India’s second-largest mobile-phone operator, Reliance Communications Ltd’s shares have fallen by 56% in the past three months, more than three times the rate at which shares of Bharti Airtel Ltd have fallen (down 18%).
Investors have been worried about the firm’s large funding needs for its nation-wide network rollout on the global system for mobile communications, or GSM, technology platform, at a time when liquidity is tight. Spreads on credit default swaps on the company’s overseas debt has risen substantially since July, and equity investors in India have responded with large-scale selling, assuming that any new debt would involve high borrowing costs.
It’s not surprising the company took time to allay fears about funding problems in its conference call with analysts on Friday. According to the management, it has over $2 billion (Rs9,860 crore) in cash and has tied up long-term credit lines worth $1.5 billion at cost of less than Libor (London inter-bank offered rate) plus 200 basis points, which is in line with its borrowing cost before the recent tightening in the credit markets. One basis point is a hundredth of a percentage point.
Analysts were also concerned that about 50% of the company’s debt at the end of March was designated as short-term in its annual report. Again, the worry was that refinancing this would pose problems with tight liquidity. But the company says only a small part of its debt is short-term and all dollar-denominated debt is long-term, maturing in 2011 and beyond. The company also said it’s currently at the peak of its capex cycle, and capex will reduce in the next two years.
Despite these clarifications, the firm’s shares are expected to trade at a discount to its main competitor, Bharti Airtel. Its enterprise value to past trailing earnings before interest, taxes, depreciation and amortization stands at 6.76 times, a 30% discount to Bharti’s valuation of 9.61 times.
While Bharti’s earnings are likely to be revised upwards after the September quarter results, Reliance’s are likely to be revised downwards after reporting a meagre 2.3% increase in operating profit.
Also, with the company being in the midst of its GSM rollout, it’s unclear how much of the profit margins will be impacted next year.
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