OPTIONS TO REVIVE GROUP DRYING UP FOR ANIL AMBANI

With RCom defaulting on interest payment to US bonds, other group firms need to step up performance

The shareholders of Anil Ambani group firms are a worried lot these days, particularly due to the stress in Reliance Communications (RCom). News reports on the group have been mixed — while the demerger and separate listing of Reliance Capital’s (RCap’s) housing finance arm and the initial public offering (IPO) of its asset management business were positive, RCom disappointed.

The telecom business defaulted on interest payment to its US dollar bond holders this week, sending its share price below ~10 in intra-day trades. RCom, however, told the exchanges that following the invocation of the strategic debt restructuring (SDR) scheme by lenders as per the Reserve Bank of India guidelines, it is under a standstill period on interest payment till December 2018. “The company has announced various asset sales and a comprehensive debt resolution plan, as advised per our earlier letter dated October 30. Accordingly, for the time being, no payment of interest and/or principal is being made to any lenders and/or bondholders,” it said.

With Ericsson filing insolvency proceedings for unpaid dues of ~1,150 crore in September, the deal to merge with Aircel being called off, the collateral impact on valuation of RCom’s tower assets and the closure of its 2G/3G mobile business, time is running out fast for the debt-saddled arm.

At the end of March, RCom’s consolidated debt stood at nearly ~50,000 crore. Given the repayment liabilities of US bonds, analysts were anticipating a default. “Under the current situation, the chance of a coupon miss on RCOMIN’20 (a US dollar-based bond issued by RCom) on November 6 is high,” Anna Zhang and Keith Chan of HSBC Global Research said a month ago.

In June, the joint lenders forum had agreed to invoke SDR for RCom. The SDR was based on the agreement that the tower asset sale and merger with Aircel would be done by the end of this year and proceeds would be used to repay debt. But with the merger off the table, revised terms of tower sales unclear and the closure of the mobile telephony business, there is uncertainty over debt repayment.

RCom’s operational performance has been on a decline since FY10, and has worsened of late. Especially with Reliance Jio’s entry, things are likely to get worse.

Competitors with deeper pockets are already consolidating. While the deal between Bharti Airtel and Tata Teleservices to acquire the latter’s network and customers for free will improve Airtel’s coverage and subscriber base, Vodafone and Idea Cellular are working to merge to form India’s largest mobile services company. Airtel, Vodafone and Idea are also moving fast to monetise investments in their tower assets, which would help them cut debt and fight Jio.

The worst for RCom’s equity shareholders would be if banks convert their loans into equity should RCom default on its debt obligations. However, as RCom’s debt is nearly 19 times its market cap, bank creditors may be reluctant to convert to equity. If they do, the leftover value for minority shareholders would be miniscule. RCom does have a few options. Ajay Bodke, chief executive officer and chief portfolio manager (PMS), Prabhudas Lilladher, said, “RCom will have to explore consolidation with one of the global biggies not having business in India or aggressively pare debt by selling all non-core assets. They are already in the market to sell tower business, undersea cable business, etc. The sticky point is the difference in valuation. They will have to bite the bullet and do a deal.”

The group’s infrastructure business under Reliance Infrastructure (RInfra) — which also directly owns 43.22 per cent in Reliance Power (RPower; total promoter holding is 75 per cent) — hasn’t turned in any path-breaking performance either, despite some notable achievements and assets to its credit. The latter includes the Mumbai-based integrated power generation and distribution business (among the largest in Indian private sector), India’s largest integrated Sasan-based ultra-mega power project of 4,000 Mw, and Mumbai’s first metro rail project.

Investments into road projects haven’t yielded desired success. Its power business (except for Mumbai circle operations) is nothing much to write home about either, given standalone revenues and net profit have grown at a compounded annual rate (CAGR) of 4.5 per cent and 4.9 per cent, respectively, during FY07-17. RPower, after the growth seen in the initial years, has also seen profits remain range-bound between ~900 crore and ~1,100 crore in the past five years, even as the top line doubled.

Bodke said, “The overall macro environment for the infra sector was challenging. Not just RInfra, other players, too, struggled. To be fair, RInfra has been able to navigate these times pretty well, thanks to the lucrative Mumbai power distribution circle.”

RInfra, however, is now aiming to turn leaner, grow faster and in a more profitable manner with focus on EPC (engineering, procurement and construction) and defence equipment manufacturing. Recently, it sold Western Region System Strengthening Scheme transmission undertakings to Adani Transmission for ~1,000 crore and entered into an exclusive deal, again with Adani Transmission, to sell its Mumbai-based power generation, transmission and distribution business (valued at ~13,000-15,000 crore). These assets typically earn regulated returns that are fixed by electricity regulators. It remains to be seen if RInfra’s new strategy is successful.

The story is not different for RCap. Its profit growth was muted and return on equity was sub-par, though revenues clocked a CAGR of over 20 per cent in the past 10 years. RCap, too, has been taking steps to unlock value for its shareholders, which includes sale of stake in insurance and asset management companies to its Japanese partner, Nippon Life group. Recently, it demerged the home finance business, which got listed on September 22, with an aim to enhance focus and grow fast. Last month, Reliance Nippon Life Asset Management came out with a ~1,542-crore IPO. IPOs of RCap’s life and general insurance businesses are also expected in future. Bodke said that separate listing of these businesses would help discover their true values.

These moves should help the group’s financial and infra businesses to revive fortunes, providing relief to shareholders who have seen significant erosion in the value of their holdings.

A questionnaire sent to the group remained unanswered.

Another market expert, who did not wish to be quoted, said, “The improvement in performance of Anil Ambani’s troubled companies is contingent on how soon they are able to monetise assets. A relief from lenders is unlikely from here on, specifically, for RCom. So, they will have to sell assets. In these tough times, only good assets will find a buyer, which is why the Mumbai power business is being put on sale.”