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Second Wind

With some judicious deals, Anil Ambani's RCom is slowly clawing its way out of the overleveraged trap into which it had fallen.
Sunny Sen | Print Edition: July 21, 2013

Anil Ambani has put on his running shoes again. And it's not for the Mumbai marathon, where the Reliance Group chairman makes an occasional appearance. Nor is it for his daily morning run. Dhirubhai Ambani's younger son is getting ready to sprint ahead in the telecom business by turning around Reliance Communications, his Rs 20,561-crore telecom venture, which he got in 2005 as part of the historic settlement with his elder brother, Mukesh Ambani.

Reliance Communications, popularly known as RCom, has not exactly been in the pink of financial health lately. Its revenues have been almost flat for years, it is saddled with a debt of Rs 38,864 crore. Its share price has plunged 86 per cent from its peak in January 2008. It has slipped from being the country's No.2 telecom operator after Sunil Mittal's Bharti Airtel to a distant No.6.

"RCom's net debt ... and net debt/EBITDA of six times remains a concern, though recent infrastructure sharing deals would aid deleveraging," Shobhit Khare, analyst with equity firm Motilal Oswal, wrote in a June report.

But the younger Ambani is hoping to claw his way back to the top of the telecom business again through some clever business deals. The reconciliation of the Ambani brothers will certainly help turn around RCom's financial fortunes.

Five years after they scrapped an agreement that prevented them from competing in each others' businesses, RCom and Mukesh Ambani's Reliance Jio Infocomm sealed a Rs 12,000-crore deal in May to share RCom's nationwide telecom towers infrastructure.

The 15-year agreement came about a month after the two companies had signed an earlier deal, an inter-city optic fibre sharing agreement, which is expected to add Rs 1,200 crore to RCom's coffers. Yet one more deal, an intra-city optical fibre sharing deal with Reliance Jio is on the cards, and is expected to get RCom another Rs 3,500 crore.

"We are looking at a comprehensive agreement with Reliance Jio. We have finished two out of three - the inter-city and the tower deals," says Gurdeep Singh, CEO of the wireless business at RCom. "The next logical step is to work on the intra-city."

Also on the anvil is a plan to sell Reliance Globalcom's undersea cable unit FLAG Telecom, estimated to bring in another Rs 6,000 crore. If everything falls in place, RCom's debt will drop to Rs 28,000 crore while the annual interest payout will reduce to Rs 1,800 crore from Rs 2,600 crore. Already, RCom's share price has leapt to a 52-week high following the infrastructure-sharing agreements.

Some insiders say RCom might even be an investment option for Mukesh Ambani. A senior telecom association member feels RCom is being restructured so Mukesh can pick up a stake or use its assets for his own telecom operations. "RCom will get a better deal from the brother than in the open market," he says.

Of late, market talk about African telecom operator MTN picking up a big stake in RCom has also gathered momentum. MTN declined comment on the issue.

"In line with internal corporate governance, as well as Johannesburg Stock Exchange requirements, MTN does not comment on market speculation," MTN Group Investor Relations executive Nik Kershaw said in an email response.

Gurdeep Singh, CEO of Wireless, Reliance Communications
The mandate from the parent is to enhance our significant capability in the market and get returns on the assets deployed: Gurdeep Singh
Anil Ambani is not alone in his efforts to overhaul RCom. With him is his trusted friend, Amitabh Jhunjhunwala, a relationship that goes back to the 1980s. In 1993, Jhunjhunwala founded Reliance Capital, the Reliance Group's finance arm. He also built the group's entertainment business from scratch, acquired Adlabs in 2005 and negotiated a joint venture with Hollywood's iconic studio, Steven Spielberg's DreamWorks. And Gurdeep Singh, who quit Aircel to join RCom less than a year ago, is part of the core turnaround team too.

Some market experts say it may not be that easy for RCom to get back on track. The company's biggest business blunder was to bet big on limited mobility CDMA, or Code Division Multiple Access technology, for the longest time. The big drawback of this technology is that it limits a customer's handset options - its SIM cards cannot be used in other mobiles.

