A HOUSE OF CARDS
Reliance Communications Limited (“RCom” or the “Company”) is entering a
phase of maximum uncertainty. In our view, macro-economic conditions in
India are deteriorating at a rapid rate. Fractured policy making, high inflation,
an uncontrollable fiscal deficit, in addition to a hyper-competitive
telecommunication business, are highly detrimental to the prospects of RCom.
Exceedingly high financial leverage, accompanied with debt repayment
obligations of approximately $U.S. 2.2B over the next twenty-four months, at a
time when EBITDA in core business operations is stagnating, is a significant
challenge for the management team.
In order to tide over the cash crunch, we believe that RCom has been scaling
back its capital expenditures (“capex”) and has put assets on the block.
However, given the weak competitive position of the Company in the Indian
wireless sector, we believe that curtailed capex will be detrimental to the
Company’s prospects going forward. We believe that RCom is at a
disadvantage in terms of its GSM spectrum position in most of its footprint
compared to its peers, and to tide over its spectrum deficit the Company
needs to incur higher capex to maintain quality of service. RCom has been
disproportionally affected by the entry of new players in the market and its
ARPU has suffered more than its peers.
