Sunday, July 31, 2016

Reliance Communications Ltd: Powered by the Launch of Reliance Jio...
CMP: Rs.52.60

The daily candle stick chart of Reliance Communications Ltd looks attractive. The recent buoyancy in the share price movement is primarily pivoted on two major events:

1. The integration of Reliance Communications Ltd with MTS, the merger with Aircel and towers sale would help reduce debt by 75%. A potential three-way merger between Reliance Communications Ltd (RCom) Sistema Shyam Teleservices and Aircel will make the combined entity the second-largest in terms of subscriber base and fourth-largest in terms of revenue, according to a report by the ICRA.. 

This merger deal will also help RCom, the country's fourth-largest mobile carrier, to expand its GSM services in West Bengal, Bihar and Assam, where it could not win back its 900 Mhz airwaves in the March 2015 auction. 

ICRA had also said that the data services had remained a major thrust area for telecom companies as the number of data subscribers and the average data usage per subscriber per month is growing rapidly, which it feels has triggered a string of spectrum trading deals in recent weeks, including back-to-back 4G spectrum acquisitions by Bharti Airtel from Videocon Telecom and Aircel. 

RCOM and Maxis Communications Berhad (MCB) and Sindya Securities and Investments Private Limited (Sindya), the shareholders of Aircel Limited ("Aircel"), expect to sign binding definitive documentation and announce the proposed transaction for the combination of the Indian wireless business of RCOM and Aircel very shortly. RCom will demerge its wireless business and merge it with the existing unlisted Aircel, with promoters of both sides owning 50% each in the new entity. 

RCom and Aircel will each transfer Rs.14,000 crore of their debt into it. RCom has a gross debt of Rs.42,651 crore while it is Rs.23,436 crore for Aircel. Russia's Sistema will hold 10% in the listed RCom as per a parallel ongoing process but the Russian company, which operates under the MTS brand in India, won't have any board representation in the new entity. 

The RCom-Aircel deal would create an entity with revenue of about Rs.25,000 crore annually, earnings before interest, taxes, depreciation and amortisation of about Rs.6,000-Rs6,500 crore and an Ebitda margin of 25%, with cash flows of around Rs.3,000 crore a year to start with. 

RCom-Aircel-MTS combined will hold around 19% of the total spectrum in the country across of the 4G bands of 800 Mhz and 1800 Mhz and 3G bands of 2100 Mhz and 900 Mhz. It will have around a 180 million subscribers. This compares with nearly 175 million for Idea, over 252 million for market leader Bharti Airtel and nearly 198 million for Vodafone India, as per sector regulator data at April end. 

The new entity will be rebranded and remain unlisted initially. Promoters of both companies will have equal board representation. 

(ii) Earlier in January this year, RCom announced entering into strategic partnership with RJIL covering 4G Lte services. Reliance Jio and RCom signed a multi-circle airwaves sharing and trading pacts in the 850 Mhz band to jointly offer 4G services across India.

A merger with MTS and a spectrum sharing/trading deal with Reliance Jio will allow RCom to be aggressive in offering fourth-generation technology (4G) services. The company has already migrated a large portion of its subscribers from its CDMA base to 4G, with the rest likely to follow over the next couple of months.

Reliance Communications (RCom) earlier said that the Department of Telecommunications (DoT) has taken on record 800 megahertz (MHz) spectrum sharing in 7 circles of RCom and 2 circles of Reliance Telecom (RTL), a wholly-owned subsidiary with Reliance Jio Infocomm (RJIL). 

The spectrum arrangements between RJIL and RCOM will result in network synergies, enhanced network capacity and will optimise spectrum utilisation and capex efficiencies. Both operators anticipate considerable savings in operating costs and future investment in networks. RCom's customers will benefit from access to RJIL's nationwide 4G LTE network under the reciprocal sharing and ICR agreements. 

Thus, Reliance Communications Ltd is fast emerging as the biggest beneficiary of the approval of spectrum sharing guidelines, though Vodafone and Bharti Airtel — which obtained 3G spectrum earlier — could also benefit big time.

According to a report in the Economic Times, Reliance Jio and Reliance Communications will take advantage of the new rules to pool their spectrum in the highly penetrative 800 MHz band for a joint 4G play. The combined network will be jointly owned and operated by both companies.

The main advantage for RCom in all this is that since Reliance Jio has already set up a network or is in the process of setting up a 4G network, RCom does not have to set one up itself. Instead, it can just share its spectrum with Jio, and Jio can include the spectrum in its network.

Including an extra carrier (spectrum) will not require Jio to double its towers or base stations. As a result, RCom practically gets a free 4G network thanks to this arrangement.

This will save RCom thousands of crores in network deployment costs. Jio is estimated to be spending around Rs.1 (one) lakh crore to set up a network of around 75,000-80,000 4G towers, out of which most of the money is for the physical infrastructure.

However, this is not the only opportunity for RCom in 4G space. Once the MTS deal goes through (or even without it), RCom can have a combined 4G network using MTS’ spectrum in another nine circles – taking its total coverage to 19 circles.

These nine circles are Delhi, Gujarat, Karnataka, Kerala, Kolkata, Rajasthan, Tamil Nadu, UP West and West Bengal.

Once that is done, RCom-MTS would easily be the player with the most extensive 800 MHz 4G network in India. In comparison, the coverage of Reliance Jio in the 800 band would be restricted to the less lucrative markets mentioned in the beginning of this article.

The advantage for RCom is that the deals with Reliance Jio and MTS can also be done even without a merger with MTS with the help of intra-circle roaming arrangements and spectrum sharing. However, spectrum sharing would require RCom and MTS to have their spectrum in a contiguous block.

The tentative date of launch of Reliance Jio Infocom Ltd's service is 15th August, 2016. The share price should reach Rs.60, by the time Reliance Jio actually launches its operations. Therefore, the investors are suggested to keep holding the stock of Reliance Communications Ltd (BSE: Rs.52.55; NSE: Rs.52.60) for another 20-30 days, to get some superb appreciation in their investments Ltd. 
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