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India Equity Research Reports, IPO and Stock News
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Lofty debt burden
Reliance Comm’s FY11 annual report confirms its lofty debt burden and
its low interest, licence and taxation charges. In the 2G case, the CBI has
filed only preliminary charges: three executives will defend themselves.
Management claims the charges are not connected to Reliance Comm or
listed group companies: we await the CBI’s third charge sheet to assess
regulatory risks. A stake sale in its tower company is under due diligence:
valuations will likely be a key hurdle. We maintain our Underperform call.
High capital work in progress and rising debt.
Reliance Comm’s FY11 annual report confirms continuing high capital work in
progress (CWIP) of Rs182bn/US$4bn (US$2.6-2.5bn in FY10-09). While CWIP has
been high in previous years due to the launch of GSM services, 3G-spectrum fees
of Rs86bn/US$1.9bn contributed to the jump in FY11. Meanwhile Reliance Comm
continues with an aggressive depreciation policy of 18 years, which risks a stepup
in future and/or one-time write-offs. Also its end-FY11 gross debt increased
31% to Rs391bn/US$8.7bn and net debt increased 38% to Rs342bn/US$7.6bn,
taking net debt to Ebitda to an uncomfortable 5.2x.
Low net interest cost and FCCB redemption.
Reliance Comm’s net interest cost in FY11 was Rs11bn, compared to positive
Rs11bn in FY10 (which had included Rs26.5bn of foreign exchange gains). In FY11
RCom had a foreign exchange loss of Rs1.2bn and its effective interest cost stood
at 3.7% (excluding FCCB (foreign currency convertible bonds)) - still low,
especially as its Indian rupee debt increased fivefold to Rs89bn (27% of the total).
Reliance Comm had two FCCBs of US$500m and US$1,000m outstanding on 31
March 2011 and in May it had redeemed US$500m: currently US$925m of FCCBs
are outstanding. Details also reveal a reduction in treasury operations, with
investment transactions 50% lower.
Lower licence fees, accounting change and towers.
Reliance Comm’s cost details reveal licence fees dropped 20bps to 5% - now
380bps lower than peer Bharti Airtel and its provision for tax fell 7ppt to 1%
against 10% for Idea Cellular. Also in FY11, Reliance Comm changed its
accounting for IRU’s on network capacity: it now recognises income received
upfront, a change from the previous straight line over the period of the contract.
This resulted in FY11 revenue being Rs25.5bn (11%) higher, but also led to
amortisation Rs25.6bn (39%) higher. RCom has 117 subsidiaries and the 95%-
owned Reliance Infratel profit was down 9% YoY to Rs8.3bn: it is evaluating offers
for a stake sale here, as well as in the 100%-owned DTH venture.
CBI charge sheet in 2G, high regulatory risk.
In the 2G case, the annual report details that the CBI has filed preliminary
charges against Reliance Telecom, a subsidiary, and three executives of the group.
The annual report states that the three executives will defend themselves and
that charges are not connected to Reliance Comm or any other listed group
companies. However we await CBI’s third charge sheet to confirm that Reliance
Comm did not violate any licence conditions. Meanwhile with Reliance Comm’s
lofty leverage and poor financial performance, we maintain our Underperform call
on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lofty debt burden
Reliance Comm’s FY11 annual report confirms its lofty debt burden and
its low interest, licence and taxation charges. In the 2G case, the CBI has
filed only preliminary charges: three executives will defend themselves.
Management claims the charges are not connected to Reliance Comm or
listed group companies: we await the CBI’s third charge sheet to assess
regulatory risks. A stake sale in its tower company is under due diligence:
valuations will likely be a key hurdle. We maintain our Underperform call.
High capital work in progress and rising debt.
Reliance Comm’s FY11 annual report confirms continuing high capital work in
progress (CWIP) of Rs182bn/US$4bn (US$2.6-2.5bn in FY10-09). While CWIP has
been high in previous years due to the launch of GSM services, 3G-spectrum fees
of Rs86bn/US$1.9bn contributed to the jump in FY11. Meanwhile Reliance Comm
continues with an aggressive depreciation policy of 18 years, which risks a stepup
in future and/or one-time write-offs. Also its end-FY11 gross debt increased
31% to Rs391bn/US$8.7bn and net debt increased 38% to Rs342bn/US$7.6bn,
taking net debt to Ebitda to an uncomfortable 5.2x.
Low net interest cost and FCCB redemption.
Reliance Comm’s net interest cost in FY11 was Rs11bn, compared to positive
Rs11bn in FY10 (which had included Rs26.5bn of foreign exchange gains). In FY11
RCom had a foreign exchange loss of Rs1.2bn and its effective interest cost stood
at 3.7% (excluding FCCB (foreign currency convertible bonds)) - still low,
especially as its Indian rupee debt increased fivefold to Rs89bn (27% of the total).
Reliance Comm had two FCCBs of US$500m and US$1,000m outstanding on 31
March 2011 and in May it had redeemed US$500m: currently US$925m of FCCBs
are outstanding. Details also reveal a reduction in treasury operations, with
investment transactions 50% lower.
Lower licence fees, accounting change and towers.
Reliance Comm’s cost details reveal licence fees dropped 20bps to 5% - now
380bps lower than peer Bharti Airtel and its provision for tax fell 7ppt to 1%
against 10% for Idea Cellular. Also in FY11, Reliance Comm changed its
accounting for IRU’s on network capacity: it now recognises income received
upfront, a change from the previous straight line over the period of the contract.
This resulted in FY11 revenue being Rs25.5bn (11%) higher, but also led to
amortisation Rs25.6bn (39%) higher. RCom has 117 subsidiaries and the 95%-
owned Reliance Infratel profit was down 9% YoY to Rs8.3bn: it is evaluating offers
for a stake sale here, as well as in the 100%-owned DTH venture.
CBI charge sheet in 2G, high regulatory risk.
In the 2G case, the annual report details that the CBI has filed preliminary
charges against Reliance Telecom, a subsidiary, and three executives of the group.
The annual report states that the three executives will defend themselves and
that charges are not connected to Reliance Comm or any other listed group
companies. However we await CBI’s third charge sheet to confirm that Reliance
Comm did not violate any licence conditions. Meanwhile with Reliance Comm’s
lofty leverage and poor financial performance, we maintain our Underperform call
on the stock.
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