With Reliance Communications posting dismal set of numbers for the March quarter, the stock has taken a beating in the past few sessions. The scrip has declined over 40 percent in the past one month, while in the past three sessions itself, it fell 23 percent.
The company’s management, in an interview to CNBC-TV18, said that the company had plans to bring down its debt by over 60 percent (Rs 25,000 crore) once the transactions are complete.
The telecom operator posted a consolidated net loss of Rs966 crore for the fiscal ended fourth quarter compared to a net profit of Rs90 crore in the same period last year.
“For the first time in over 20 years, the telecom sector registered de-growth in revenues, leading to a reduction in the Government’s share in revenues, sharp drop in operating margins, accompanied by increased interest costs arising from a staggering industry debt burden, and higher depreciation and amortisation charges as a result of higher spectrum purchase costs,” said the company in its statement.
Gurdeep Singh, the company’s CEO-Consumer Business said that he was confident of completing the merger between Reliance Communication and Aircel by September 30. With the same deadline, he expects the Brookfields deal to be completed. According to the deal, the company will sell 51 percent stake in Reliance Infratel for Rs 11,000 crore.
With these two deals, the company expects making some pre-payment of debt, he added.
Elaborating on plans post September 30, Singh said that the focus would be on disposing non-core assets and expects to bring down its mounting debt by selling real estate properties. For instance, it is looking to sell 103 acres of DAKC Campus in Navi Mumbai. The remaining amount, it said, will be paid by cash flows coming in from other segments, it added.
Below is the verbatim transcript of the interview.
Q: I want to ask you specifically about the plan for two specific transactions. One is the Aircel deal. When exactly will the demerger of the wireless business be completed and the subsequent merger with Aircel will go through? Give me a specific timeline that you are aiming.
A: Let me first comment about our quarterly results. Between the last quarter, sector's operational and financial performance has been continuing severe adverse impact due to free offers, disruptive pricing and hyper competition. For the first time in over 20 years, the sector has registered degrowth in revenues leading to a reduction in the common share in revenue, sharp drop in operating margins accompanied by increased interest cost arising from a staggering industry debt burden and higher appreciation and amortisation charges is the result of higher spectrum purchase cost. Steep declines in profitability and/or net losses have been reported for the past two quarters by all telecom operators in the country without exception. A couple of operators have shut down their entire operations in the country.
In this backdrop, our key financial and operational highlight for the quarter are: consolidated revenues stood at Rs 4,524 crore, down 8.1 percent and earnings before interest, taxes, depreciation and amortisation (EBITDA) at Rs 1,083 crore, down 10.2 percent compared to the trailing quarter in line with industry trends.
The EBITDA margin declined to 24 percent compared to 24.5 percent in the trailing quarter. Financial highlights for the FY17 are consolidation revenue stood at Rs 19,949 crore, down 10.8 percent year-on-year. The company suffered a net loss of Rs 1,285 crore for the year compared to a net profit of Rs 660 crore in the previous year. This is the first year since inception when Reliance Communication (RComm) has incurred a net loss during the year having shown steady financial and operational performance during last 10 years of its operation.
RComm has been working steadfastly on execution of its well-planned future proof, all-round strategic transformation strategies since last two years. RComm, post completion of transaction would emerge as a strong player with solid operating businesses of high margin, domestic enterprise segment, data centres, optic fibres and international business in Global Cloud Xchange (GCX). Additionally, RComm will hold valuable strategic stakes of 50 percent in wireless joint venture and a 49 percent future economy upside in the tower business.
Q: The two points that you made right now, let us talk about that. What is the timeline that you are looking at to close the merger specifically? By when will the wireless business be demerged and what is the timeline that you are looking at to merge the two companies? What is the broader timeline for both these two points?
A: Both the transactions are on track and we are very confident of completing the transactions by September 30, this year.
Q: So the demerger as well as the subsequent merger will be done by September 30?
A: That is correct.
Q: The other transaction that you have been mentioning is the Brookfield tower deal. That is something that will bring in Rs 11,000 crore. Can you confirm when will the full amount of Rs 11,000 crore come into the balance sheet for RComm?
A: We are very confident about consummation of the Brookfield tower transaction by September 30, 2017 and immediately thereafter, the proceeds will flow in.
Q: So, after September 30 is when the entire Rs 11,000 crore will come in?
A: No, we expect the proceeds to come in by September 30, 2017 as the transaction gets consummated.
Q: I want to understand your debt reduction plan. You have made a statement in the concall saying that the payment and prepayment of Rs 25,000 crore from both these transactions will be made on or before September, 2017. So, Rs 25,000 crore, Rs 11,000 crore of that is the amount that will be coming in from the Brookfield tower transaction. Where does the Rs 14,000 crore cash coming in from that will enable you to make payments to your lenders?
A: It is a timing mismatch, but for unforeseen circumstances, both the transactions would have been consummated by now. Our lenders are very supportive and fully aligned and mechanics are being worked out. We are confident of completing both the transactions by September 30 which will bring our debt down by over 60 percent that is Rs 25,000 crore. In fact, we will be making substantial amount of prepayments on the consummation of these transactions.
Q: First, since you mentioned the lenders point, have you approached the lenders already? What have the lenders and bondholders said because you have asked for deferment of loan repayments till September 30, till you close these two transactions, so have all the lenders and bondholders come on board for this?
A: Our lenders are very supportive and fully aligned and mechanics are being worked out.
Q: There is a refinancing discussion also with the lenders. What is the update on that? By when can we expect there to be some clarity on the refinancing agreement and thereby, by how much can the interest cost come down?
