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Reliance Communications (RCOM)
Telecom
Excitement understandable but unjustified. The market appears excited with a
couple of developments (1) the US$1.9 bn term loan facility from China Development
Bank – this should at best be seen as a stamp of confidence on the company, an
endorsement that should do little for a stock already getting rich valuations, and (2)
potential tower sale deal – it does deleverage RCOM, but not by generating free cash
but by transferring EBITDA. Retain SELL.
CDB debt agreement would be a positive if RCOM were trading at distressed valuation
A section of the Street appears excited with RCOM finalizing its US$1.9 bn loan facility with China
Development Bank. RCOM has indicated that US$600 mn out of the US$1.9 bn facility is
essentially financing for equipment purchase from Chinese vendors, while the remaining US$1.3
bn is a syndicated loan for refinancing part of the company’s existing debt. We do not share the
excitement and are in fact, perplexed with the same. The debt agreement can at best be seen as
(1) an indicator of RCOM’s ability to raise debt in the market, and/ or (2) a stamp of confidence
from CDB on RCOM as a going concern.
Such a development would be a positive for a company trading at distressed valuations, where the
stock price indicates low confidence in the company as a going concern. RCOM is not trading
anywhere close to distressed levels – a stock price of Rs90 translates into an FY2012E
EV/EBITDA of 7.3X, a 30-40% premium to emerging market telcos and broadly in line with
Bharti’s trading multiple. We also note that this assumes a 12% yoy growth in EBITDA in
FY2012E; RCOM has not reported yoy EBITDA growth for the past six quarters; its EBITDA declined
by 17% in FY2010 and we estimate a 7% yoy EBITDA decline in FY2011E.
The fact that the stock price has fallen 88% from its peak and that the stock has underperformed
massively (44% 12-month underperformance versus Sensex) may make the valuations appear
distressed but as we discussed above, this is clearly not the case. Current valuations just about
reflect the company’s weakened earnings power and not ‘going concern’ concerns.
Tower deal – value realization, not value creation
Please see our note dated March 4, 2011 for detailed thoughts on a potential tower sale
transaction. Recent press reports indicate that RCOM is in talks with three/four bidders for the
company’s tower assets residing in the Reliance Infratel subsidiary. We note that RITL towers have
very little external tenancy and hence, the headline deal valuation would reflect the tower lease
terms that RCOM agrees to, in the transaction. It’s a ‘sale and lease back’ transaction, essentially –
high/low tower sale valuation would reflect the high/low lease rentals agreed upon. Bottom-line –
(1) a tower deal would aid deleveraging but at the cost of lower future EBITDA and (2) the
transaction values reported in the press do not suggest value creation
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Communications (RCOM)
Telecom
Excitement understandable but unjustified. The market appears excited with a
couple of developments (1) the US$1.9 bn term loan facility from China Development
Bank – this should at best be seen as a stamp of confidence on the company, an
endorsement that should do little for a stock already getting rich valuations, and (2)
potential tower sale deal – it does deleverage RCOM, but not by generating free cash
but by transferring EBITDA. Retain SELL.
CDB debt agreement would be a positive if RCOM were trading at distressed valuation
A section of the Street appears excited with RCOM finalizing its US$1.9 bn loan facility with China
Development Bank. RCOM has indicated that US$600 mn out of the US$1.9 bn facility is
essentially financing for equipment purchase from Chinese vendors, while the remaining US$1.3
bn is a syndicated loan for refinancing part of the company’s existing debt. We do not share the
excitement and are in fact, perplexed with the same. The debt agreement can at best be seen as
(1) an indicator of RCOM’s ability to raise debt in the market, and/ or (2) a stamp of confidence
from CDB on RCOM as a going concern.
Such a development would be a positive for a company trading at distressed valuations, where the
stock price indicates low confidence in the company as a going concern. RCOM is not trading
anywhere close to distressed levels – a stock price of Rs90 translates into an FY2012E
EV/EBITDA of 7.3X, a 30-40% premium to emerging market telcos and broadly in line with
Bharti’s trading multiple. We also note that this assumes a 12% yoy growth in EBITDA in
FY2012E; RCOM has not reported yoy EBITDA growth for the past six quarters; its EBITDA declined
by 17% in FY2010 and we estimate a 7% yoy EBITDA decline in FY2011E.
The fact that the stock price has fallen 88% from its peak and that the stock has underperformed
massively (44% 12-month underperformance versus Sensex) may make the valuations appear
distressed but as we discussed above, this is clearly not the case. Current valuations just about
reflect the company’s weakened earnings power and not ‘going concern’ concerns.
Tower deal – value realization, not value creation
Please see our note dated March 4, 2011 for detailed thoughts on a potential tower sale
transaction. Recent press reports indicate that RCOM is in talks with three/four bidders for the
company’s tower assets residing in the Reliance Infratel subsidiary. We note that RITL towers have
very little external tenancy and hence, the headline deal valuation would reflect the tower lease
terms that RCOM agrees to, in the transaction. It’s a ‘sale and lease back’ transaction, essentially –
high/low tower sale valuation would reflect the high/low lease rentals agreed upon. Bottom-line –
(1) a tower deal would aid deleveraging but at the cost of lower future EBITDA and (2) the
transaction values reported in the press do not suggest value creation
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