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Unreliable profits

4 October 2011 By Jeff Glekin

Anil Ambani will be relieved that Indian investigators haven’t uncovered any evidence implicating him in one aspect of the 2G telecoms saga. But he shouldn’t be complacent. His telecoms firm, Reliance Communications, is struggling to keep pace with its rivals. It would be better if it was taken over.

Reliance Communications has lost 44 percent of its value this year and is now worth $3.4 billion. Eight straight quarters of falling profits and failed attempts to raise cash are eroding investor confidence. In a new effort to reduce its $7 billion net debt, the firm last week hired UBS to find a buyer for its tower unit. It is hoping to raise $5 billion from the sale. Last year, it tried to sell a 26 percent stake in itself to pare debt, but found no takers. An old plan to float the tower unit in an initial public offering also failed.

India’s telecoms market is no easy ride. Following years of rapid expansion, new customers are much harder to come by. India, which has a 1.2 billion population, already has 820 million mobile subscribers. Margins have been savaged. Reliance’s average revenue per user had fallen to $2.26 per month in the first quarter of 2011 from $7.63 in 2008.

Reliance is weak compared to its rivals. It has 16.7 percent of customers but only 10.6 percent of revenues. Bharti Airtel has 20 percent of customers but 31.3 percent of revenue. Not surprisingly, Reliance’s forward price-earnings multiple is only 8.7 compared to Bharti’s 16.

Consolidation isn’t possible now because of complicated rules preventing operators with overlapping networks from merging. The government has proposed to relax these rules. If its proposal passes later in the year, Reliance looks like an obvious takeover target. The question then would be whether Ambani, who owns 67 percent of the business with his family, would be willing to sell. On this evidence, he should.


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