Rcom - Incremental steady-state EBITDA of INR7b-7.5b post tower deal :: Motilal Oswal

Incremental steady-state EBITDA of INR7b-7.5b post
tower deal
Increasing target price by 14%; maintain Neutral
 Reliance Communications (RCOM) and Reliance JIO Infocomm have signed an
agreement for sharing tower infrastructure with an aggregate value of INR120b.
 The deal will enable Reliance JIO to utilize up to 45,000 sites from RCOM's existing
network.
 We estimate incremental revenue of ~INR8b per year and incremental EBITDA of
INR7b-7.5b per year for RCOM, assuming that Reliance JIO ramps up to 45,000 sites.
 We are upgrading FY14/FY15E EBITDA by 1-2% and target price by 14% to INR111.
 The stock trades at an EV of 7.5x FY14E and 6x FY15E EBITDA. Maintain Neutral.

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INR120b deal for up to 45,000 towers with Reliance JIO
RCOM and Reliance JIO Infocomm have signed a comprehensive agreement for
sharing tower infrastructure with an aggregate value of INR120b. Reliance JIO
would utilize up to 45,000 sites from RCOM's existing network.
Intra-city fiber, the missing piece post inter-city fiber and tower deals
This is the second major agreement between these two companies. In April
2013, the two companies had announced an INR12b inter-city optic fiber IRU
(Indefeasible Rights to Use) agreement. Going forward there is further scope to
for a similar agreement for leasing its intra-city fiber network to Reliance JIO.
Incremental steady-state annual revenue of ~INR8b and EBITDA of
INR7b-7.5b
Assuming a monthly rental of INR15,000 per slot and steady-state utilization of
45,000 slots by Reliance JIO, we estimate steady-state incremental revenue of
INR8.1b per year and steady-state incremental EBITDA of INR7.3b per year
assuming 90% incremental EBITDA margin.
High debt remains a concern though deal to aid deleveraging
RCOM's net debt of INR389b and net debt/EBITDA of ~6x remains a concern,
though recent infrastructure sharing deals would aid deleveraging. Our
estimates imply decline in net debt/EBITDA from 5.9x currently to 3.3x by FY15.
Upgrading FY14/15E EBITDA by 1-2% and target price by 14%; Neutral
We are upgrading FY14/15E EBITDA by 1-2% and target price by 14% (INR14) to
INR111. The stock trades at an EV of 7.5x FY14E and 6x FY15E EBITDA. Maintain
Neutral.