Reliance Communications – Justifications for the strong outperformance?

Some investors have wondered about RCOM’s strong outperformance recently. RCOM is currently trading at a 10-15% premium to Bharti on FY10E EV/EBITDA. In the past, this premium has reached 25% also but only when the Towerco IPO looked imminent (Jan-08) and when the market was at its peak in terms of bullish sentiment. Such premium may not be repeated again in our view.

Most of the reasons for the sharp up-move have been macro & technical rather than company specific – increased risk appetite for high leverage B/S, esp. in the underweight index names which had been beaten down. Besides, a new rule on allowing non-compliance to AS-11 comes as a relief for companies with high forex debt (which are incurring huge translation losses). However, this does not benefit RCOM’s P&L as it anyway was not reporting as per AS-11 in FY09. In any case, relaxation in accounting rules does not mean there is no impact.