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We expect RCom's share of minutes to fall to 10.9% by FY14 from 12.7% in FY11 due to low
brand visibility, limited network expansion and likely loss of CDMA subs. This would restrict the
company's EBITDA CAGR to 7.5% in FY11-14. High financial leverage (net debt/EBITDA of 5.2x
in FY11) poses a risk. Hold.
Minute CAGR restricted to 9.1% over FY11-14F owing to decline in MinMS
RCom’s revenue market share (RMS) declined to 7.8% in 1Q12 despite its GSM foray (in 4Q09)
and the reduction in competitive intensity over last few quarters. The company’s minute market
share (MinMS) dropped from 15.9% in FY09 to 12.7% in FY11, implying incremental MinMS of
8.2%. We expect RCom to capture 7.4% incremental MinMS over FY11-14, leading to a restricted
minute CAGR of 9.1% to 487bn minutes, due to low brand visibility, limited network rollout, limited
3G footprint and likely loss of CDMA market share owing to mobile number portability (MNP).
Hence, we expect RCom’s MinMS to decline to 10.9% by FY14.
Low capex intensity; potential increase in coverage gap against peers
RCom’s high financial leverage (net debt/EBITDA of 5.2x in FY11) has left little scope for
aggressive network expansion. RCom’s capex guidance stands at Rs15bn for FY12, significantly
lower than listed peers. Lower capex intensity poses a risk of market share loss, as its network
coverage gap against its peers could widen. Also, 3G footprint, restricted to 13 circles (46% of
industry revenue), poses further risk of market share loss.
High financial leverage poses risk
RCom’s high financial leverage remains a concern. Its net debt stood at Rs337bn and net
debt/EBITDA at 5.2x in FY11. Debt repayment of US$1.7bn is scheduled over CY12. This
includes FCCB repayment of US$1.18bn, maturing in February 2012. In our view, regulatory
uncertainty has reduced the likelihood of equity dilution.
We initiate at Hold
We initiate at Hold with a 12-month target price of Rs67. Our fair value estimate for RCom is
based on 5.6x EV/EBITDA (implying a 25% discount to Bharti’s target India valuation multiple).
We believe a discount to Bharti is justified owing to RCom’s lower return profile.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We expect RCom's share of minutes to fall to 10.9% by FY14 from 12.7% in FY11 due to low
brand visibility, limited network expansion and likely loss of CDMA subs. This would restrict the
company's EBITDA CAGR to 7.5% in FY11-14. High financial leverage (net debt/EBITDA of 5.2x
in FY11) poses a risk. Hold.
Minute CAGR restricted to 9.1% over FY11-14F owing to decline in MinMS
RCom’s revenue market share (RMS) declined to 7.8% in 1Q12 despite its GSM foray (in 4Q09)
and the reduction in competitive intensity over last few quarters. The company’s minute market
share (MinMS) dropped from 15.9% in FY09 to 12.7% in FY11, implying incremental MinMS of
8.2%. We expect RCom to capture 7.4% incremental MinMS over FY11-14, leading to a restricted
minute CAGR of 9.1% to 487bn minutes, due to low brand visibility, limited network rollout, limited
3G footprint and likely loss of CDMA market share owing to mobile number portability (MNP).
Hence, we expect RCom’s MinMS to decline to 10.9% by FY14.
Low capex intensity; potential increase in coverage gap against peers
RCom’s high financial leverage (net debt/EBITDA of 5.2x in FY11) has left little scope for
aggressive network expansion. RCom’s capex guidance stands at Rs15bn for FY12, significantly
lower than listed peers. Lower capex intensity poses a risk of market share loss, as its network
coverage gap against its peers could widen. Also, 3G footprint, restricted to 13 circles (46% of
industry revenue), poses further risk of market share loss.
High financial leverage poses risk
RCom’s high financial leverage remains a concern. Its net debt stood at Rs337bn and net
debt/EBITDA at 5.2x in FY11. Debt repayment of US$1.7bn is scheduled over CY12. This
includes FCCB repayment of US$1.18bn, maturing in February 2012. In our view, regulatory
uncertainty has reduced the likelihood of equity dilution.
We initiate at Hold
We initiate at Hold with a 12-month target price of Rs67. Our fair value estimate for RCom is
based on 5.6x EV/EBITDA (implying a 25% discount to Bharti’s target India valuation multiple).
We believe a discount to Bharti is justified owing to RCom’s lower return profile.
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