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Reliance
Communications Ltd.
Wireless Business Shines;
Debt Concerns Overdone
What's Changed
Price Target Rs130.00 to Rs116.00
EPS F2012E, F2013E -38%, -28%
We reiterate our Overweight rating on RCOM on
three grounds: 1) The positive trends in F1Q12 results
support our bullish stance on Indian wireless; 2) RCOM
is FCF positive, and we believe that it is in a good
position to meet its debt obligations; 3) Valuation is
attractive at all-time low price to book of 0.3x.
Tariff stabilization in Indian wireless: We believe that
price competition has stabilized in the last quarter.
Indeed, in the F1Q12 results, all the major operators
reported stable to slightly increasing tariffs, which is a
good sign for the industry.
RCOM’s debt repayment is not a concern. RCOM was
FCF positive in F1Q12, and we estimate that RCOM can
generate US$1.1bn FCF in F2012E, which can be utilized
to meet its requirements for the FCCB repayment, in
addition to the remaining US$600mn of its CDB loan yet
to be drawn down. The FCCB bond is currently trading at
an attractive yield of 16%. We have not assumed any
asset sell-off in our base case assumptions.
Current valuation looks attractive. RCOM’s valuation
looks attractive at price to book of 0.3x, the lowest among
Asian telcos, and arguably, anywhere across the world.
We have lowered our EPS estimates for F2012/13E
by 38%/28% largely due to lower contributions from the
global and enterprise business. This has led us to lower
our price target by 11%, to Rs116, which implies 46%
upside from the current levels. Our revised EBITDA
estimates are slightly lower than consensus
We Reiterate Our Overweight Rating on RCOM
Summary & Conclusions
We lower our target price from Rs130 to Rs116: That
implies 46% upside from current levels. We have lowered our
EPS estimates for F2012/13E by 38%/28% largely due to
lower contributions from the global and enterprise business.
Our revised F2012/13 EBITDA estimates are slightly lower
than consensus.
Our OW rating on RCOM is based on three factors:
1) The positive trends in F1Q12 results support our bullish
stance on Indian wireless;
2) RCOM is FCF positive, and we believe that it is in a good
position to meet its debt obligations;
3) Valuation is attractive at all-time low price to book of 0.3x.
Tariff stabilization in Indian wireless
We believe that the price competition in Indian wireless has
stabilized in the last quarter. Indeed, in the F1Q12 results, all
the major operators reported stable to slightly increasing
tariffs, which is a good sign for the industry. In late July, Bharti,
Vodafone and Idea raised their prepaid on-net tariffs by 20%
in several circles. RCOM also followed suit and announced a
similar hike in its tariff in the last week. This leads us to
believe that growth has returned to the industry, and further
affirms our bullish stance on the Indian wireless business
RCOM’s debt repayment is not a concern
RCOM has obtained a US$1.9bn line of credit from China
Development Bank and has already drawn down US$1.3bn of
this facility, while the balance (US$600mn) is yet to be drawn
down. RCOM has utilised these funds to repay its short-term
rupee debt, which has declined to US$1.6bn in F1Q12 from
US$2.7bn in the previous quarter. However, the net debt of
the company has remained largely constant during the quarter,
as the foreign loans have increased and cash balance has
declined (Exhibit 4).
On the FCCB loans, the company has already paid its first
FCCB tranche of US$375mn due in May 2011, and the
second FCCB tranche of US$1.15bn, including the premium
linked to the FCCB, is due in March 2012. RCOM already was
FCF positive in F1Q12, and we estimate that the company will
be FCF positive and can generate FCF of US$900mn of FCF
in F2012E, which can be utilized for meeting its requirements
for the FCCB repayment, along with the balance US$600mn
to be drawn down from CDB. Our F2012E capex estimate of
~US$940 is much higher than the capex guidance of US$330
indicated by management, hence there is upside risk to our
Company Description
Reliance Communications Ltd was formed by the demerger and
vesting of the telecom business of Reliance Industries Limited.
Reliance Communications is one of the largest integrated
communications service providers in the private sector in India.
It had over 135mn individual consumer, enterprise, and carrier
customers as of March 2011. It has pan-Indian operations,
providing wireless, wireline, and long-distance voice, data, and
Internet communication services. It also has an extensive
international presence, providing long-distance voice, data, and
Internet services and submarine cable network infrastructure.
India Telecommunications
Industry View: Attractive
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance
Communications Ltd.
