Stabilising operations but debt burden constrains valuations
RCOM’s key challenge is to build momentum in its wireless business and
generate sufficient cashflows to reduce its debt burden (current net debt to
EBITDA 4.7x). Over the last six quarters, revenue/min has been stable, but
mobile EBITDA has stagnated. Weak cashflows have forced RCOM to
constrain capex to generate sufficient cash to repay around $1.2bn in FCCBs
maturing in March 2012. We are reducing our FY13E EPS and target price by
c.50% to reflect RCOM’s operating and financial challenges. Maintaining Hold
(target price Rs80).
Wireless business – growth is critical, but could be harder to achieve
Over the last ten quarters, RCOM’s wireless revenue-share fell from 12% to
8%. We believe it could be challenging for RCOM to maintain market share;
we forecast FY13/14 revenue growth of 13%/11% (below sector growth of
15% p.a.). Margins should improve by 200bps to 29% by FY14 as RCOM has
also raised tariffs following hikes by incumbents. Unlike in the past, we believe
RCOM’s ability to precipitate a tariff war is limited due to its leveraged balance
sheet.
Debt burden a key concern, economic cost of debt difficult to estimate
At end-2QFY12, RCOM’s net debt stood at Rs319bn, which includes a recent
drawdown of $1.3bn out of a $1.93bn loan facility extended by a consortium
of Chinese banks. Cash flows in 1HFY12 have also been weak, likely on
account of payments to capex creditors. While we forecast cumulative FCF
(FY12-14) of Rs88bn, our FY14 net debt to EBITDA remains at an elevated level
of 3x. RCOM’s interest costs are hard to fathom from its quarterly disclosures.
However, we note that its convertible, due in March 2012, is trading at YTM of
around 27%.
High leverage relative to peers results in a valuation discount
Our DCF-based target price for RCOM is Rs80/share, implying 6.3x FY13E
EV/EBITDA (20% discount to Bharti’s implied valuation). Our DCF
assumptions: RFR of 6%, risk premium of 8.5%, CoE of 17%, Kd of 10.5%,
WACC of 13.1% and terminal growth rate of 2%. A reversal in market share
losses would be a key upside risk. A resumption of the tariff war would be a
downside risk.
RCOM’s key challenge is to build momentum in its wireless business and
generate sufficient cashflows to reduce its debt burden (current net debt to
EBITDA 4.7x). Over the last six quarters, revenue/min has been stable, but
mobile EBITDA has stagnated. Weak cashflows have forced RCOM to
constrain capex to generate sufficient cash to repay around $1.2bn in FCCBs
maturing in March 2012. We are reducing our FY13E EPS and target price by
c.50% to reflect RCOM’s operating and financial challenges. Maintaining Hold
(target price Rs80).
Wireless business – growth is critical, but could be harder to achieve
Over the last ten quarters, RCOM’s wireless revenue-share fell from 12% to
8%. We believe it could be challenging for RCOM to maintain market share;
we forecast FY13/14 revenue growth of 13%/11% (below sector growth of
15% p.a.). Margins should improve by 200bps to 29% by FY14 as RCOM has
also raised tariffs following hikes by incumbents. Unlike in the past, we believe
RCOM’s ability to precipitate a tariff war is limited due to its leveraged balance
sheet.
Debt burden a key concern, economic cost of debt difficult to estimate
At end-2QFY12, RCOM’s net debt stood at Rs319bn, which includes a recent
drawdown of $1.3bn out of a $1.93bn loan facility extended by a consortium
of Chinese banks. Cash flows in 1HFY12 have also been weak, likely on
account of payments to capex creditors. While we forecast cumulative FCF
(FY12-14) of Rs88bn, our FY14 net debt to EBITDA remains at an elevated level
of 3x. RCOM’s interest costs are hard to fathom from its quarterly disclosures.
However, we note that its convertible, due in March 2012, is trading at YTM of
around 27%.
High leverage relative to peers results in a valuation discount
Our DCF-based target price for RCOM is Rs80/share, implying 6.3x FY13E
EV/EBITDA (20% discount to Bharti’s implied valuation). Our DCF
assumptions: RFR of 6%, risk premium of 8.5%, CoE of 17%, Kd of 10.5%,
WACC of 13.1% and terminal growth rate of 2%. A reversal in market share
losses would be a key upside risk. A resumption of the tariff war would be a
downside risk.
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