Reliance Jio to use Rcom’s fiber optic network
Reliance Jio Infocomm (RJI), the 4G arm of Reliance Industries, to use Rcom’s nationwide 120,000kms fiber optic network as backbone for its 4G roll out. RJI to pay a one time indefeasible right to use (IRU) fee of Rs12bn while Rcom would also get access to RJI’s optic fiber infrastructure in the future. More importantly, the sharing of fiber optic network is the first step in an intended framework of cooperation which may include fiber, towers and related assets on a reciprocal basis on part of both the companies
Fiber optic sharing can add ~Rs5/share
Rcom to get ~Rs12bn as one time IRU fees but the time frame of payment has not been disclosed; in our view, the cash inflow may not make a meaningful dent to Rcom’s net debt of ~Rs374bn as of December 31, 2012, though it can add ~Rs5/share to FY13E PAT. We believe a more sustainable balance sheet impact would accrue from asset monetization, tower sharing etc. For now, we retain our estimates and 9-12 mth target price of Rs60, but upgrade the stock to Market Performer in lieu of the price correction since Q3 FY13 results. Although the deal is a step in the right direction for Rcom, we would prefer Bharti and Idea at current juncture given lower leverage and relatively higher growth visibility.
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