FY11E) remains an overhang and significant dilution would be necessary to reduce the burden.
Mobile business turnaround in the offing
Contrary to the popular belief (including ours until now) about RCom being a price warrior, we witness signs in the marketplace that the company has taken steps to increase its prices (refer figures 3-5). We expect RCom’s wireless revenue growth momentum to improve as a result of its focus on paid minutes. We would like to highlight that so far we were cautious of the impact of RDEL income on wireless revenue since subsidy was supposed to end at the beginning 1QFY11. However, stable RPM through 1QFY11 implies that the impact of decline in RDEL income is being absorbed by an improvement in the mobile business.
Expect improvement in revenue per cell site
RCom’s revenue per cell site is likely to improve from 2.1mn/cell site in FY10 to ~ 2.7mn/cell site in FY13 led by improvement in realisation and load factor (minutes per cell site). In addition, we expect significant improvement in RCom’s FCFF to ~ 50bn by FY13, which is supported by a steep decline in its capex.
However, high financial leverage remains an overhang
RCom’s net debt stands at 334bn (FY11E) and Net debt/EBITDA at 4.7x (FY11E). Its FCCB repayment obligation (including premium) stands at ~US$1.5bn for FY12. Significant dilution is required to reduce the burden.
Upgrade to Neutral led by improvement in business fundamentals
Due to improvement in RCom’s business fundamentals which would enhance chances of capital infusion as well, we upgrade the stock to Neutral from Underperform. We expect Revenue/EBITDA to grow at 15%/22% CAGR respectively from FY11-13 led by turnaround in its mobile business. However, due to the back-ended nature of turnaround expected in FY12 and FY13, EV/EBITDA and PE-based valuation metrics would not be able to capture the right value of the company. Hence, we value the company based on DCF. On this basis, our estimated fair value is 199 (implying 6.3x FY13E EV/EBITDA).
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