Saturday, 1 July 2017

Reliance Communications is sinking

  • Reliance Communications, 7th largest telecom service provider posted its yearly loss of Rs.1,283 crores.
  • Its debt stood at Rs.45,733 crores, as on March 2017, prompted banks raise red flag.
  • Rating agencies downgraded RCom over debt concerns.
  • In seven days, RCom stock tanked 33%.
  • The lenders has granted seven month standstill on the debt.
  • By Dec 2017, it will have to conclude merger deals with Aircel and sale of 52% Reliance Infratel's equity to Brookfield infrastructure for Rs.25,000 crores to pare down its debt to Rs.20,000 crores.
  • Debt pile up was due to its decision to switch from CDMA to GSM and purchase of 3G spectrum at Rs.8,585 crores.
  • And then company landed in debt trap i.e. borrowing money to repay debt.
  • Reliance Jio's aggressive marketing has impacted smaller companies like RCom losing its subscribers. While Airtel experienced severe contraction of profits all others viz. RCom, Idea, Vodafone etc slipped into losses.
  • They expect reduction in market share resulting in pressure on margins.
  • In last quarter RCom lost 29.5 million customers, whereas Airtel and Idea gained 22.41 and 14.4 million customers.
  • The current issue is partly due to delay in shifting from CDMA to GSM that resulted in its low value subscriber base. Initial attempts to upgrade to GSM has not yielded any good results.
  • Today it has 62,000 cell sites compared to Idea-Vodafone's 273,000 and Airtel's 185,000. 
  • As investments slowed so are subscriber additions, as people chose operators with superior networks.
  • RCom plans to sell of its Dhirubai Ambani Knowledge City's 135 acres in Navi Mumbai and 4 Acres property near Connaught place New Delhi to retire its remaining debt.
  • RCom proposed to surrender part of spectrum to escape payment liabilities to DoT. 
  • Merged entity AirCom of RCom-Aircel-MTS with its 10% market share, sub optimal quality subscribers, less spectrum and debt burden will find it hard to service with its prevailing EBITDA. 
  • It is even more tricky to incur capex for modernisation given its financial health and inability to raise bank loans.
  • Anil Ambani's elder brother, Mukesh Ambani, might not allow RCom to die because of its name "Relaince" attached to it.
My View:
While AirTel, Idea and Vodafone continuously invested in capex, spectrum and marketing to increase its presence and value, RCom did nothing of that sort and landed in trouble. Also banks are to be blamed which funded Reliance Jio to the tune of Rs.180,000 crores only to trouble the saturated telecom sector pulling down almost all telco's with combined exposure by banks to the extent of Rs.400,000 crores. SBI Chairman expressed concerns about telco's combined EBITDA dropping to levels where debt servicing becomes hard and their loans might get turned into NPA's. Needless to say like in any other case, here too promoter owners will walk off with riches, banks will get charge of worthless assets and will have to take huge haircut. And then PSU Banks will look at centre to recapitalize them. Same old story repeating.

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