R-Com,R-Jio: Perfect fit?

The Markets are continuing to cheer the stock impact of Tuesday’s mega announcement by debt-ridden Reliance Communications Ltd

Written by Anil Sasi | Published: April 4, 2013 1:49:40 am

The Markets are continuing to cheer the stock impact of Tuesday’s mega announcement by debt-ridden Reliance Communications Ltd. After gaining 11 per cent yesterday,R-Com surged nearly 2 per cent on Wednesday. This despite some brokerages,including Kotak Securities,emphatically retaining their sell rating on R-Com on the grounds that the Rs 1,200 crore-deal with RIL-unit Reliance Jio does not materially change things for the Anil Ambani firm,given the massive debt of over Rs 37,000 crore on R-Com’s books.

The broader trigger for the sentiment boost for R-Com seems to be the potential ripple effects of Tuesday’s deal that signals a rapprochement between chairman Anil Ambani with his elder brother Mukesh Ambani,which would have many fold affects on the stock and the company in future. Indications are that there will be a series of announcements coming through in the due course.

Purely from the perspective of its impact on R-Com’s books,Tuesday’s deal,though not big by industry standards,does bring in much needed funds for debt-laden R-Com. More importantly,the deal with Reliance Jio on the fibre optic infrastructure points to the distinct possibility that in the coming months,the other profit centres within R-Com,including its tower unit,could be part of similar deals involving RIL. It almost seems like a perfect fit,considering that RIL is cash-rich — it had cash and cash equivalents of over Rs 75,000 crore at the end of December 2012 — and is raring to go with a big splash in the telecom space. Backend fibre optic network is crucial to supporting the 4G airwaves that the RIL unit already has. Besides,from RIL’s perspective,for Rs 1,200 crore,Reliance Jio Infocomm would get access to 1,20,000 kilometers of optical-fiber network,much cheaper than having to build such a network from scratch. Access to the tower infrastructure,analysts predict,is likely to be the next business venture on the table.

The other important facet to Tuesday’s deal is that for both Reliance Jio and R-Com,the deal is mutually “non-exclusive”,meaning that while R-Com would be free to offer fibre optics to other firms as well,Reliance Jio can avail of other firms’ fibre infra. Morgan Stanley has reiterated ‘equal weight’ rating on R-Com with price target set at Rs 56 after the deal,with the brokerage firm calling it a “win-win” for both companies. “RIL will avoid huge capex as it will get access to readily available telecom infrastructure,while for R-Com,it will result in optimal utilisation of its existing untapped infrastructure,” the Morgan Stanley note said.

Anil is a senior editor based in New Delhi.


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