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  1. How Reliance Communications destroyed value & got saddled with back breaking debt

How Reliance Communications destroyed value & got saddled with back breaking debt

A stagnation in the company's revenues from its various businesses hurt its operational and financial performance while its costs kept rising. Further, company's mounting debt and associated interest costs continued to weigh it down.

By: | Updated: May 30, 2017 2:39 PM
At Monday’s closing price of Rs 20.50, the company’s share had shed 97.57% of its value from an all-time high of Rs 844.7o in January 2008 and was far below its 2006 opening price of Rs 307.00. Yesterday, the stock nosedived 23.50 percent to an all-time low of Rs 19.70 on the NSE before closing at Rs 20.50, down 20.4% from the previous close.

Reliance Communications (RCom), the Anil Ambani-promoted company, which can be credited with bringing the mobile telephony to masses in India, has now been reduced to a languishing player in desperate need for revival options. At Monday’s closing price of Rs 20.50, the company’s share had shed 97.57% of its value from an all-time high of Rs 844.7o in January 2008 and was far below its 2006 opening price of Rs 307.00. Yesterday, the stock nosedived 23.50 percent to an all-time low of Rs 19.70 on the NSE before closing at Rs 20.50.

The Fall and the Catalyst

Yesterday’s fall came on the back of the company reporting that the net debt rose to Rs 44,345 crore at the end of the fourth fiscal quarter of the financial year 2017 versus Rs 42,803 crore at end of the third fiscal quarter. This heavy debt load weighed heavily on the performance of the stock of RCom, which incidentally happens to be the most leveraged among listed Indian telecommunication carriers.

The company’s poor Q4 results acted as a catalyst for the share price fall. RCom on Saturday reported a consolidated net loss of Rs 966 crore for the quarter ended March 31, 2017, against a net profit of Rs 90 crore posted in the same quarter of the previous year. Revenue from operations fell about 24 percent from a year earlier to Rs. 4,312 crore. The company said in a BSE filing that it incurred losses due to free offers, disruptive pricing and hyper competition prevailing in the telecom sector.

Fell Behind

The Indian telecom sector as a whole has grown over the years, but RCom’s low-cost offerings have dragged its performance down. RCom continues to bleed while the other operators have gained in terms of market share and revenue. The beleaguered telecom firm has failed to garner high-revenue subscribers for its services and as a result has not been able to grow in sync with the rest of the telecom industry. The company could not even keep its flock of low revenue subscribers together and lost a majority of them to other operators.

A stagnation in the company’s revenues from its wireless telecommunications services, broadband access to enterprise customers, managed internet data centre services, and direct-to-home (DTH) businesses hurt its operational and financial performance while its costs kept rising. Further, the weak performance of its global network operations unit and mounting debt and associated interest costs continued to weigh it down. RCom’s revenue fell from over Rs 27,000 crore in FY 2008-09 to over Rs 22,100 crore in FY 2015-16, while its net profit shrank to Rs 703 crore from Rs 6,250 crore during the same period.

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The way out

The company has delayed repayment of loans to more than 10 banks. In its quarterly results statement, however, Reliance Communications said that “pending formal confirmation by the lenders for waiver of certain loan covenants”, some loan amounts would continue to be classified as non-current liabilities.

Reliance Communications plans to repay Rs 25,000 crore worth of loans to its lenders with proceeds from its deals with Aircel and Canada’s Brookfield Infrastructure. Reliance Communications is merging its wireless business with rival Aircel and is also selling a 51 percent stake in its radio masts business to Canada’s Brookfield Infrastructure Group for Rs 10,000 crore. The company expects lenders consent for sale of tower business and Aircel deal in the next few months. RCom has also said that it aims to further cut debt by selling real estate in Delhi and Navi Mumbai. the company has approached lenders and bondholders to defer loan repayments till at least September 30 so that it can finalise the two deals.

“RCom is currently engaged in discussions with its lenders to obtain their requisite consents for the two transactions and to refinance scheduled instalments falling due in the interim period up to September 30, 2017, to facilitate expeditious closing of both transactions in the best interests of all stakeholders,” said Gurdeep Singh, CEO, Consumer Business, Reliance Communications.

Singh said that as a part of the plan to raise funds, Anil Ambani group’s office complex in the erstwhile Ranjit Hotel (near Connaught Place) in Delhi, and the sprawling Dhirubhai Ambani Knowledge City (DAKC) in Navi Mumbai are on the block.

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