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Reliance Communications (RCOM)
Telecom
Valuation check amid ‘positive’ news flow. The RCOM stock has had a good
upmove over the past few days, driven possibly by news flow about (1) refinancing for
its FCCB redemption of US$1.18 bn, (2) a potential tower deal with RIL’s BWA
subsidiary, Infotel Broadband, (3) potential tower sale, and (4) potentially more material
collaboration between RIL and RCOM. Even as the excitement is understandable,
valuations now appear stretched. We reiterate our SELL rating.
Refinancing of FCCB redemption – ‘debt’ in any form is ‘debt’; balance sheet remains stretched
A section of the Street appears to be excited by RCOM refinancing its FCCB redemption of
US$1.18 bn with a term loan from a consortium of Chinese banks. The terms of the loan (sevenyear
tenure, 5% interest cost) appear favorable for a company with a balance sheet as stretched as
RCOM’s. Nonetheless, fresh debt is replacing the FCCB, whose effective interest cost (1) was at a
similar level and (2) was not being routed through the P&L. More importantly, the refinancing debt
transaction 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 in RCOM by the Chinese banks.
Now, such a development would be a positive for a company trading at distressed valuations,
where the stock price indicates low confidence in the company. Clearly RCOM is not trading
anywhere close to distressed levels. Its CMP of Rs90 translates into 7.1X FY2013E EV/EBITDA, a
20% premium to emerging market telcos and a 15-20% premium to Bharti/Idea. Also note that
this assumes 15% yoy growth in EBITDA in FY2013E. RCOM has not reported yoy EBITDA growth
over the past nine quarters.
The fact that the stock price has fallen 89% from its peak and that the stock has underperformed
massively (23.5% 12-month underperformance versus the Sensex, despite the recent run-up) may
make the valuations appear distressed but as we pointed out, this is clearly not the case. Current
valuations do not even reflect the company’s weakened earnings power, far less, indicate distress.
Other potential corporate developments – largely in the price; little room for disappointment
Even as we refrain from commenting on the likelihood of, or from quantifying the impact of some
other potential positive developments (a tower deal with RIL, tower sale to PE players, more
material collaboration with RIL) keeping the market excited about RCOM, we believe current
valuations (7.1X FY2013E EV/EBITDA) more than price in upside from such developments. The
margin of safety has been eroded. We also note that potential regulatory negatives, like high
spectrum renewal pricing and spectrum re-farming, impact RCOM as well. This is an aspect largely
ignored by the Street, which seems preoccupied with their impact on Bharti and Idea.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Reliance Communications (RCOM)
Telecom
Valuation check amid ‘positive’ news flow. The RCOM stock has had a good
upmove over the past few days, driven possibly by news flow about (1) refinancing for
its FCCB redemption of US$1.18 bn, (2) a potential tower deal with RIL’s BWA
subsidiary, Infotel Broadband, (3) potential tower sale, and (4) potentially more material
collaboration between RIL and RCOM. Even as the excitement is understandable,
valuations now appear stretched. We reiterate our SELL rating.
Refinancing of FCCB redemption – ‘debt’ in any form is ‘debt’; balance sheet remains stretched
A section of the Street appears to be excited by RCOM refinancing its FCCB redemption of
US$1.18 bn with a term loan from a consortium of Chinese banks. The terms of the loan (sevenyear
tenure, 5% interest cost) appear favorable for a company with a balance sheet as stretched as
RCOM’s. Nonetheless, fresh debt is replacing the FCCB, whose effective interest cost (1) was at a
similar level and (2) was not being routed through the P&L. More importantly, the refinancing debt
transaction 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 in RCOM by the Chinese banks.
Now, such a development would be a positive for a company trading at distressed valuations,
where the stock price indicates low confidence in the company. Clearly RCOM is not trading
anywhere close to distressed levels. Its CMP of Rs90 translates into 7.1X FY2013E EV/EBITDA, a
20% premium to emerging market telcos and a 15-20% premium to Bharti/Idea. Also note that
this assumes 15% yoy growth in EBITDA in FY2013E. RCOM has not reported yoy EBITDA growth
over the past nine quarters.
The fact that the stock price has fallen 89% from its peak and that the stock has underperformed
massively (23.5% 12-month underperformance versus the Sensex, despite the recent run-up) may
make the valuations appear distressed but as we pointed out, this is clearly not the case. Current
valuations do not even reflect the company’s weakened earnings power, far less, indicate distress.
Other potential corporate developments – largely in the price; little room for disappointment
Even as we refrain from commenting on the likelihood of, or from quantifying the impact of some
other potential positive developments (a tower deal with RIL, tower sale to PE players, more
material collaboration with RIL) keeping the market excited about RCOM, we believe current
valuations (7.1X FY2013E EV/EBITDA) more than price in upside from such developments. The
margin of safety has been eroded. We also note that potential regulatory negatives, like high
spectrum renewal pricing and spectrum re-farming, impact RCOM as well. This is an aspect largely
ignored by the Street, which seems preoccupied with their impact on Bharti and Idea.
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