A: As I said just now that we are confident of completing both the transactions by end September. Our lenders are very supportive and fully aligned. As we speak, the mechanics are being worked out. This will not only help us bring the debt down by Rs 25,000 crore that is over 60 percent from the current debt level and in fact, we will also be making a lot of prepayments on the consummation of these transactions.
Q: Since you mentioned prepayment, how much is due so far and how much is due till September? If you can give us some clarity on that and since you said that there is going to be more than the amount that is due, that is the amount that you will be looking at paying. So, what is the amount that is due so far and what will be due in September? If you can give us a breakup.
A: I will just say that as the mechanics are being worked out, it is something that we will come back and share with you later.
Q: The other aspect that I wanted to understand is that again, Rs 11,000 crore is coming from the tower deal. The remaining Rs 14,000 crore, I assume is the debt transfer to Aircel or the demerger or the merged entity, am I correct?
A: Yes, that is right.
Q: So the cash component is not really coming in right? So, where is the Rs 14,000 crore cash coming in from that you are going to give to the lenders?
A: RComm's debt will come down by Rs 25,000 crore post the tower sale and merger with Aircel. We will receive Rs 11,000 crore from the tower sale and we are transferring Rs 14,000 crore of debt from RComm to Aircel and it will get refinanced.
Q: So there is no fresh Rs 14,000 crore additional cash coming in which is going to the lenders, correct?
A: When it gets refinanced, it gets refinanced with the new entity which pays back to RComm for the transfer of the debt.
Q: There is another point as far as non-core asset sale is concerned. Over and above the tower deal, you have mentioned that real estate assets are also an aspect which you are looking at to be able to bring down debt further. There are two assets that have been mentioned in a few reports. There is Dhirubhai Ambani Knowledge City (DAKC) and Ranjit Hotel. Where are you as far as the sale of assets of these two specific real estate properties are concerned and are there any more real estate properties that you can look at?
A: First, we are currently immensely focused on consummating the Aircel, Sistema Shyam TeleServices Limited (SSTL) and the TowerCo transactions. Once these are completed by September 30 which we are very confident of, as we are on track, we will then take up the disposal of the non-core assets which you have rightly mentioned is the Hotel Ranjit in Delhi and the DAKC Rs 103 crore campus and much of the details we will share later.
Q: Could you give us a sense? What is the value of the non-core assets? Be it the real estate assets. What are the other non-core assets that you are looking at? What is the total value that you can look at to be able to retire debt further?
A: I will not be able to comment on the overall value but essentially, these are the two large blocks of the real estate that we are primarily focusing on.
Q: So, 60 percent debt will come down by September end, am I correct?
A: Yes, that is correct.
Q: By how much further can you bring down debt? If you look at a target of end of FY18, by how much more can you bring down debt? That is point number one and by when are you expecting the entire transformational plan that you have been talking about? By when will that be completed? Can I estimate FY18 end?
A: In the financial year 2018 of which the September 30 timeline we are confident of meeting to pare the debt down by Rs 25,000 crore remains our critical and the main focus this year.
Q: But what is next? Once you are done with the refinancing, once you are done with the demerger, September is an ambitious target, what is next? What are you doing to be able to take the company forward? Cash flows, EBITDA have been a concern. What are you doing to be able to, for lack of a better word, look at positive cash flows and EBITDA growth over the next few quarters?
A: On a pro rata basis, all lenders will be paid through Rs 25,000 crore proceeds. Remaining substantially lower debt in RComm would be serviced through RComm's existing high growth and high margin business in the domestic enterprise segment, data centres, optic fibres and international business in GCX. All these businesses have a higher stability of revenue and a stickier customer base with minimal churn. Additionally, RComm will continue to hold strategic 50 percent stake in the wireless JV and a 49 percent future economic upside in the new TowerCo.
Q: What is the plan that you are looking at as far as scalability of the wireless business is concerned once you demerge it and go ahead with the merger?
A: The merged entity becomes very strong with a pan-India 4G footprint, 3G and a 2G footprint with the operational synergies which are currently estimated at Rs 20,000 crore may over a period of time makes that entity very strong to go to the market and have the substantial market share. The new entity that is being envisaged will be a number three player in more than 12 circles and a number four player in the remaining circles. So, given the market position of the new entity backed up by the requisite spectrum ability to service the consumer segments and the operating synergies will make it a strong business entity.
Q: By when will you know the branding and the new management structure of the merged entity?
A: Once the transaction is consummated and all the necessary approvals come in, as you are aware, for Aircel we already have stock exchange approval, we have competition commission, SEBI and the scheme of demerger and merger has already been filed in National Company Law Tribunal (NCLT). We are very hopeful as it is on the track right now to close the transaction by September 30.
Q: So after that there will be some clarity as far as management and the branding of that entity is concerned, am I right?
A: That is right. In fact post the completion of these transactions, RComm will emerge one of the strongest players in the telecom industry with the least debt and a very strong 4G footprint.
Q: I want to ask you, there have been reports on the issues as far as debt repayment is concerned and I want to ask you for a specific clarity. Are you confident, based on your conversations with lenders that lenders are patient to wait till the deferred timeline that you are looking at and are you confident that the asset will not be made into a non-performing asset (NPA)?
A: We are very confident since our lenders are very supportive and fully aligned and the mechanics are being worked out and they are very appreciative of our intense focus to complete the transactions by September 30. So, all-in-all I will say we are very confident of this transaction completion by September 30 paring the debt down by Rs 1,000 crore that is over 60 percent and also, in fact make substantial amount of prepayments once the transactions are consummated.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
