How Reliance Jio deal can help RCom

Jun 8, 2013:--



The agreement signed by Reliance Communications with Reliance Jio - the telecom arm of Mukesh-Ambani-controlled Reliance Industries - to share the tower infrastructure of RCom - for which the value has been assigned at Rs 12,000 crore for the lifetime of the agreement - should provide a measure of comfort to investors and the debt-laden firm of the Anil Ambani Group.



The deal comes at a time when RCom\'s debt servicing poses a major challenge. For FY13, the telecom company\'s interest to earnings before interest and tax or EBIT was 0.75 compared to 0.6 last year and 0.4 a year before that.



Although there is no clarity on the nature and timeline of the payment, this will come as a relief to Rcom\'s investors worried about the company\'s mounting debt and weakening cash flows from operations.



RCom\'s debt has shot up in the past five years. By the end of March 2013, its net debt was close to Rs 39,000 crore, on which the company paid an interest of Rs 2,500 crore.



Its profit after tax for FY13 was 744 crore, 25% lower than a year ago. Assuming that the lifetime of the contract is 15 years, RCom will get incremental revenues of close to Rs 800 crore annually. Over the past three months, the RCom stock has gained 82% in anticipation of the deal.



However, analysts reckon that the latest deal may not lead to a re-rating of the company\'s stock as even after the contracts, its debt will remain high with core operations continuing to remain weak.



Based on this, most analysts have given a neutral rating to the stock at current valuations and do not see any major upside from here. But Friday\'s alliance could well pave way for more such initiatives in the future, which could be positive for RCom. \"There is a further scope for similar infrastructure-sharing deals for Rcom\'s intra-city fiber,\" says Shobhit Khare, VP research of Motilal Oswal Securities.
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