Wednesday, March 23, 2016

Reliance Communications Ltd: Advantage Bulls
CMP: Rs.52

4G data services could help it fend off the competition, to some extent, according to Fitch Ratings.

The firm said that RCom's IDR is constrained by its weak market position as the fourth-largest telco in India with a revenue market share of around 8% and a subscriber base of mostly low-revenue customers.

The top-three telcos - Bharti Airtel, Vodafone India and Idea Cellular- have been gradually gaining market share and now account for about 70% of wireless revenue in India's telecoms market.

"We forecast FCF will be limited in FY17 as Rcom needs to invest around Rs 40bn (FY16: Rs 34bn - excluding a one-off spectrum payment of Rs 11bn) on capex to support its fast-growing data traffic and to improve the quality of voice services. However, its capex/revenue of around 17%-18% will still be below than top-three telcos' average of 19%-20% due to its infrastructure and spectrum-sharing arrangement with Reliance Jio," the ratings firm said.

In January 2016, RCom said that it would share and pool its 800MHz spectrum with Reliance Jio in 17 regions. Rcom has future plans to share 800MHz spectrum in the remaining five circles. Spectrum sharing will give Rcom access to a wider band of spectrum and Jio's network to provide faster 4G data services and provide capex and operating costs savings.

RCom and Reliance Jio signed reciprocal infrastructure agreements during FY14-15 to share Rcom's 43,000 towers, 120,000km of inter-city fibre, and 70,000km intra-city fibre network for the next 17-20 years. Under the agreements, Rcom also has access to existing and future towers and fibre assets of Reliance Jio.

The ratings firm reckons that RCom's acquisition of Sistema Shyam Teleservices Ltd (SSTL), the Indian mobile subsidiary of Russia's Sistema JSFC, in an all-stock deal is credit neutral for Rcom, at least in the short term. RCom will benefit from additional nine million subscribers and Rs 15bn revenue and also will be able to extend the life of its 800MHz spectrum in eight Indian circles.

"However, we believe that in FY17 incremental EBITDA from the acquisition will likely fall short of SSTL's annual spectrum cost of Rs3.9bn - the cost of the spectrum SSTL acquired in the March 2013 auction will be paid annually over 10 years starting FY17. In the longer term we expect that growth in incremental EBITDA may make the transaction cash-flow positive. SSTL will pay off its existing debt before the acquisition," the firm said.

The firm expects competition to intensify in Indian market as Reliance Jio enters the market with cheaper tariff plans and faster data speeds, and armed with sufficient spectrum and access to funds. We expect the industry blended monthly average revenue per user (ARPU) to fall due to a decline in data tariffs, which will more than offset the rise in data usage.

RCom's FY17 blended ARPU, however, is likely to decline by 1%-2% compared with a 5%-6% decline in the industry's blended ARPU. This is because Rcom's ARPU of Rs 140 is already lower than the industry average of Rs 170.

RCom's liquidity, according to Fitch, is dependent on its ability to refinance its maturing debt because its cash generation and unrestricted cash of Rs 22bn are insufficient to pay its short-term debt of Rs143bn. Banks have been willing to lend on a secured basis with licences and immovable assets as collateral.

Meanwhile, the government is readying a presentation to convince RBI to modify its 30 November notification on external commercial borrowing (ECBs) so as to ease the ability of infrastructure firms, especially telecom firms, to raise short-term foreign-currency loans, according to a media report.

The telecom sector is also lobbying the government to get the service tax on spectrum trading, announced in the Union budget, rolled back.

Reliance Communications Ltd (R-Com), India’s fourth largest mobile-phone services provider, has bought the local unit of Russia’s Sistema JSFC in a deal valued at Rs.4,500 crore in stock and payments to the government for spectrum allotted to Sistema—a transaction that may herald the much-anticipated consolidation in India’s telecom industry.

Shareholders of Sistema Shyam Teleservices approved the merger of the company with Reliance Communications, according to reports. SSTL reportedly said the meeting in Jaipur was convened by the high court to seek approval of the SSTL shareholders.

In another significant development, recent media report suggests that, Tillman Global is looking for new partners for a tower deal for R-Com as TPG Capital valued the telecom towers sharply lower than the Rs.21, 500 crore as initially projected.

TPG and Tillman Global Holdings LLC signed a non-binding pact in December to buy cellular towers from Reliance Communications Ltd. The deal could be the largest private-equity investment in India, according to data compiled by Bloomberg.

In case of Reliance  Communications Ltd ( Rs.52), the change in Open Interest : -15,92,000 or % Change in Open Interest: -2.74 and the share price has fallen slightly.

Therefore, the inference is that the Bulls are preparig to come back in the arena.

Besides, the book value of the shares of Reliance Communications Ltd is Rs.114.25. The investors are suggested to buy the Stocks of the company at around Like Rs.52, for short term targets of Rs.57 - 59.
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