Share price decline in our view has been driven by slower progress on tower monetization. Delay could have been driven by multiple reason including valuations or process delays. That said two recent developments may have an adverse bearing on tower valuations. Firstly with the shutdown of 900 spectrum operations in 5 circles, total base stations for RCOM came down by c12%.
In addition, RCOM has entered into active infra sharing with 4G entrant Jio, which allows RCOM to offer 4G services without investing much capex. RCOM active sharing limits the upside for the buyer of RCOM towers assets as demand by RCOM (anchor tenant) for additional towers in the near to medium term may not be much.
Both of these developments have a negative impact on tower valuations; therefore, we cut our RCOM tower valuations from R35 to R29 per share. We now estimate the sale proceeds from the tower assets at R122 billion (earlier R144 billion).
In our view, RCOM had the option to either ask for a premium from Jio for trading of 800 spectrum or leverage Jio’s 4G network and offer 4G services. Charging a premium may have allowed RCOM to pay down some debt and invest in 3G but may have prevented RCOM from participating in 4G. RCOM has chosen to offer 4G by leveraging Jio’s 4G network.
We remain cautious and have cut our TP to Rs 49 (from Rs 69). There are two reasons driving our TP: one is the cut in our tower valuations and the other is the lower value we now assign to real estate given the slow progress. We note that we have lowered our FY17e EBITDA estimates by 6%.
