Reliance Communications – Company Update – Nirmal Bang Institution Desk

Reliance Communications (RCOM) has entered into a partnership with Reliance Jio Infocomm (RJI), the 4G arm of Reliance Industries (RIL), to share its telecommunications tower infrastructure with the latter. As per RCOM, it will earn Rs120bn "during the lifetime of the agreement", which, however, it has not divulged.

Interactions with our sources suggest that "lifetime of the agreement" typically implies a minimum commitment of five years, stretchable to 15 years. Thus, the Rs120bn contract value is likely to stretch over a period of 15 years, which implies Rs8bn per year, adding 3% to FY15E revenue. From a monthly rental perspective, it translates into just Rs14,815, which is over 40%-50% discount to the industry' s average rental of Rs25,000-Rs30,000 per month. As a result, we have assumed 50% incremental EBITDA from this deal, which implies 5% addition to FY15E EBITDA.

However, at this point, it appears unlikely that the deal will materially reduce RCOM' s significantly high debt pile of Rs386bn. The market remains highly competitive and RJI' s entry, while a positive for RCOM' s tower arm Reliance Infratel, could be negative for RCOM itself in the wake of a large player with deep pockets entering the market. Regulatory risk remains an issue.

We have retained our Hold rating on RCOM with a revised target price of Rs128 (Rs115 earlier) owing to the slight rise likely in FY15E EBITDA.

Source : Equity Bulls

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