Motilal Oswal neutral on Reliance Comm; target Rs 111

Motilal Oswal's research report on Reliance Communications (RCOM)

Increasing target price by 14 percent; maintain Neutral

• 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.

INR120b deal for up to 45,000 towers with Reliance JIO
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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