RIL-RComm deal: ICICI Sec sees little cheer for ADAG firm

Reliance Communications' (RCom) deal with Reliance Industries (RIL) is positive for the former as asset monetisation will help the company reduce some debt, but operating challenges remain, says Vikash Mantri of ICICI Securities.

RIL's telecommunications unit will lease up to 45,000 mobile masts from RCom. The deal is valued at more than Rs 12,000 crore over the lifetime of the contract. RCom has lost revenue and market share over the last few years in the telecom market as it has not been competitive enough. However, it can overcome these operating challenges if it reduces debt, which will boost flexibility, he explained. The company should monetize few more assets to significantly reduce debt to be a good play, he added. ICICI Securities still has a negative stance on RCom. Also Read: Third spectrum auction in Aug; telcos have to bid: Sources Below is the edited transcript of Vikash Mantri's interview with CNBC-TV18. Q: What are your first thoughts on this entire deal, is it in line with expectations, what stands out for you? A: This deal was due for quite some time has happened now and it is positive news for Reliance Communication. However, the amount for which it has happened in terms of rental seems to be low. Finally there is some asset monetization for RComm. We will only be able to comment on the cost front if we get to know the time period of the deal, which has not been yet mentioned. Q: How would you look at the Reliance Communication stock? A: While asset monetisation is really very good for RComm, the challenge still lies on the operating side. This asset monetisation will help in paring debt. However, the operating challenges continue. They need to do few more of these asset monetisation and may be sell a stake in these tower companies to reduce debt significantly for RComm to be a good play. So we still have a negative stance on RComm. Q: When you say an operating challenge is it only because of the high debt or is it an operating challenge also because they aren’t as competitive as some of the market leaders? A: They have not been as competitive, so they have lost revenue and market share over the last few years. However a lot of these operating challenges can change on lower leverage because then the flexibility of the company improves. So, while they are operating in nature, leverage changes that at times. _PAGEBREAK_ Q: Usually what is the tenure of these tower sharing agreements? Based on that could you give us some sense on what the rentals could be if say they get into a 20 years period then what does Rs 12000 crore over 45,000 towers mean? A: The average lifetime of these tenures as seen in the case of other tower companies is generally 10-15 years. Reliance depreciates these towers by around 20 years. If I assume 10 years per se then rentals come close to Rs 22,000 crore. However, if the deal would have been as lucrative as this, then they would have mentioned. It is a longer period of time and therefore rentals might be lower. Q: What are you penciling in at all or are you just waiting for the company to say something? A: We will wait in for the details to come in in terms of rentals, time period and nature of payments - whether they are upfront. Q: What would be the range of rentals which should enthuse the street or what should be the rentals which will disappoint, what are market expectations? A: A number around Rs 20,000-22000 crore would have been nice, but looks like it is at a discount to do that. Again there are many ifs and buts how it has been structured to understand in more detail. Q: Do you expect more deals between RComm and Reliance Industries or on that now the market should go a little quite with their expectations? A: What was expected has already happened, so I don't see much more happening going forward. Q: What is your expectation of what the stock should do because it has come off, it is now down 0.5 percent to Rs 117? A: This news bodes well, the run up has also been high on the stock and valuations are on the expensive side. They need more number of asset monetisation deals to justify the current valuations and improve on the operating front.