Motilal Oswal's research report on Reliance Communications (RCOM)
Increasing target price by 14 percent; maintain Neutral
INR120b deal for up to 45,000 towers with Reliance JIO
- Reliance Communications (RCOM) and Reliance JIO Infocomm have signed an agreement for sharing tower infrastructure with an aggregate value of INR120b.
- The deal will enable Reliance JIO to utilize up to 45,000 sites from RCOM's existing network.
- We estimate incremental revenue of ~INR8b per year and incremental EBITDA of INR7b-7.5b per year for RCOM, assuming that Reliance JIO ramps up to 45,000 sites.
- We are upgrading FY14/FY15E EBITDA by 1-2 percent and target price by 14 percent to INR111.
- The stock trades at an EV of 7.5x FY14E and 6x FY15E EBITDA. Maintain Neutral.
RCOM and Reliance JIO Infocomm have signed a comprehensive agreement for sharing tower infrastructure with an aggregate value of INR120b. Reliance JIO would utilize up to 45,000 sites from RCOM's existing network.
Intra-city fiber, the missing piece post inter-city fiber and tower deals
This is the second major agreement between these two companies. In April 2013, the two companies had announced an INR12b inter-city optic fiber IRU (Indefeasible Rights to Use) agreement. Going forward there is further scope to for a similar agreement for leasing its intra-city fiber network to Reliance JIO.
Incremental steady-state annual revenue of ~INR8b and EBITDA of INR7b-7.5b
Assuming a monthly rental of INR15,000 per slot and steady-state utilization of 45,000 slots by Reliance JIO, we estimate steady-state incremental revenue of INR8.1b per year and steady-state incremental EBITDA of INR7.3b per year assuming 90 percent incremental EBITDA margin.
High debt remains a concern though deal to aid deleveraging
"RCOM's net debt of INR389b and net debt/EBITDA of ~6x remains a concern, though recent infrastructure sharing deals would aid deleveraging. Our estimates imply decline in net debt/EBITDA from 5.9x currently to 3.3x by FY15.
Upgrading FY14/15E EBITDA by 1-2 percent and target price by 14 percent; Neutral
"We are upgrading FY14/15E EBITDA by 1-2 percent and target price by 14 percent (INR14) to INR111. The stock trades at an EV of 7.5x FY14E and 6x FY15E EBITDA. Maintain Neutral," says Motilal Oswal research eport.
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