Reliance Communications
Raising target on improved tower prospects
HOLD
CMP: Rs276 Target Price: Rs303
The recent deals signed by Reliance Infratel (RITel) with Etisalat DB, S-Tel, Aircel, Shyam Sitema, and TTSL would not only bring external tenancy on RITel's towers but also benefit from cost savings and create value for RITel as a standalone business. With transfer of optic fiber assets from RCOM to RITel, the company not only provides passive infrastructure but also transmission and carriage services. RITel currently has a portfolio of 50,000 towers with tenancy of 1.6x entirely coming from captive usage by RCOM CDMA & GSM. While the contract signed with Etisalat would increase the tenancy to 2.2x, RITel aims to achieve tenancy of 3x by FY11 helped with contracts with other operators.
Considering the contracts signed for tower business and the incremental profit accretion from external tenants, we increase our value for Infratel opportunity from Rs25/share to Rs78/share assuming external tenancy of 1.4x on 40,000 towers. Subsequently we increase our target price on the stock to Rs303 (from Rs225 earlier) due to increased value of infratel opportunity from Rs25 per share to Rs78 per share. Retain HOLD rating on the stock.
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