Wireless Business Shines;
Debt Concerns Overdone
What's Changed
Price Target Rs130.00 to Rs116.00
EPS F2012E, F2013E -38%, -28%
We reiterate our Overweight rating on RCOM on
three grounds: 1) The positive trends in F1Q12 results
support our bullish stance on Indian wireless; 2) RCOM
is FCF positive, and we believe that it is in a good
position to meet its debt obligations; 3) Valuation is
attractive at all-time low price to book of 0.3x.
Tariff stabilization in Indian wireless: We believe that
price competition has stabilized in the last quarter.
Indeed, in the F1Q12 results, all the major operators
reported stable to slightly increasing tariffs, which is a
good sign for the industry.
RCOM’s debt repayment is not a concern. RCOM was
FCF positive in F1Q12, and we estimate that RCOM can
generate US$1.1bn FCF in F2012E, which can be utilized
to meet its requirements for the FCCB repayment, in
addition to the remaining US$600mn of its CDB loan yet
to be drawn down. The FCCB bond is currently trading at
an attractive yield of 16%. We have not assumed any
asset sell-off in our base case assumptions.
Current valuation looks attractive. RCOM’s valuation
looks attractive at price to book of 0.3x, the lowest among
Asian telcos, and arguably, anywhere across the world.
We have lowered our EPS estimates for F2012/13E
by 38%/28% largely due to lower contributions from the
global and enterprise business. This has led us to lower
our price target by 11%, to Rs116, which implies 46%
upside from the current levels. Our revised EBITDA
estimates are slightly lower than consensus
We Reiterate Our Overweight Rating on RCOM
Summary & Conclusions
We lower our target price from Rs130 to Rs116: That
implies 46% upside from current levels. We have lowered our
EPS estimates for F2012/13E by 38%/28% largely due to
lower contributions from the global and enterprise business.
Our revised F2012/13 EBITDA estimates are slightly lower
than consensus.
Our OW rating on RCOM is based on three factors:
1) The positive trends in F1Q12 results support our bullish
stance on Indian wireless;
2) RCOM is FCF positive, and we believe that it is in a good
position to meet its debt obligations;
3) Valuation is attractive at all-time low price to book of 0.3x.
Tariff stabilization in Indian wireless
We believe that the price competition in Indian wireless has
stabilized in the last quarter. Indeed, in the F1Q12 results, all
the major operators reported stable to slightly increasing
tariffs, which is a good sign for the industry. In late July, Bharti,
Vodafone and Idea raised their prepaid on-net tariffs by 20%
in several circles. RCOM also followed suit and announced a
similar hike in its tariff in the last week. This leads us to
believe that growth has returned to the industry, and further
affirms our bullish stance on the Indian wireless business
RCOM’s debt repayment is not a concern
RCOM has obtained a US$1.9bn line of credit from China
Development Bank and has already drawn down US$1.3bn of
this facility, while the balance (US$600mn) is yet to be drawn
down. RCOM has utilised these funds to repay its short-term
rupee debt, which has declined to US$1.6bn in F1Q12 from
US$2.7bn in the previous quarter. However, the net debt of
the company has remained largely constant during the quarter,
as the foreign loans have increased and cash balance has
declined (Exhibit 4).
On the FCCB loans, the company has already paid its first
FCCB tranche of US$375mn due in May 2011, and the
second FCCB tranche of US$1.15bn, including the premium
linked to the FCCB, is due in March 2012. RCOM already was
FCF positive in F1Q12, and we estimate that the company will
be FCF positive and can generate FCF of US$900mn of FCF
in F2012E, which can be utilized for meeting its requirements
for the FCCB repayment, along with the balance US$600mn
to be drawn down from CDB. Our F2012E capex estimate of
~US$940 is much higher than the capex guidance of US$330
indicated by management, hence there is upside risk to our
Company Description
Reliance Communications Ltd was formed by the demerger and
vesting of the telecom business of Reliance Industries Limited.
Reliance Communications is one of the largest integrated
communications service providers in the private sector in India.
It had over 135mn individual consumer, enterprise, and carrier
customers as of March 2011. It has pan-Indian operations,
providing wireless, wireline, and long-distance voice, data, and
Internet communication services. It also has an extensive
international presence, providing long-distance voice, data, and
Internet services and submarine cable network infrastructure.
India Telecommunications
Industry View: Attractive
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