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Potential de-leveraging = Value creation?
High leverage – one of the key concerns in RCom
Based on our interaction with investors, we believe high leverage is one of the key
concerns on RCom. RCom management has stated their intention to sell a
controlling stake in Reliance Infratel to de-leverage balance sheet. In this note, we
analyse the impact of a possible stake sale in Reliance Infratel on RCom’s leverage
ratios.
What is the impact of a stake sale in Reliance Infratel on RCom?
RCom’s net debt to FY12E EBITDA declines to 2.5x if RCom sells 46% stake in
Reliance Infratel and declines to 1x if RCom sells its entire stake. We believe that a
stake sale in Reliance Infratel is likely to materialize in the next 6 months.
Positive catalysts likely over the next few quarters
1) Quarterly datapoints showing growth in total minutes, rev/min trend in line with
peers, improvement in revenue market share etc 2) news flow regarding further 2G
spectrum allocation to RCom 3) Passive infrastructure sharing agreement with
other operators as well as Reliance Industries 4) Announcement regarding stake
sale at Reliance Infratel or strategic stake sale at RCom. Please refer to our note
‘Favourable risk-reward’ dated 11 October 2010 for more details.
Valuation: Maintain Buy rating with price target of Rs270
We expect positive changes at the margin at RCom such as: 1) Improvement in
revenue market share 2) Revenue per minute close to incumbent operators. We
believe news flow regarding potential sale/stake sale in Reliance Infratel is likely
to act as a key catalyst to RCom stock price. Reliance Infratel contributes Rs89
(30%) to our SOTP based price target.
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