Land assets account half of RCom's valuations: ICICI Direct

In an interview on CNBC-TV18, Karan Mittal of ICICI Direct says it will take a long time for Reliance Properties to actually monetise the assets because of its sheer size. He says, "The huge size could actually take up to atleast 8-10 years for full monetization to happen."

RCom announced its plan to monetise its land assets on Sunday after approval from its board.
He says Rcom is trading above 10 percent today on the back of its assets being about 50% of its current valuations.
According to Mittal, RCom's land parcels would be valued at Rs 8,100 odd crore for the Mumbai land and about Rs 900-1,000 odd crore for the Delhi land, which translates into about Rs 53 or Rs 54 per share. But liability (if any) against the company's land as well as development costs need to develop the land have to be taken into account while valuing the assets. He sees the stock price going up by Rs 30-40 from its current levels and may go for further upwards revision in price later.
He feels a part of RCom's debt would definitely get transferred to Reliance Properties. Also Read: Reliance Comm hits 31.5-month high on realty demerger Below is the verbatim transcript of Karan Mittal's interview on CNBC-TV18 Q: What did you make of this entire deal and more importantly how long do you think it would take for Reliance Properties to monetise any of those assets and eventually reduce the debt?
A: It is a very good and positive news for the company, because it will do humongous value unlocking for the company and the shareholders. However, having said that, it will take a long time for the company to actually monetise this kind of an asset because according to our internal estimates the commercial property of that huge size could actually take up to atleast 8-10 years for full monetisation to happen. Q: More important than that has not any of this land being factored in by any analyst in the valuation of the company so far?
A: No, I really don't think so. Q: Such a big asset Rs 12,000 crore and no one took cognisance at all?
A: No, I don’t think so because it was never highlighted by the company that this is the kind of asset that the company possesses. But yes, looking at the current valuations of Reliance Communications that is almost about 50 percent of its current valuation. So that should reflect in the stock price and obviously that is why the stock price is above 10 percent today. Q: So, would you want to reconsider, what would be your price target? I agree it will take a long while to monetise such a huge asset, nevertheless what will you factor in, in terms of a price target immediately for Reliance Communications?
A: On a conservative basis, we think about Rs 8,100 odd crore would be for the Mumbai land and almost about Rs 900 crore to Rs 1,000 odd crore for the Delhi land. That translates into almost about Rs 53 or Rs 54 per share, but then what we need to consider is how much would be the liability against this land of the company and also if there is any other development cost which is to be incurred in the near future for developing both the land parcels.
So, somewhere atleast about Rs 30-40 should come in for the share price for the Reliance Communications shareholders, but we will look it in more detail and maybe revise our target price upwards. Q: Do you think any of the debt will be transferred from Reliance Communications to Reliance Properties?
A: I would presume so, but then most of the debt that Reliance Communications currently has would primarily be on account of telecom business, be it in the 2G spectrum or in the 3G spectrum or also laying the fibre optic cable or the building of the passive infrastructure. So, I am not sure what would be the extent of the debt that will get transferred to the other company, but then obviously it should impact the balance sheet of Reliance Communications per se. However, I feel the major benefit would come in once the monetisation actually happens, but then that is still a long way to go. Q: The past history of such kind of deals has not gone down very well and investors remember the time when Indiabulls Real Estate had demerged the power business, at that time Indiabulls Real Estate was at some Rs 150 and now it has come all the way down to Rs 65 and Indiabulls Power, it has gone all the way down to Rs 7. Eventually for the longer term how circumspect would you be about this whole demerging into another business and 1:1 ratio etc. and how would you approach Reliance Communications for the longer term?
A: Exactly, the point I was trying to make is that we will look at the fundamental strength of the business rather than the land deal or value unlocking, which is happening, because on the ground nothing exactly changes for the shareholders or for the company because you don’t have any monetisation or anything coming in and the debt level currently remains the same. But yes, there are a couple of debt-reducing measures which the company is taking, be it direct to home (DTH) business or also the selling of the enterprise business. So, things of those sort would actually impact the balance sheet and hence the valuations. I think the overall scenario in the telecom industry is improving with competitive intensity declining and also the regulator giving indications that it is actually kind of being a little more lenient on the telecom operators. So with that and also the data, the pace at which data is growing.
So with all these things, I think the profitability overall in the telecom sector should improve and Reliance Communications primarily on the debt front has been marred and the valuations are relatively cheaper to other operators. So, I think if they are able to successfully pare down the debt, we could look at brighter prospects for the shareholders in Reliance Communications. But currently we are a little circumspect on the fundamental side. Q: There is another possible niggling worry, which Bharti just cleared or some other brokerage cleared it on behalf of Bharti. If your total debt is not hedged then the potential loss, if there was a big volatility in the rupee could become a source for higher cost of domestic debt. Have you done that arithmetic at all for Reliance Communications? I don’t know how much it is possible to do. But will local debt become expensive for Reliance Communications next time the reset happens?
A: Definitely yes, but then Reliance Communications also had done a couple of refinancing from foreign debt. They have taken a Chinese loan. So, I am not very sure how much would be the impact of the current devaluation? What is the extent of the hedge that they have done? But obviously the forex fluctuation does impact the company and most of it should be translated through the balance sheet as of now. Q: Would it have been more beneficial for Reliance Communications stock if instead of demerging it into a separate company the company had merely said that it has landed assets, which it can use to retire?
A: I don’t think so. Q: The interpretation of some investors is that this is good for Reliance Communications shareholders because they get that asset, but not good for Reliance Communications because it does not retire its debt or may not be allowed to retire its debt. So, do you think that posing it as an asset, which might be sold some day would have been more beneficial to the stock?
A: I think this is good for the shareholders as you correctly mentioned, but what it does is they had also done a tie up with a Chinese real estate developer about three-four months back. So before they actually not block their managerial bandwidth and the current management of Reliance Communications could actually focus only on the telecom business, the voice or the data side of the business and the other management could actually take care of this.
I think one good thing they could have done is if they could have right away sold off this land to Reliance Properties and got done with in terms of Reliance Communications, that could have actually impacted the balance sheet right away and benefited the shareholders.