BNP Paribas: Reliance Comm- Debt is manageable

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Debt is manageable 
ƒOur analysis of debt instils faith in ability to service debt
ƒ Ability to meet debt obligations would prevent distress sale
ƒ Deleveraging could drive valuation close to replacement cost
ƒ Reiterate BUY with TP of INR200 (FY12 EV/EBITDA of 8.7x)

Analysis of RCOM’s debt

One of the concerns raised by investors
following our recent upgrade (see our
note, “Valuable assets”, dated 7 January
2010) of Reliance Communications
(RCOM) based on replacement cost was
its inability to meet its debt obligations,
possibly resulting in a sale of assets
significantly below replacement value. To
seek clarity on RCOM’s ability to service
its debt, we have calculated a debt
repayment schedule and future funding
requirements (Exhibit 1), based on the
Reserve Bank of India’s data on External
Commercial Borrowing (ECB) (Exhibit 6),
company reports and our estimates for capex and interest cost. Our
analysis suggests that RCOM is well-positioned to meet its debt
obligations and fund its future capex requirements.
No urgency to sell assets below cost to deleverage
In FY11, RCOM had to borrow INR85.85b for 3G spectrum auctions, part
of which was refinanced recently from China Development Bank (CDB).
As shown in Exhibit 1, the ECBs due for repayment by RCOM are
INR12.59b in FY11 and INR5.22b in FY12. The revised interest cost in
FY11, including the 3G-related debt, works out to INR19.92b, translating
into FY11E interest cover of 3.4x or ECB and interest cover of 2.1x. For
FY12E, the ECB, FCCB and interest cover works out to 0.9x and interestonly cover works out to 4.6x. RCOM has recently secured USD600m
from China Development Bank (not listed) to procure equipment from
Chinese vendors. In addition, rollover of debt and cash balance of
INR86.1b could enable RCOM to meet its funding needs (Exhibit 5).
Deleveraging could drive valuation to replacement value
The adequate level of EBITDA and lower interest cost should enable
RCOM to meet its interest and debt repayment obligation and prevent
distressed sale of assets below replacement value. We reiterate BUY on
RCOM based on our base-case replacement value of assets net of debt
of INR200.00 per share translating into FY12E EV/EBITDA of 8.7x. We
value the 2G GSM spectrum at USD1b, 2G CDMA spectrum at 75% of
value ascribed to GSM spectrum and 3G at USD1.5b, or 75% of the
auction price. We value infrastructure such as telecom towers at
USD100,000/tower, in-line with recent tower deals in India and the undersea cable and domestic fiber network at the current cost of construction.
The wireless equipment is valued at USD50 per subscriber, assuming
50m GSM and 38m CDMA subscribers (based on Visitor Location
Register data). Other businesses (including DTH) are valued at book.
Risks include deterioration of core business, economic downturn freezing
credit issuance and inability to consummate an asset sale transaction.