The proposed separation of real estate into a separate unit is part of RCom’s strategic plan to divest non-core assets, and focus on its core wireless and enterprise business, a statement from RCom said
The Anil Ambani-led Reliance Communications (RCom) announced on Sunday it is hiving off its entire real estate assets—estimated to be of around Rs12,000 crore—into a separate listed company.
Besides unlocking the value of its real estate, RCom shareholders will get free shares in Reliance Properties in the ratio 1:1.
Indicative value of Reliance Properties shares is Rs60 apiece and market price of RCom shares is Rs130. This translates into almost 50% enhancement/addition in shareholders’ value of RCom.
“Board of directors has in principle decided on a demerger of the real estate held by RCom into a separate unit, Reliance Properties. The preliminary and indicative monetisable value of RCom’s real estate on development is estimated by independent valuers at over Rs12,000 crore ($2 billion), which is equal to Rs60 ($1) per RCom share,” the company said in a statement.
The demerger is aimed at creating large shareholder value. Similar value was created from the initial demerger of Anil Ambani’s Reliance Group from Reliance Industries in 2005.
The proposed separation of real estate into a separate unit is part of RCom’s strategic plan to divest non-core assets, and focus on its core wireless and enterprise business, the statement said.
Reliance Properties will be a separate listed company and will work with leading global partners to develop the real estate.
All shareholders of RCom will receive fully tradeable pro-rata shareholding in Reliance Properties, free of cost, based on their existing shareholding in RCom, it said.
The properties proposed to be developed by Reliance Properties include prime land at Dhirubhai Ambani Knowledge City in Navi Mumbai measuring nearly 135 acres, with saleable area of over 15 million square feet and its another property near Connaught Place in New Delhi spread across nearly 4 acres.
“The board has constituted a committee to consider the matter in detail, and prepare the necessary demerger scheme, etc. in consultation with legal and other advisors. The demerger will be subject to approvals from shareholders, lenders, courts, etc,” the statement said.
The entire process may take three to four months. In December 2012, RCom had announced setting up a joint venture with Chinese real estate firm Wanda Group.
Net debt of the company stood at Rs38,864 crore by end of March 2013.
Specific to NCC Limited, asset sale and lower working capital would provide liquidity for quicker execution of projects this year, forecasts Anand Rathi
A large number of external developments —reforms delay, tightening interest rates, high inflation and dearth of funds—have knocked the wind out of India’s infrastructure industry, pointed out Dr AVS Raju, chairman emeritus, NCC at the company’s AGM. In this bleak scenario, individual companies in the sector are finding their own solutions to achieve profitability in their operations.
Brokerage firm Anand Rathi says that NCC has good prospects, as the company repaid debt of about Rs3 billion in 4QFY13, with cash flow from sale of real estate and Himachal Sorang (power project), and reduced working capital. Benefit of the same is likely to flow in FY14. Further, asset sale and lower working capital would provide liquidity for quicker execution of projects this year. As NCC has its focus on balance-sheet improvement, Anand Rathi has a ‘Buy’ recommendation for the company’s stock with a target price of Rs61 (current market price of Rs27).
The company’s focus on lowering working capital has led reducing debtors to 70 days in FY13, from 88 days in FY12.
The company aims at 15% revenue growth in FY14. Anand Rathi expects it to maintain its 8% EBITDA margin in FY14/15 supported by the higher proportion of the NCC power project to revenue (mainly through the low-margin BTG component).
While the company’s management is optimistic and Anand Rathi’s forecast is favourable, there is still uncertainty in Andhra Pradesh’s political climate. Uncertainty over splitting of Andhra/ Telengana has held up investments and growth. It is expected that there will be clarity on this factor together with elections in 2014 and the commissioning of a few major power plants, to trigger growth.
According to Anand Rathi, other macro-economic factors which could affect the company adversely include rise in interest rates and slowdown in order inflows in the infrastructure sector.
The company’s projected financials as per Anand Rathi’s analysts are given below:
On a stretched balance sheet and working capital constraints, execution has slowed for Ramky Infrastructure. This, coupled with high interest burden, has lowered profitability. With further requirement of equity for BOT projects, balance sheet could be stressed for 3-4 quarters. Brokerage Anand Rathi has recommended a ‘Buy’ on the stock
Ramky Infrastructure (Ramky Infra) is an integrated construction, infrastructure development and management company in India. Since commencement of business in 1994, the company has delivered a range of construction and infrastructure projects in various sectors such as water, wastewater, transportation, irrigation, industrial construction, parks (including SEZs), power transmission, power distribution, residential, commercial and retail property.
Brokerage house Anand Rathi has analysed the conference call of Ramky Infrastructure. The brokerage highlights the following takeaways:
Ramky Infrastructure’s order book stands at Rs120 billion (4x FY13 revenue), dominated by transportation (40%), buildings (17%), water (17%) and irrigation (14%). Order inflows during FY13 were Rs13.4 billion. The company has targeted an order inflow of Rs20 billion in FY14, the Anand Rathi report noted.
Following slower execution due to working capital constraints, revenue declined 1.8% y-o-y, while the EBITDA margin stood at 8.9% (down 150 bps y-o-y). The management is aiming at 15%-20% growth in FY14 and expects to maintain the margin at present levels. However, due to higher interest costs, the net-profit margin stood at 2% (down 260 bps).
On the higher working capital required and investment in BOTs, debt increased from RS9.5 billion a year ago to around Rs12 billion in FY13, taking net gearing to 1.1x. Working-capital days have increased from 141 to 162.
Of the total around Rs10 billion required, Rs4.3 billion has been invested by the company towards its BOT projects. The remaining equity would be funded through internal accruals in the next 2-3 years. The equity requirements are more back-ended.
Anand Rathi believes that on the back of a stretched balance sheet and working capital constraints, execution has slowed. With further equity funding required for its BOT projects, the company’s balance sheet is likely to be stressed for 3-4 quarters. At the current price, the stock trades at a P/BV of 0.3x FY14/15 consensus estimates. The brokerage has a Buy rating on the stock, with a sum-of-parts target of Rs101, based on 4x PE of the FY14e construction business (Rs63) and 0.5x P/BV for its investment in Road and other projects (Rs38). However, the brokerage states that a rise in interest rates would pose a risk to its business prospects.