Assign high risk rating to Anil Ambani’s Reliance Communications shares

RCom has finally signed a long speculated deal with Reliance Industries to lease its fiber network.

Written by Citi | Published: April 4, 2013 4:36:26 pm

Event:Anil Ambani’s Reliance Communications has finally signed a long speculated deal with Reliance Industries to lease its fiber network. The deal is for Anil Ambani’s Reliance Communications 120k km national fiber optic network and involves a one-time payment by RIL of R1,200 crore and an annual charge depending upon the network usage.

The media release also discloses that the agreement is the first in an intended framework of business co-operation for optimal utilisation of their infrastructure,including towers.

Background: Anil Ambani’s Reliance Communications plans to launch a nationwide LTE network,following its spectrum win in mid-2010. Media reports indicate the company intends to initially launch services in the metros (next 3-6 months) before gradually expanding nationwide. Anil Ambani’s Reliance Communications needs passive infrastructure (tower/fiber) to launch the service and the fiber deal was necessary before a commercial launch (unless the company was to build its own fiber network; always a low probability).

Impact: The R1,200-crore cash inflow would only marginally reduce RCom’s net debt,which stood at R37,300 crore at the end of 3Q ’13. However,the annual usage charge as well as potential tower sharing with RCom,following the fiber deal,would help accelerate the deleveraging,which is critical for the stock re-rating.

Action: Anil Ambani’s Reliance Communications leverage is high,but low capex,market repair and cash inflow from the infra deal should help in

a gradual improvement. R83/share replacement value also provides some downside support. The stock remains a high-risk Buy and infra sharing deal/corporate action (asset/stake sale) remain the key triggers. Fundamentally,we prefer Bharti and Idea (top pick) over Anil Ambani’s Reliance Communications.

Risks: We assign a High Risk rating to Anil Ambani’s Reliance Communications shares,given that the stock is deemed to be relatively volatile by our quantitative risk-rating model (based on stock price movements in the past year).

Newsflow around potential infra sharing deal and corporate action (stake sale/business tie-up) remain the key upside risks to our target price and investment thesis on Anil Ambani’s Reliance Communications. Key downside risks that could prevent the stock from reaching our target price include: 1) Higher impact on usage from rising rev/min,2) Competitive intensity spiking up again and 3) Inability to deleverage through asset sale or tie-up for asset lease.

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