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Reliance Communications (RCOM)
Telecom
FY2011 annual report analysis, more thoughts. RCOM remains fundamentally
challenged with a balance sheet saddled with high debt and a P&L that continues to
deteriorate despite the company’s aggressive cost-rationalization efforts. Net debt has
expanded 3X since FY2008, while EBIT is down 45% - primarily a result of the
company’s GSM rollout, which is yet to yield desired revenue/EBITDA upside. We cut
our EPS estimates for FY2012-14E by 15-24% and lower our end-FY2013E DCF-based
target price to Rs80/share (Rs95 earlier). Reiterate SELL.
Multi-year performance deterioration continues
RCOM’s FY2011 consolidated revenues of Rs224 bn were just 19% higher than FY2008 levels, a
3-year CAGR of just 6% despite the company rolling out its pan-India GSM network and making a
few acquisitions on the non-wireless side in the interim. EBITDA in the same timeframe has grown
at a CAGR of <2%, that too aided by the IRU accounting change in FY2011. Annualized 1QFY12
EBITDA is almost 20% lower than FY2008 levels. GSM investments and acquisitions have of course
impacted the company’s EBIT – FY2011 EBIT was 64% lower than FY2008 levels despite the
company having adopted aggressive depreciation policies since. Pre-tax ROCE in FY2011 was just
2%, down from 8% in FY2008.
Net debt continues to go up
RCOM’s net debt at end-FY2011 stood at Rs336 bn, up from Rs247 bn at end-FY2010 and Rs25
bn at end-FY2007. We note that the net debt as per the annual report is higher than the Rs319 bn
reported in the company’s 4QFY11 disclosures. This is likely on account of reclassification of
buyer’s credit into debt – this is classified as current liability in quarterly reports. Gross debt at end-
FY2011 stood at Rs391 bn, of which Rs120 bn was Re-denominated and the balance in foreign
currency. We also note that Rs27 bn of capex credit is not included in these debt figures and is
classified as current liabilities. Even as capex credit is a normal industry practice, we highlight this
as the company has now guided for a low-capex phase – this would mean additional cash flow
burden going forward as capex credit declines.
Weak competitive positioning + stretched balance sheet. SELL
We reiterate our SELL rating on RCOM despite the sharp correction in the stock. Low capex
(guided FY2012E capex is just 6.7% of estimated revenues), and potential corporate actions to
shore up the balance sheet (parent equity dilution, stake sale in subsidiaries) are necessary, but
may not be value-accretive. P&L improvement remains critical to long-term balance sheet health –
RCOM’s weak competitive positioning across business lines makes this a difficult challenge, in our
view. Valuations at 5.6X FY2013E EV/EBITDA is not inexpensive, either.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Communications (RCOM)
Telecom
FY2011 annual report analysis, more thoughts. RCOM remains fundamentally
challenged with a balance sheet saddled with high debt and a P&L that continues to
deteriorate despite the company’s aggressive cost-rationalization efforts. Net debt has
expanded 3X since FY2008, while EBIT is down 45% - primarily a result of the
company’s GSM rollout, which is yet to yield desired revenue/EBITDA upside. We cut
our EPS estimates for FY2012-14E by 15-24% and lower our end-FY2013E DCF-based
target price to Rs80/share (Rs95 earlier). Reiterate SELL.
Multi-year performance deterioration continues
RCOM’s FY2011 consolidated revenues of Rs224 bn were just 19% higher than FY2008 levels, a
3-year CAGR of just 6% despite the company rolling out its pan-India GSM network and making a
few acquisitions on the non-wireless side in the interim. EBITDA in the same timeframe has grown
at a CAGR of <2%, that too aided by the IRU accounting change in FY2011. Annualized 1QFY12
EBITDA is almost 20% lower than FY2008 levels. GSM investments and acquisitions have of course
impacted the company’s EBIT – FY2011 EBIT was 64% lower than FY2008 levels despite the
company having adopted aggressive depreciation policies since. Pre-tax ROCE in FY2011 was just
2%, down from 8% in FY2008.
Net debt continues to go up
RCOM’s net debt at end-FY2011 stood at Rs336 bn, up from Rs247 bn at end-FY2010 and Rs25
bn at end-FY2007. We note that the net debt as per the annual report is higher than the Rs319 bn
reported in the company’s 4QFY11 disclosures. This is likely on account of reclassification of
buyer’s credit into debt – this is classified as current liability in quarterly reports. Gross debt at end-
FY2011 stood at Rs391 bn, of which Rs120 bn was Re-denominated and the balance in foreign
currency. We also note that Rs27 bn of capex credit is not included in these debt figures and is
classified as current liabilities. Even as capex credit is a normal industry practice, we highlight this
as the company has now guided for a low-capex phase – this would mean additional cash flow
burden going forward as capex credit declines.
Weak competitive positioning + stretched balance sheet. SELL
We reiterate our SELL rating on RCOM despite the sharp correction in the stock. Low capex
(guided FY2012E capex is just 6.7% of estimated revenues), and potential corporate actions to
shore up the balance sheet (parent equity dilution, stake sale in subsidiaries) are necessary, but
may not be value-accretive. P&L improvement remains critical to long-term balance sheet health –
RCOM’s weak competitive positioning across business lines makes this a difficult challenge, in our
view. Valuations at 5.6X FY2013E EV/EBITDA is not inexpensive, either.
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