RCom’s Debt Increases, With The Loss Of Deal

Reliance Communication, one of India’s leading telecom companies in India, is in a spot of bother as their debts are rapidly increasing. It was a known fact that RCom had plans of cleaning these debts by the selling its 26 per cent equity to Etilasat and tower assets to GTL. Since the tower sale is cancelled, RCom is planning a new strategy for reducing its Rs 33,000 crore debt. But, however, the company’s debt have further increased, since it has paid fees of Rs 8,585 crore for the 3G spectrum.

It is expected that if the deal of tower was finalised the debt would have reduced by almost half, and with the sale of equity to Etilasat, it would get reduced to almost 2 times.

One of the worries of RCom is the completion of deal with Etilasat, even if it happens it will take more time than it is expected, since there are several regulatory issues that are to be considered. As per rules, Etilasat is not allowed to purchase 10 per cent equity of RCom, since it already owns sizeable stake in Swan Telecom. Also, Etilasat will not walk out of Swan Telecom, as it may lose its considerable investment. According to the sources, Etisalat is having talks with the government on for getting back its Rs 1,450 crore, which they have already compensated for the 2G spectrum; enabling them to cut their losses.

These days Rcom is making considerable investments in 3G operations, and if this deal doesn’t work-out it would face many more troubles. As per the analysts, RCom won’t make money from 3G for at least four to five years.

Jagannadham Thunuguntla, Equity Head of SMC Capital informed that the euphoria that was created with this deal, no more exists. It was expected that with this deal the financial situation of the company would have improved. IndiaInfoline, a stock broking firm, in one of their reports said that “Operating cash flows of Rs 1,390 crore compare unfavourably with an average quarterly level of Rs 2,200 crore seen in FY10. Any further deterioration would threaten its capex guidance (prediction) of Rs 3,000 crore.”

The first quarter results of RCom disappointed many analysts, since it showed a gigantic 84 per cent fall in its net profit. The company has also faced loses in its minutes on network, which grew hardly by 1 per cent, at the same time the other companies grew by 10-12 per cent. They are also reducing their margins for the revenue average per user. It is expected that the stake sale plans can bring in some cash flow, which will provide the much-needed financial flexibility.

Analysts also believe that the deal failed, since GTL was not capable of rising the needed capital, moreover, the original proposed evaluation of $11 billion didn’t looked favourable on examination.

GTL and Reliance Communications should find out some alternative transaction structure favouring both the parties, since there are slim chances of the deal with Etilasat coming true.

RCom’s REAL LOSS – Guess, RCom’s real loss would be the loss in its Brand Value, coming from Ambani’s table. Going forward, chance are very strong that Indian customers dont’t pay much attention to RCom as the company is not coming to their desired expectations. In such cases, fall in stock prices will further deteiorate the situation.

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