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Reliance Communication Ltd.
Tight rope-walk on various fronts
„Earnings pressure likely to stay; maintain underperform
RCom’s share price has collapsed recently and barring M&A triggers, we think
valuations are still not exciting. The stock is trading close to 7.5x FY12EEV/EBITDA i.e. on par with Bharti for weaker earnings outlook. We think dramatic
earnings turnaround is unlikely given RCom’s current brand position & advertising
intensity. We have cut PO to Rs115/sh (-18%) and foresee pot’l further downside
from recent TRAI recos and non-execution of the tower-sharing deal with Etisalat.
Traffic contracts in 3Q; MNP may aggravate weakness
RCom’s operating performance in 3Q FY11 was a tad below our expectations.
Wireless traffic fell 3% QoQ in 3Q FY11 and wireless revenues contracted 2%
QoQ despite stable tariffs. On its post-results call, RCom’s top mgt. said they are
rebalancing their offerings by withdrawing from less profitable segments like
PCOs. Also, our channel checks suggest that the Co’s advertising and distribution
intensity are low resulting in loss of traffic market share. We worry that RCom’s
traffic share may weaken further owing to mobile number portability.
FCCB refinancing may hurt FY12E; bal-sheet stress remains
As of Dec ’11, RCom’s net debt stood at ~US$7bn and net debt/EBITDA is
forecast at ~5x FY11E. The Co’s average borrowing cost (excluding forex
fluctuations) has been relatively low at ~4.5% due to funding via convertible
bonds. (FCCBs) to the tune of ~US$1.2bn. The FCCBs are due for redemption in
FY12E & a challenging refinancing environment may lift RCom’s borrowing costs.
M&A attractiveness may emerge; low visibility on buyers
RCom is now trading at a Price/book of 0.5x FY11 albeit for a low RoE of ~2-3%,
and assuming full value for the CDMA network. We think the deep discount may
facilitate M&A/asset attractiveness unless regulatory risks surface.
Price objective basis & risk
RCVL (RLCMF)
We have a price objective of Rs115/sh for RCom. Our PO is based on sum-ofparts and DCF. Reliance Infratel (towerCo) is valued at the top-end of EV implied
by deals in the towerCo space. We value RCom's non-wireless businesses at 5x
FY12-EV/EBITDA while RCom's wireless business is rough-stab valued at around
4.5x FY12-EV/EBITDA (post-towers) implying 15-20% discount versus GEM
wireless majors. Upside surprise could be led by asset sales at strong premiums.
Downside risk to our outlook could stem from continued failure to monetize the
tower-business and unforeseen margin pressures post MNP and 3G.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Communication Ltd.
Tight rope-walk on various fronts
„Earnings pressure likely to stay; maintain underperform
RCom’s share price has collapsed recently and barring M&A triggers, we think
valuations are still not exciting. The stock is trading close to 7.5x FY12EEV/EBITDA i.e. on par with Bharti for weaker earnings outlook. We think dramatic
earnings turnaround is unlikely given RCom’s current brand position & advertising
intensity. We have cut PO to Rs115/sh (-18%) and foresee pot’l further downside
from recent TRAI recos and non-execution of the tower-sharing deal with Etisalat.
Traffic contracts in 3Q; MNP may aggravate weakness
RCom’s operating performance in 3Q FY11 was a tad below our expectations.
Wireless traffic fell 3% QoQ in 3Q FY11 and wireless revenues contracted 2%
QoQ despite stable tariffs. On its post-results call, RCom’s top mgt. said they are
rebalancing their offerings by withdrawing from less profitable segments like
PCOs. Also, our channel checks suggest that the Co’s advertising and distribution
intensity are low resulting in loss of traffic market share. We worry that RCom’s
traffic share may weaken further owing to mobile number portability.
FCCB refinancing may hurt FY12E; bal-sheet stress remains
As of Dec ’11, RCom’s net debt stood at ~US$7bn and net debt/EBITDA is
forecast at ~5x FY11E. The Co’s average borrowing cost (excluding forex
fluctuations) has been relatively low at ~4.5% due to funding via convertible
bonds. (FCCBs) to the tune of ~US$1.2bn. The FCCBs are due for redemption in
FY12E & a challenging refinancing environment may lift RCom’s borrowing costs.
M&A attractiveness may emerge; low visibility on buyers
RCom is now trading at a Price/book of 0.5x FY11 albeit for a low RoE of ~2-3%,
and assuming full value for the CDMA network. We think the deep discount may
facilitate M&A/asset attractiveness unless regulatory risks surface.
Price objective basis & risk
RCVL (RLCMF)
We have a price objective of Rs115/sh for RCom. Our PO is based on sum-ofparts and DCF. Reliance Infratel (towerCo) is valued at the top-end of EV implied
by deals in the towerCo space. We value RCom's non-wireless businesses at 5x
FY12-EV/EBITDA while RCom's wireless business is rough-stab valued at around
4.5x FY12-EV/EBITDA (post-towers) implying 15-20% discount versus GEM
wireless majors. Upside surprise could be led by asset sales at strong premiums.
Downside risk to our outlook could stem from continued failure to monetize the
tower-business and unforeseen margin pressures post MNP and 3G.
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