RCom's ratings outlook remains negative: Report

NEW DELHI: Moody's Investors Service said that Reliance Communications Limited's (RCom) FY2015-16 results can be accommodated in its Ba3 corporate family rating and senior secured rating. The ratings outlook remains negative.

Indian telecom service provider RCom's consolidated revenues for Q4 ended March 2016 were up 3.8% year-on-year (YoY) to around INR59 billion; revenues from India operations, -- the largest contributor -- were up 6.5% over the same period. In India, a decline of 8%YoY in voice revenue in 4Q 2016 was offset by a 27% increase on non-voice revenues.

At the same time, RCom's global operations-- accounting for approximately 19% of total revenues -- reported a 4% decline in revenues in 4Q 2016.

For the full year ended 31 March 2016 (FY2015-16), the company reported broadly stable revenues at Rs 221 billion, due mainly to its cancellation of licenses in five circles earlier this year.

"RCom reported EBITDA of around INR74 billion, with its EBITDA margin decreasing by 0.4% over the previous year to 33.6%. The decline in EBITDA margin is in line with Moody's expectation, owing to increased contribution of data revenues and higher customer acquisition costs," says Nidhi Dhruv, a Moody's Vice President and Senior Analyst.

Moody's estimates RCom's adjusted, consolidated debt/EBITDA was around 6.3x for the year ended 31 March 2016, compared to 5.3x last year. This increase in leverage is notably due a Rs 38 billion increase in reported debt and the inclusion of Rs 33 billion deferred spectrum liabilities.

Upon the completion of the share swap transaction with Sistema Shyam Teleservices (SSTL unrated), RCOM will have adequate spectrum. However, should the company participate in the upcoming spectrum auctions, its leverage metrics will be further pressured.

RCom also continues to have a strained liquidity profile, with the company remaining reliant on recurring covenant waivers due to its high leverage. There is also an ongoing need to refinance upcoming debt maturities.

RCom has about $450 million in debt falling due in the quarter ending 30 June 2016, which includes a $350 million ECB facility at Reliance Infratel (unrated), which is guaranteed by RCOM and has a cross-default with other debt. Management is still in the process of renewing this facility with the banks and expects to complete the refinancing ahead of maturity.

Failure in obtaining final renewal approvals from the banks will lead to imminent ratings downgrade, which would be more than one notch.

"There have also been further delays in the RCom's deleveraging plans. In December 2015, the company announced that it had entered into exclusive discussions with Aircel Limited (unrated) for a potential combination of businesses. This deal has yet to close and RCOM has extended the exclusivity period for its discussions with Aircel by another 30 days to 22 June 2016," adds Dhruv, also Moody's Lead Analyst for RCom.

In December 2015, RCOM entered into a non-binding and exclusive agreement to sell towers owned by its subsidiary— Reliance Infratel Limited (RITL, unrated)—to two investment companies, Tillman Global Holdings, LLC (unrated) and TPG Asia, Inc (unrated). RCom has made a public commitment to use the entire proceeds from the sale for debt reduction.

"RCom has also re-prioritized its strategies again, and now plans to announce the final binding tower sale transaction within two months from the completion of discussions with Aircel. This is a significant delay from our earlier expectations for the tower transaction to be confirmed within the June quarter," adds Dhruv.

Cumulatively, these transactions, when consummated, could benefit RCom substantially. However, in our view, changes in the company's strategy continue to delay execution of its plans. Hence any tangible benefit to RCom's financial and credit profile will now be delayed for at least 6-9 months.

The negative outlook reflects our view that ongoing delays in RCom's rollout of its deleveraging plans will keep its financial and credit profile strained over the near term. Moody's will closely review the progress on RCom's stated plans over the next 6-9 months.

The ratings could be downgraded if RCom (1) experiences a significant deterioration in market share and/or competition intensifies, such that profitability deteriorates; (2) fails to execute its deleveraging plans in a timely manner; (3) encounters difficulty in complying with its financial covenant requirements, accessing capital to fund growth or repaying/refinancing debt, as and when it falls due; or (4) implements aggressive investment and/or shareholder return policies.

Specific indicators that Moody's would consider for a downgrade include: (1) adjusted debt/EBITDA failing to trend in line with expectations towards 4.0x by end-2016; (2) adjusted EBITDA margins falling below 30%; and (3) adjusted (funds from operations + interest)/interest remaining below 3.0x.

Furthermore, any unexpected regulatory developments in the Indian telecommunications sector will also be negative for the rating.

Given the negative outlook, an upgrade is unlikely over the near term. However, the outlook could stabilize should RCom (1) continue to grow revenues and earnings of its core-Indian operations by increasing the number of subscribers and data revenue without compromising its EBITDA margins; (2) continues to generate positive free cash flow on a sustained basis; and (3) improves its liquidity profile significantly.

Specific indicators that Moody's would consider for stabilizing the outlook include: adjusted debt/EBITDA at 4.0x-4.5x; adjusted EBITDA margins between 30%-35%; and adjusted (funds from operations + interest)/interest over 3.0x on a sustainable basis.

The principal methodology used in these ratings was Global Telecommunications Industry, published in December 2010. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

RCom is an integrated telecommunications operator in India (Baa3 stable) with a presence across wireless, enterprise, broadband, tower infrastructure and DTH businesses. Through its wholly-owned subsidiary, GCX Limited (B2 stable), the company also provides data connectivity solutions to major telecommunications carriers and large multinational enterprises in the US, Europe, Middle East and Asia Pacific which need multi-national IP-based solutions and connectivity.

RCom is the fourth-largest mobile operator in India by number of subscribers, which totaled 109.1 million or approximately 10.7% of the total market share by subscribers (pro forma for Sistema acquisition) as of 31 January 2016 according to the Telecom Regulatory Authority of India (TRAI).