RCom: turnaround in the offing

K VENKASUBRAMANIAN RAJESH KURUP Mumbai | Updated on August 21, 2014 Published on August 21, 2014

Company is selling non-core assets, raising cash from market to ease debt burden

After years of piling up huge amounts of debt, Reliance Communications (RCom) has started taking steps to ease the burden.

The Anil Ambani-led telecom company had a debt of over ₹40,000 crore as of March 2014.

These measures include raising funds though a qualified institutional placement(QIP) and selling real estate and other non-core assets.

The cash flow from a tower-sharing agreement with Mukesh Ambani’s Reliance Jio Infocomm will also be used to pare debt.

The company is expecting to bring down the debt to ₹25,000 crore by next year and then to ₹20,000 crore by 2016.

“There are a lot of initiatives taken to deleverage the balance sheet (reduce the debt). We are positive these will yield results,” said Gurdeep Singh, CEO, Consumer Business, RCom.

To be sure, high levels of debt aren’t peculiar to RCom alone. Other telecos Bharti Airtel and Idea Cellular, too, have relatively high levels of debt on their balance sheets.

Rising woes

But in RCom’s case, the concerns stem from the fact that its debt-equity ratio has been steadily rising over the past four years. Revenues have barely grown in this period and interest costs ate up a good portion of its operating profits.

The debt-equity ratio has more than doubled from 0.56 in FY-10 to 1.29 in FY-14. Interest coverage — the ratio of the operating profit to the interest cost — has drastically reduced over the past three years to 2.77 times.

This means that a fair chunk of its operating profits go towards servicing interest expenses.

Airtel and Idea have interest coverage of 7-10 times.

RCom’s debt woes started from FY-11, when it had to take large loans for paying spectrum charges for the 3G air waves it won in 2010. Heavy spends on capex to build its network entailed further debt. From less than ₹20,000 crore in 2009-10, debt jumped to over ₹32,000 crore in 2010-11.

Heavy competition from new entrants meant that mobile tariffs were low and realisations meagre. As a result, its revenue market share slumped and the company slid well behind Airtel, Vodafone and even Idea. The top three players now command over 70 per cent of the revenue market share.

When the Supreme Court cancelled 122 telecom licences, including those of players such as Etisalat DB, RCom lost out on a significant revenue stream. Etisalat DB had signed a long-term tower sharing agreement with the company worth ₹10,000 crore. Attempts to list its tower business or its undersea cable unit did not fructify earlier.

Easing the burden

With the new Government generating expectations of an economic revival, the market has rallied quite well. The improvement in sentiment was used well by RCom.

It has managed to raise ₹6,100 crore through the QIP route and warrants issued to promoters. The QIP book was oversubscribed, indicating reasonable level of investor interest. A sale of real estate worth ₹2,000 crore is also reportedly on the cards.

“This (fund-raising) will help in reducing interest cost by over ₹600 crore annually, which will accrue from the second quarter of the financial year 2015,” RCom CEO Vinod Sawhny said in an analysts’ call.

The company also plans to sell a stake in its undersea cable division (Globalcom).

“This should happen in the next few months, and is likely to net the company about $1 billion (₹6,000 crore),” Gurdeep Singh said.

Sources say the company is also in talks to sell its DTH business, Big TV, for about ₹2,000-2,500 crore. Besides, the tower sharing agreements with Reliance Jio are expected to bring in another ₹12,000 crore over the next few years.

These moves may ease the burden on the company.

The net debt to equity ratio is expected to be closer to 1-1.1 levels in the next few years.

As the company faces a scale-down in its CDMA business, its GSM operations continue to look up, given the overwhelming subscriber preference for the latter.

The analyst community, too, seems to be convinced that these moves would pay off.

“I think these will yield results as RCom has already reduced debt through QIP. It is now looking at paring debt through various other methods. However, more than the debt from here on, we would be looking at RCom’s improving operational parameters like EBITDA and minutes of usage among others,” said Bhavesh Gandhi, Research Analyst at IIFL.

Kishor Ostwal, Chairman and Managing Director at CNI Research, said: “We are in a bull trajectory, and in a bullish market, markets buy any kinds of papers. Therefore, there is a reasonable belief that RCom will be able to reduce debt by various means. Positively, I am bullish on the stock”.

(This is part of a series on how companies are managing debt to gear up for better times.)

Published on August 21, 2014
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