HSBC retains ‘reduce’ on RCom post even as co talks merger with Sistema

MUMBAI: HSBC Global Research has maintained ‘Reduce’ rating on Reliance Communications (RCom) even as the company entered into merger talks with Sistema.

RCom and AFK Sistema have entered into exclusive discussions on a potential merger between the Indian telecom business of Sistema Shyam Teleservices (SSTL) and RCOM through share swap.

The discussions are not binding in nature and subject to approvals. SSTL at present has spectrum in 850 band in nine circles with all circles having overlap with RCOM CDMA operations.

According to the brokerage, if the transaction is completed, it will reduce spectrum renewal risk for RCom. In the eight overlap markets, SSTL spectrum is valid for another eighteen years unlike RCom which faces 800 spectrum renewal in six years.

Secondly, spectrum owned by SSTL has been obtained via auctions and can be used for LTE. This may allow RCom to save on one-time fee of USD 50 million.

The proposed merger may allow RCom to offset revenue loss from recent spectrum losses and there could be cost savings as both RCom and SSTL run parallel CDMA operations in eight markets.

“We have a 'Reduce' rating and fair value target price of Rs 55. We continue to value using DCF based sum-of-the-parts. We make no changes to estimates as the proposed merger is subject to regulatory approvals. Key upside risk will be faster than estimated data growth,” the report said.