Reliance Communications- Impact of recent sector developments: Anand Rathi

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Reliance Communications
Impact of recent sector developments
 Maintain Sell. RCom is a key beneficiary of spectrum to be freed-up on
the proposed cancellation of new telcos’ licenses. However, cancellation
of Etisalat DB’s licenses would impact value of RCom’s tower business.
Besides, CAG report observations on Swan Telecom-related issues could
be an overhang on the stock.


 RCom key beneficiary of spectrum ‘dividend’ on proposed cancellation
of new telcos’ licenses…If the 69 licenses are cancelled as per TRAI’s
recommendations, ~280MHz of 2G spectrum across 22 circles would revert
to DoT. This freed-up spectrum could be given to telcos that have not yet
received the total 6.2MHz ‘contracted spectrum’. Notably, RCom has only
4.4MHz of GSM spectrum in 14 circles and could receive another 1.8MHz in
its circles for no additional consideration. Besides, the freed-up spectrum could
be used for allocation beyond the ‘contracted’ amount, although at a price.

 …however, cancellation of Etisalat DB’s licenses is negative for
tower arm. TRAI has recommended cancellation of 15 licenses of Etisalat
DB. Note, Etisalat DB had signed an agreement for leasing towers from
RCom’s tower arm, Reliance Infratel. Our target price (TP) of `160 for
RCom includes value for the tower business of `30/share (mainly driven
by the lease contract with Etisalat DB), which is at risk. We await the final
outcome of the issue (cancellation of licenses) and maintain our TP.

 Management clarifies stand on CAG report observations. CAG
report states that Swan’s application for 13 licenses (that overlapped with
RCom’s) were processed by DoT despite being ineligible due to noncompliance
with M&A norms, as RCom held >10% stake in Swan (M&A
norms prohibit an entity from holding +10% equity stake in two licensees
in a circle). RCom has clarified that at no time has it held +10% equity
stake in Swan and that it held 9.9% equity stake for a brief period. We
understand that CAG has included even preference shares issued by Swan
to RCom when calculating RCom’s stake in Swan. RCom said that issues
related to priority in spectrum allotment to Swan are ‘irrelevant’ to its
operations; it highlighted that it was not a shareholder in Swan when Swan
was given the licenses.