Mumbai: Reliance Communication is up some 45% in the past month following news of FCCB refinancing via Chinese banks and reports of listing undersea cable assets in the Singapore market. But is that trend sustainable and does it alleviate long term debt concerns?
R-Com is starring at $1.18 billion or Rs6,018 crore worth FCCB redemption on 1 March. The stock price is trading at a steep 90% discount to the conversion price as the bonds were issued during the stock market boom of 2007. The loan from three Chinese banks (Commercial Bank of India, China Development Bank and Export Import Bank) with an extended maturity period of seven years and interest rate at 5% comes as a life line for R-Com which is grappling with high 10-13% interest rates in the domestic market.
Analysts said that FCCB refinancing has eased near term liquidity concerns given its frayed finances with net-debt to EBITDA of 4.9 and total debt load of Rs34,896 crore as of the September quarter, but long term debt concerns remain. Sachin Gupta, a research analyst from Nomura in a report dated 17 January said, “R-Com’s stretched balance sheet will be a long-term concern. It could also curtail investment needed for the business. The company has been vocal about divesting a stake in one of its businesses, to de-lever its balance sheet. However with little success.”
R-Com is also planning to list its undersea cable assets and is aiming at raising $1.5 billion from the Singapore market by selling 75% in the business trust to investors, said Wall Street Journal in report dated 19 January. However, most of the analysts were not very positive and said that the fund raising plan could be stymied due to range-bound markets. Also, in 2009, the deal was called off because they were not able to get the right valuation for undersea cable network of 65,000 km. Moreover, no information is available on record about the value of the assets or cash flow to assess the fair value of the deal.
Also even if R-Com manages to list the undersea cable assets at $1.5 billion, it will fetch only around Rs7,500 crore which is not enough to repay the debt of over Rs34,000 crore. “We may continue to see the debt overhang on the stock,” said Ankita Somani from Angel Broking.
Furthermore, R-Com’s revenue from telecom operations will continue to lag Bharti Airtel and Idea Cellular. R-Com’s average revenue per minute (ARPM) and minutes of usage (MoU) are expected to remain flat in the coming quarters. The revenue growth is expected to fall by 14% in FY12, but may see a growth of 7% in FY13, said analysts. Angel Broking expects FY12 EPS at Rs3.9 and FY13 at Rs5.7.
Also, R-Com is losing out on number portability. The positive for the company is that it can monetize 50,000 towers and strike a deal with Reliance Industries to deleverage. That may be one catalyst for a stock re-rating.