Reduce Reliance Comm; target of Rs 67: Emkay

Emkay Global Financial Services is bearish on Reliance Communications and has recommended reduce rating on the stock with a target of Rs 67 in its July 11, 2012 research report.

“Reliance Comm, with this IPO the company is expected to raise $1bn on the higher price band of IPO, which would reduce the consolidated debt of Rs370 (at the end of FY12) by ~Rs54bn. Implied equity value for the trust stands at $1.5bn and EV of $1.5bn (due to insignificant debt) on the higher price band. The implied EV/EBITDA stand at 6.6x on lower price band and 7.9x on upper band, which is premium to its comparable peers (Tata communication & CWW). Tata communication and Cable and Wireless Worldwide (CWW) trade at ~6.5x FY13E and 3.3x CY2012E, resp. Rcom currently trades at 6.4x FY13E, which is at par with Bharti and Idea (despite weak financials). This indicates that most of the potential upside from the stake sale is already factored in the stock price.”

“At the higher price band Rcom would be able to raise $1bn (~Rs54bn), which would not reduce the current debt of 370bn (at the end of FY12) in a big way. Net-Debt to EBITDA post this transaction would still remain stretched at 4.1x for FY13E. At the higher price band Rcom would be able to raise $1bn (~Rs54bn), which would not reduce the current debt of 370bn (at the end of FY12) in a big way. Net-Debt to EBITDA post this transaction would still remain stretched at 4.1x for FY13E.”

“This transaction is the first step towards reducing debt via divestment of stake in subsidiary. While the net debt would be reduced but concerns over weakness in core business still remain. The wireless (core) revenue of RCom has been stagnant from last 12 quarters which is in complete contrast with Bharti and Idea. EBITDA has also fallen at a CQGR of 3.3%. RCom has guided Rs15bn capex for FY13 while that of Bharti and Idea stand at Rs120bn and Rs40bn, respectively. We believe this may impact network quality and lead to loss of market share. We maintain our cautious view on the stock with REDUCE rating. We would revise our financials and target price post this transaction,” says Emkay Global Financial Services research report.    

Non-Institutions holding more than 90% in Indian cos

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