Ever since the market started buzzing with news on a potential tower sharing deal between Reliance
Jio and Reliance Communications
(RCom), select analysts have been betting on the turnaround of the debt-laden telecom company. The latest reason that strengthens this theory is the announcement of a tower sharing deal between the two groups. While the details are not clear, Reliance Jio will lease 45,000 towers of RCom for Rs 12,000 crore ($2 billion). Since the company has not specified the tenure over which the payment will be made, analysts believe it could be 17 years (the remaining life span of the licence).
On the face of it, it might appear that the impact of this deal on RCom would be marginal, given its Rs 39,000-crore debt. But this is neither the first deal or the last between the two groups. Morgan Stanley believes four such deals could cut RCom's debt by Rs 7,700 crore more - nearly halving net debt to earnings before interest, tax, depreciation and amortisation. Two of these deals have already been announced. The first deal signed was one where both would share the optic fibre network linking different cities.
Analysts believe the deal implies a rental of Rs 13,000 per month for each of the towers, at a significant discount to the Rs 36,000 charged by Bharti Infratel. If one assumes that the deal is for the remaining 17 years of Reliance Industries's license tenure, RCom could get additional revenues of Rs 700 crore, "which is decent incremental revenue for the company, considering all the towers will not be used in the first year," says Edelweiss Securities. Apart from this, the deal also implies better asset utilisation for RCom. Given that the deal value pertains to the annual leasing revenues, the bottom line impact would be larger than the top line, says Nomura.
While Morgan Stanley is overweight on the stock, the opaque nature of the deal has prevented most other analysts from upgrading the earnings outlook. Despite this, there are other factors that signal better days ahead. The recent tariff hikes the company undertook suggest some improvement in financials is imminent. The company's interest expense in FY13 was Rs 2,500 crore ($450 million). If the company is able to garner Rs 1,000 crore each year through the deal, interest burden might halve. Having said that, the deal is a win-win for Reliance Industries too, which will be able to curtail its capital and infrastructure costs through these deals. Most analysts will wait for a couple of quarters before re-rating the stock.