Is RCom on road to unviability?

Financial and operational troubles are sloshing around Anil Ambani-owned Reliance Communications (RCom), and if it is not able to swiftly tackle the issue of capital shortage it could soon find itself on the road to unviability, telecom experts told DNA Money.

"Clearly, there is an issue of capital. The company is severely undercapitalised. Selling (towers) and combining (merger with smaller telecom firms) will not solve the problem. Somebody has to come in and make the investment required to make it viable. The requirement in this (telecom) sector is much higher than what they have been given (by investors and lenders) so far," said a telecom analyst with a leading global management consultancy firm, who did not want to be named.

The fourth largest telecom services player is reportedly struggling to repay its huge debts to banks, which are on the verge of becoming non-performing assets (NPAs).

The telecom service provider also posted its first full-year loss since inception of Rs 1,285 crore for the last fiscal compared to a net profit of Rs 660 crore the year before.

In a conference call with analysts on Monday, the management reportedly said that it was in discussion with lenders to refinance debt payments even as it was trying to take measures like monetizing its towers, merging with Aircel and MTS to derive economies of scale and other such moves that would improve its financial and operational viability in an intensely competitive telecom market.

Gurdeep Singh, president and CEO of RCom's wireless business, in a statement said; "The sector's operational and financial performance has seen continuing severe adverse impact due to free offers, disruptive pricing and hyper competition. This sector situation needs urgent requisite corrective policy initiatives by the government and regulators to infuse operational and financial health".

He told analysts that the company expected to meet all its debt obligations, which would stand to reduce by Rs 25,000 crore through sale of tower business to Canadian tower company Brookfield.

The company management said RCom is expected to receive Rs 11,000 crore upfront payment from Brookfield transaction.

"Post signing of binding documents for the Aircel and Brookfield transactions, RCom has formally advised all its lenders that it will be making repayment of an aggregate amount of Rs 25,000 crore from the proceeds of these two transactions, on or before September 30. The said amount will cover not only all scheduled repayments, but also include substantial pre-payments to all lenders on a pro-rata basis," Singh said in a company statement that was released post earning calls on Monday.

In the backdrop of "sharp drop" in operating margins and deteriorating financials, the company management called for intervention from regulators to improve the general health of the telecom sector.

The entry of Reliance Jio Infocomm late last year has pushed the telecom sector into troubled waters with a war being fought between major players to corner higher share in the data market.

The sector has seen many mergers and acquisitions (M&As) over the last few years but analysts believe only those with huge war chests will survive.

"The idea is good (M&As and tower sale) but that doesn't solve the core problem that they require the capital to break the debt cycle," said another telecom analyst.

"Mergers will not solve the problem, you still need capital," he said.

According to him, the only players who were well positioned in terms of capital to slug it out in the current market were Bharti Airtel and Reliance Jio; "Frankly, everybody else is right now significantly undercapitalised".

However, another senior telecom executive, who spoke on condition of anonymity, was confident that RCom would wade out of trouble.

"If it reduces the debt, it may be able to raise some more debt. It will also be able to bring thousands of crores from sale of towers. Once its debt is reduced then its standing in the financial market will improve and somebody else will come and offer the loan," he said.

"And, last but not the least, sharing arrangement with Mukesh Ambani's Jio for towers, infrastructure and spectrum is also going to help it (RCom). I don't see its debt turning NPAs soon," said the telecom official.