India's Start Telecom Analyst, Reena verma from Merrill Lynch has an UNDERPERFORM rating on the stock of RCOM.
RCom's press release says the Co is now exploring a similar tower deal with other potential partners. We think failure to consummate the transaction with GTL-I will likely revive investor concerns about the seriousness of RCom's balance-sheet deleveraging plans. RCom's tower monetization plans via IPO and M&A appear to be fraught with execution and valuation risks. Based on our interactions with GTL-I it seems unlikely to us that deal-financing was a major bottleneck.
RCom's wireless revenues have been flat over last 4-5 quarters despite 9% QoQ growth in its sub base. Low quality subscriber base & weak 3G footprint relative to peers makes any strong operational turnaround appear unlikely. We estimate that 3G would be P&L neutral over next 12-24 months assuming 100% of RCom's post-paid base migrates to 3G & generates ~1.6-1.65x current post-paid ARPU.
We have cut PO by 20% to Rs140 after RCom & GTL-Infrastructure (GTL-I) announced, earlier today, cancellation of their agreement to demerge RCom's towers into GTL-I. Our revised PO continues to assign top-end towerCo valuations to RCom based on recent M&A deals but assumes that the rich premium assigned by GTL-I will be difficult to re-capture. An in-principle merger of RCom's towers with GTL-I had been announced in end-June & was described as a transformational initiative during RCom's recent earnings call in mid-August
