What’s next for Reliance Communications?

The stock of Reliance Communications (RCom) plummeted about 11 per cent yesterday to a 52-week low of Rs 16.75 as the company’s merger plans with Aircel was called off. The stock now trades a tad higher at Rs 17.35. The company’s prospects though don’t seem encouraging.

RCom’s revenue has been on the decline since June 2016 and its customer base has been shrinking too. The company’s customer base fell to 84.7 million as on March 2017, an 18 per cent decline compared with 103.6 million as on March 2016.

Its troubles accentuated with Reliance Jio’s entry into the sector late last year - revenues fell 34 per cent y-o- y in the quarter ended June 2017, and the company reported a loss of Rs 1,210 crore against a profit of Rs 90 crore in the year-ago period.

High debt (about Rs 45,000 crore), intense competition and pricing pressures have forced the company into a consolidation mode to deleverage its balance sheet. There was hope that the merger with Aircel would give it some reprieve.

Through the merger agreement with Aircel, RCom hoped to reduce Rs 14,000 crore of its debt and hold equal stake in the merged entity. But now, Reliance Communication is left looking for other alternatives.

One, Reliance Communications can monetise its tower business. The company still has plans to carry out the deal with Brookfield Infrastructure for the sale of its tower business. The company was supposed to receive Rs 11,000 crore for 51 per cent stake sale in its tower business. However, since the deal now will not include Aircel’s towers and the tenancy ratio will also come down, the deal valuation will likely be renegotiated lower.

Next, the company plans to monetise its real estate assets, including nearly 125 acres at Dhirubhai Ambani Knowledge City (DAKC), Mumbai. According to RCom, this property could fetch around Rs 10,000 crore; some broker reports though expect a lower valuation. The company is also planning to sell its property near Connaught Place, New Delhi.

RCom also plans to monetise its spectrum (worth Rs 19,000 crore as per the company) across 800 Mhz, 900 Mhz, 1800 Mhz and 2100 Mhz bands through sharing and trading arrangements with other players.

However, the value realised from spectrum sharing and trading could be lower as a few spectrum bands expire in 2021 according to reports and high debt levels could prevent the company from renewing these. That said, the company will be better placed in the 800-850 Mhz bands if the Sistema Shyam Teleservices merger is completed.

RCom plans to now focus on 4G services, away from 2G and 3G, but this shift will involve additional infrastructure cost. Spectrum and network sharing arrangement with Reliance Jio though could moderate this cost to some extent.

Even if the above measures help RCom pare its debt, leverage will still remain high. Also, the company could continue facing challenges due to intense competition in the industry, declining revenue and customer base and regulatory changes.

The ongoing insolvency case filed by Ericsson against RCom also remains an overhang. While increasing competitive intensity in the B2C business could continue impacting RCom badly, it can possibly count on support from its B2B business,including enterprise, carrier, internet data centre and global submarine cable network.

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