In mid-January 2008, the market capitalization of Reliance Communications Ltd had come close, 1.3% away to be precise, to that of Bharti Airtel Ltd. A little over two years later, it stands at less than one-third of its larger rival.
Of course, the excesses of the bull market had much to do with optimism over RCom’s shares in early 2008. Around that time, there was also the expectation that its tower infrastructure arm will be listed and will unlock value for investors.
The immense erosion in the company’s value since then is partly because these expectations didn’t materialize, but more importantly, because of a far inferior financial performance. Two years ago, when the company reported its results for the December quarter, revenues and net profit were about 30% and 20% lower, respectively, compared with Bharti. Based on the latest quarterly performance of the two firms, RCom’s revenues are now 46% lower and its net profit is 50% lower.
In the same period, Bharti’s net debt has fallen by 57% and stands at a mere Rs1,931 crore. RCom’s debt has ballooned by 180% to Rs18,871 crore thanks to its entry into the GSM technology platform.
RCom has done well to bring down its net debt from the March level of Rs22,594 crore, thanks to a rationalization of debtors and loans and advances. Besides, it has reduced capital expenditure considerably. In this fiscal, the company expects capex of around Rs4,500 crore, a far cry from the average capex of Rs20,000 crore in each of the two preceding fiscals.
While this will help the company curtail debt and provide a buffer for its 3G bid, lower capex will also have a bearing on its growth. “We believe that all longer term structural re-rating factors (for the stock) are related to improvement in network coverage and RCom’s tower base of 50,000 towers is inadequate. Idea Cellular covers pan India subscribers with 63,000 base stations despite having a subscriber base of 58 million, which is about 74% lower than RCom,” according to a recent report by HSBC.
Besides, as Citigroup points out in a recent report explaining its “sell” recommendation on the stock: “While RCom was able to show early signs of success in its GSM foray in Q1 (first quarter), traffic growth has slowed down post other new launches, especially DoCoMo. RCom’s subscriber base is more susceptible to churn/traffic migration, given a high proportion of ‘scheme-hunting subscribers’ as well as the focus of new entrants on the same set of subscribers.”
It’s no surprise, then, that the difference between RCom and Bharti’s market cap has been widening in the past few months.
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