Sunday, June 19, 2016

Photo: The Hindu
The euphoria which fueled a Market Rally back in 2013-2014 on hope that Prime Minster Narendra Modi would boost growth, revive the investment cycle and prop up earnings growth, helped push earnings multiples for some of the mid and small cap stocks to reach record highs. 

However, some of these shares lost steam slowly in the past 12 months. But they are still good buying opportunity on dips, feel experts. Investors have to be selective before putting their hard-earned money in these stocks. 

One such stock is Reliance Communications Ltd, which looks to cut down the debts by 75% in the next few months. 

"Integration of MTS business with RCom is on track. We expect to complete the integration in August. We expect to make announcement with respect to Aircel merger anytime in June. Once we complete the Aircel transaction, we will go for the tower deal," RCom CEO for consumer business Gurdeep Singh said during a conference call on Tuesday.

"With completion of these deals, we expect RCom's debt to reduce by 75 per cent."

RCom's net debt at the end of March 2016 stood at Rs 41,362.1 crore.

RCom and Aircel have extended discussion period for a possible merger of the two till June 22. Mr Singh said discussions are in advanced stages.

Reliance Communications Ltd (R-Com) and Aircel Ltd are likely to complete the merger of their wireless operations by the end of the month, a top Reliance Group official said last week. Talks between RCom and Aircel, if successful, would lead to a combined entity holding 19.3% of the total spectrum allocated to the industry - the highest by an entity. .

On a lighter note: Outlook's Essar leaks show who controls the vital pillars of Indian democracy.. 

The two brothers, Mukesh and Anil (Ambani) have already tied up in the telecom space.

But most of the investors are now confused, because some of the rating agencies have still not changed their negative outlook on Reliance Communications Ltd, even though it has taken pro-active steps to push-up its fundamentals. 

And as usual some financial analysts who fail to understand the potential of this deal, continue to peddle their "Avoid Jargon". This has led to many Investors losing patience and selling the scrip of Reliance Communications Ltd at a distressed price, like they did in case of Vedanta Ltd (Rs.122.55), Hindalco Ltd (Rs.118.80), BHEL (Rs122.35), JSW Energy Ltd (Rs.84.10) and so on; only to repent later. 

Most Investors have a habit of believing more or drinking a bottle of cold drink more when they see suited-booted persons sitting in TV-channels and shooting their trading ideas. This is the irony!! 

Meanwhile, after R-Com and Aircel had begun discussions about six months ago, the former's shares have fallen by more 45% since then. 

This again gives the investors to zoom-in, in this shares, especially when the Telecom Commission has lowered the annual spectrum usage fee for telcos to 3% of revenue for all bands in the upcoming auction slated for July, and brought the 4G airwaves purchased in 2010 under the ambit of a formula to calculate the overall fee for each carrier. 

The Business Today writes, on 3 July, 2016 edition: 
It is a one-stop solution the government seems to have found to preclude allegations of corruption in the allocation of natural resources - hold an auction. From oil and gas blocks to coal blocks to spectrum bandwidth, auctions have become the preferred mode of sale to both ensure transparency and generate substantial revenue. The civil aviation ministry even considered auctioning unused and future bilateral rights (rights to fly to foreign destinations negotiated with destination countries), though the proposal was eventually stalled due to internal differences over its advisability. The reverse auction, where the government is the buyer of goods or services, has also become an effective means of driving down prices, especially in the case of solar tariffs.
Last year alone, a total of 55 coal mines were auctioned over three rounds, of which 28 went to private companies and 27 to Central and state PSUs. 3G and broadband wireless spectrum was auctioned too, earning the government over Rs.1.1 lakh crore. This year, there are expectations of another Rs 70,000 crore from the auction of 67 small oil and gas fields, which began in late May. (So far, under the New Exploration Licensing Policy or NELP, formulated in 1998, over 250 hydrocarbon blocks have been auctioned across nine rounds.)
Anyway, in the latest move to help banks deal with their stressed assets, RBI has issued guidelines to help banks identify opportunities to convert up to half of their non-performing debt positions in indebted companies into equity, should the borrowers meet certain criteria that would determine if their debt is sustainable in the long-term. Under RBI's ‘Scheme for Sustainable Structuring of Stressed Assets,’ the conversion into equity or quasi-equity instruments could provide an incentive to lenders to share in the profits should the indebted company turn around, according to an RBI note.

So what types of bad debt situations are eligible for this provision? Stressed debt related to all commercially operational entities that owe more than Rs.500 crore to lenders, including interest, would qualify. Additionally, their debt should also meet RBI’s test of sustainability which includes.

Once the sustainable debt has been worked out, the banks and borrowing companies can evaluate various recapitalisation scenarios with the help of an external agency. The equity portion of the deal will have to be "marked to market," or deemed at fair value, according to the RBI note.

Banks would also have to follow certain terms and conditions that will govern the sustainable debt portion -- such as one that would prohibit them from extending the repayment schedule of the loans, or otherwise amending loan terms, according to the note. Other caveats and conditions can be found here.

To be sure, banks have had the option to convert their debt into equity in the past, but the procedures have been somewhat onerous in India that would allow banks to take “haircuts,” where a lender agrees to a loan repayment less than what is owed.

The latest move is good news for banks as they have another option and framework at hand to resolve their bad debt mess, according to Srikanth Vadlamani, a senior analyst with Moody’s Investors Service. 

Thus, Dr.Raghuram Rajan's exit, could bring in a rally in the shares of companies, who have been sitting on the piles of debts, because it could rekindle the hopes of a massive interest rate cuts; if the INR remains stable. This gives legs to the shares like Reliance Communications Ltd (Rs.47.20). 

I will recommend another, a very well known share tomorrow in this blog (anytime after 10 am in the morning), which could get benefited both by Dr.Rajan's exit and also due to RBI's latest move, regarding restructuring of the debt portfolios. 

Therefore, buy the shares of Reliance Communications Ltd at the CMP of Rs.47.20, for a target of Rs.72-plus in some months. Just buy and forget!! 
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