Telecom network deal favours RIL more than R-Com: analysts
Analysts expect a potential telecom tower-sharing agreement between Reliance Jio and R-Com
Mumbai: A day after Anil Ambani’s Reliance Communications Ltd (R-Com) signed a deal to lease out capacity on its optical fibre cable network to elder brother Mukesh Ambani’s Reliance Jio Infocomm Ltd,
most analysts see Tuesday’s development as a small yet significant step
towards a bigger partnership, which can pull R-Com out of the woods as
far as its debt burden is concerned.
However, one brokerage has advised clients to sell R-Com’s shares while the euphoria surrounding the newly forged partnership lasts and buoys the mobile telephony firm’s stock price, while another observed that the deal is tilted in favour of Reliance Industries Ltd (RIL), of which Reliance Jio is a unit.
A 2 April research note by Citigroup Global Markets Inc. said the Rs.1,200 crore cash inflow would only marginally reduce R-Com’s net debt, which stood at Rs.37,360 crore on 31 December.
“However, the annual usage charge as well as potential tower sharing with R-Com following the fibre deal would also help accelerate the deleveraging, which is critical for the stock re-rating,” the report said. Kotak Securities Ltd said the deal between R-Com and Reliance Jio is only worth Rs.6 per share, but the market was likely to be “excited” due to the suggestion of further cooperation between the two companies in their respective statements issued on Tuesday.
“We would use such exuberance to sell R-Com,” the 2 April Kotak report said. Consequent to the incremental earnings visibility due to the deal, Kotak has also revised R-Com’s price target to Rs.65 per share from Rs.60 earlier.
All eyes are also on a potential telecom tower-sharing agreement between Reliance Jio and R-Com.
Bank of America Merrill Lynch pointed out in a 2 April report that since R-Com’s 120,000km optical fibre cable network likely offers ready connectivity with a large chunk of R-Com’s towers, “this critical backhaul feature should make R-Com a preferred tower vendor for RIL’s data-oriented services,” and this could provide R-Com with strong incremental cash.
R-Com rose 1.9% to Rs.64.50 on BSE on Wednesday. The benchmark Sensex fell 1.26% to 18,801.64 points. RIL lost 2.16% to close at Rs.776.80.
Analysts also said that finally some concrete steps towards the rollout of RIL’s fourth generation broadband wireless services have started becoming visible. These steps indicate that RIL is mindful of not incurring unnecessary expenditure, they observed.
A 3 April report by Barclays Bank Plc said that RIL’s track record of non-core investments (retail and the earlier venture into telecom) is “chequered” and was responsible for dragging down return on capital employed by around 3 percentage points.
“A well-calibrated capex ramp-up (for the new broadband wireless business) that avoids equity tie-ups may help mitigate some of these concerns,” the Barclays report said. “We see the agreement with R-Com as positive in this context.” A 2 April UBS report said that the deal appeared to be “tilted in RIL’s favour”. This is because the valuation of the deal with R-Com at Rs.100,000 per km of optical fibre cable is at least 55-60% cheaper than the cost of building it as per Telecom Regulatory Authority of India estimates, according to UBS.
However, one brokerage has advised clients to sell R-Com’s shares while the euphoria surrounding the newly forged partnership lasts and buoys the mobile telephony firm’s stock price, while another observed that the deal is tilted in favour of Reliance Industries Ltd (RIL), of which Reliance Jio is a unit.
A 2 April research note by Citigroup Global Markets Inc. said the Rs.1,200 crore cash inflow would only marginally reduce R-Com’s net debt, which stood at Rs.37,360 crore on 31 December.
“However, the annual usage charge as well as potential tower sharing with R-Com following the fibre deal would also help accelerate the deleveraging, which is critical for the stock re-rating,” the report said. Kotak Securities Ltd said the deal between R-Com and Reliance Jio is only worth Rs.6 per share, but the market was likely to be “excited” due to the suggestion of further cooperation between the two companies in their respective statements issued on Tuesday.
“We would use such exuberance to sell R-Com,” the 2 April Kotak report said. Consequent to the incremental earnings visibility due to the deal, Kotak has also revised R-Com’s price target to Rs.65 per share from Rs.60 earlier.
All eyes are also on a potential telecom tower-sharing agreement between Reliance Jio and R-Com.
Bank of America Merrill Lynch pointed out in a 2 April report that since R-Com’s 120,000km optical fibre cable network likely offers ready connectivity with a large chunk of R-Com’s towers, “this critical backhaul feature should make R-Com a preferred tower vendor for RIL’s data-oriented services,” and this could provide R-Com with strong incremental cash.
R-Com rose 1.9% to Rs.64.50 on BSE on Wednesday. The benchmark Sensex fell 1.26% to 18,801.64 points. RIL lost 2.16% to close at Rs.776.80.
Analysts also said that finally some concrete steps towards the rollout of RIL’s fourth generation broadband wireless services have started becoming visible. These steps indicate that RIL is mindful of not incurring unnecessary expenditure, they observed.
A 3 April report by Barclays Bank Plc said that RIL’s track record of non-core investments (retail and the earlier venture into telecom) is “chequered” and was responsible for dragging down return on capital employed by around 3 percentage points.
“A well-calibrated capex ramp-up (for the new broadband wireless business) that avoids equity tie-ups may help mitigate some of these concerns,” the Barclays report said. “We see the agreement with R-Com as positive in this context.” A 2 April UBS report said that the deal appeared to be “tilted in RIL’s favour”. This is because the valuation of the deal with R-Com at Rs.100,000 per km of optical fibre cable is at least 55-60% cheaper than the cost of building it as per Telecom Regulatory Authority of India estimates, according to UBS.
PRIYA SINGH
PGDM 2nd SEM
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