Reliance Communications Debt Ratings Affirmed at LAAA

Indian debt ratings agency, ICRA has assigned a long-term rating of LAAA each to the Rs. 30 billion Non-Convertible Debenture (NCD) Programme and the Rs. 100 billion proposed Long-Term Fund-Based Facilities of Reliance Communications (RCOM). Further, ICRA has reaffirmed the LAAA rating assigned earlier to the Rs. 201.56 billion Long-Term Fund Based/Non-Fund Based Limits of RCOM.

LAAA is the highest-credit-quality rating assigned by ICRA. The rated instruments carry the lowest credit risk.

ICRA has also re-affirmed the short-term ratings of A1+ assigned earlier to the Rs. 74.08 billion Short-Term Fund-Based/Non-Fund Based Limits and the Rs. 20 billion Commercial Paper Programme of RCOM.

The ratings factor in RCOM's established position as a leading and integrated service provider with its presence spanning wireless services, wire-line services, enterprise connectivity solutions, domestic and international long distance segments (voice and data services), and direct-to-home (DTH) pay television services; its competitive cost structure; the operational strengths it derives from its pan-India network; and its large and fast growing customer base (around 71 million customers including over 66 million wireless subscribers as on end-January 2009).

Moreover, with the recent launch of GSM operations in 14 additional circles, the company is now well positioned to capitalise on the favourable demand potential of the domestic mobile business on the strength of an established pan-India marketing and distribution setup. Although the telecom industry is highly competitive and faces technological obsolescence risks, the same are mitigated to an extent by the company's integrated telecom operations and its strong cash flow from operations, which would enable it to partly fund its future capital expenditure and meet its scheduled debt repayment obligations. Moreover, the ratings derive comfort from the company's significant liquid and cash balances of around Rs. 80 billion and net-worth of around Rs. 338 billion (as on December 31, 2008) and the fact that it intends to use a part of the rated fresh long-term borrowings to reduce its existing short-term debt and thereby improve its debt-maturity profile.

While assigning the ratings, ICRA has noted the significant increase in RCOM's debt levels from Rs. 174.4 billion as on March 31, 2007 to Rs. 258.2 billion as on March 31, 2008 and further to Rs. 266.7 billion as on December 31, 2008 (a significant part of the debt is in foreign currency). The additional debt has been raised to meet the capital expenditure requirements of various projects, including expansion of the GSM network. Although the company has benefited in terms of competitive interest rates on the foreign currency debt, adverse movements in currency rates have affected its financial profile.

Going forward, ICRA expects RCOM to benefit from the significant operational and cost synergies because of infrastructure and resource sharing between CDMA and GSM networks. However, RCOM's ability to capture substantial market share in the GSM segment while ensuring adequate margins would have a bearing on its long-term performance. Moreover, RCOM is in an advanced stage of discussions with prospective investors for divesting an additional stake (substantial) in Reliance Infratel Limited (its telecom infrastructure subsidiary) while maintaining the latter's subsidiary status and retaining management control over it. Reliance Infratel Limited is also in an advanced stage of entering into long-term agreements for sharing its passive infrastructure with external tenants.

These factors, besides improving RCOM's capital structure, would also bolster its profitability. ICRA will be monitoring these developments closely, as they would have a bearing on RCOM's long-term credit profile. Besides, any further adverse movements in foreign currency rates would be a key rating sensitivity factor.

Posted to the site on 10th March 2009