The company shot itself in the foot by concentrating on increasing its CDMA footprint while other operators expanded their GSM (Global System for Mobile communications) operations.

GSM was developed in Europe, and over the years has become the default technology for mobiles in most parts of the world. RCom had GSM spectrum in only eight circles until it got a pan-India licence in 2008. Due to this skewed division, Ambani's RCom did not make money from either GSM or CDMA services.

Its revenue from CDMA subscribers stagnated, remaining at 65 per cent of RCom's total revenue in 2010/11. Meanwhile, Airtel, Vodafone and others grew fast on GSM. There was no device eco-system, so there was decline in our revenue," says Singh. "But we started the new (GSM) circles and have reversed the trend."

Revenues were also slow because most new generation phones did not have a CDMA option. But the belated RCom's shift to GSM is already paying off: GSM accounts for 65 per cent of total revenue now.

Over the next few months, the company will focus on transferring CDMA voice subscribers to the GSM network and use the CDMA network for data services. "Data on a CDMA network is far superior to 3G," says Mohammad Chowdhury, telecom industry leader at PricewaterhouseCoopers. "If you look at Tata Photon and (Reliance) NetConnect, they are much better than some GSM operators."

Although some market experts are sceptical about the dual-technology model, RCom is banking on changes in technology. Smarphones like the iPhone and the Galaxy series from Samsung, now use CDMA chips as well as GSM cards in the US. RCom has tied up with Lenovo to launch dual-mode devices, which will be available from the end of June. "So in the hands of the consumer, there will be no difference between a CDMA device and a GSM device," says Singh.

RCom has taken other steps to bump up revenues. It has written off 24 per cent of its inactive subscriber base and improved its average revenue per user by 7.5 per cent. It also increased tariffs in November. The moves have begun paying off: the company's mobile Internet customer base grew 6.5 per cent to 29.4 million users on a quarterly basis in March while its 3G customer base grew 18 per cent to 7.2 million users.

RCom is pinning its hopes on 3G spectrum in the metros, especially Delhi and Mumbai, where it competes with only Airtel and Vodafone. Singh says the limited number of players in the 3G market will work to RCom's advantage. In the coming months, it will try to grab most of the so-called churn subscribers, or people getting new connections. It is aiming to pick up 14 to 15 per cent market share of the additional revenue that telecom operators will generate.

Singh says when he joined he realised RCom was rich in assets, but did not have equivalent market share. "The execution capability of the company had to be moved up," he says. "The mandate from the parent is to enhance our significant capability in the market and get returns on the assets deployed."

Some experts say the recent telecom agreements suggest Anil Ambani is trying to make RCom more of a back-end provider to Reliance Jio. The telecom association member says investors are not happy - they feel RCom is getting a raw deal while Reliance Jio gets everything at a discount. "We consider the deal positive for RIL as it gives access to 45,000 towers, at a rental of Rs 15,000 per month, lower than the industry average of Rs 30,000 per month," says a Goldman Sachs report.

But it makes business sense for Reliance Jio to tap RCom's existing tower network. Laying fibre is expensive, and 65 per cent of RCom's towers are already connected through optical fibre in the very places where Jio will provide broadband services. Singh says the tower-sharing arrangement is a win-win for both. "Sharing is the most common thing now, embraced very well between operators," he adds.

The agreement to share 45,000 towers is only enough for the first phase of fourth-generation high speed broadband services by Reliance Jio. It needs more than 100,000 towers to support fourth-generation Internet services. "The agreement provides for joint working arrangements (with RCom) to configure the scope of additional towers to be built at new locations to ensure deep penetration and seamless delivery of next generation services," says a Reliance Jio statement released after the deal.

It may still be too early to draw any conclusions about future arrangements. For now Anil Ambani has managed to reduce his company's debt and is getting the customer-facing business of 2G, 3G and CDMA on track. Is that good enough for MTN to pick up a stake in RCom? Will RCom become a backend support system for Reliance Jio while MTN runs the customer-facing businesses?

Singh laughingly dismisses these questions as market speculation. "What will I comment on this?" he says. "Every six months, I suddenly become the sexy lady on the floor who everyone wants to marry."

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