Reliance Communication’s - Are you buying it?

There has been a lot of interest in Reliance Communication’s plans to reduce debt by 25,000 Cr. this year. The stock is up 10% since August 14, and investors seem to be buying into the turnaround story – Be it by merger, sale of assets, or financial restructuring.

Here are some numbers to think about:

Finance Costs: 3,500 Cr.

EBITDA = 5,392 Cr.

EBIT = 1,171 Cr.

EV = 57,973 (Debt) + 5,811 (Market Cap) – 1,300 (Cash) – 257 (Financial Investments) = 62,191 Cr.

EV/EBITDA = 11.53

Debt / Equity = 9.97

Now, with a 25,000 Cr. debt reduction (from sale of profitable business), 32,973 Cr. Debt will be left. Assuming a 40% loss of their revenue (equal to proportion of business sold to pay off the targeted 25,000 Cr. debt), no further deterioration in credit quality, and no further deterioration in operating margin:

Current Price = 23.50

EBITDA after sale of biz = Rs. 32,35 Cr.

EV after sale of biz = Rs. 37,191 Cr.

EV / EBITDA after sale of biz =11.49

Debt / Equity after sale of biz = 32,973 / 5,811 = 5.67

Okay, so it seems like the company will significantly deleverage its books, BUT these numbers do not include any operating liabilities, loss of revenue from transition, loss of synergy/integration, regulatory hurdles, interest accrued from non-payment of dues, increased competition, margin squeeze, business restructuring costs, legal fees, and potential for dilution of equity to fund future operations. Moreover, it assumes that the revenue contributed by the healthy portion of the business, which will soon be off the balance sheet, is equal in proportion to that from the portion of the business retained.

Evaluating the business in the rosiest possible scenario, the one that Mr. Anil Ambani is selling, it will still take more than 10 years for the company to redeem its debt on an EBITDA basis with the leftover business.

Let’s ‘get-real’ for a moment though – With the weak competitive, operating, bargaining, and financial position of the business, it’s highly unlikely that investors will ever see a positive bottom-line sans a (significant) dilution of their equity. So, the simple question is – Are you buying it?