Reliance Communications loses 12% in three sessions; should you buy?

MUMBAI: The stock of Reliance CommunicationsBSE -6.35 % (Rcom) was under selling pressure on Tuesday after the securities research arm of Standard & Chartered downgraded the stock's rating to underperform. It closed the day 6.4% lower after falling by as much as 9% intraday. 

The stock of the pan-India telecom operator has lost 12.4% since Friday after it announced a telecom tower infrastructure deal worth Rs 12,000 crore with Reliance Jio. It traded at Rs 104 at the end of trading session on Tuesday, down from its 52-week high of Rs 119 on June 7, 2013. 

Under the latest agreement, Jio will use upto 45,000 towers of Rcom to launch fourth generation (4G) telecom services. This follows a pact signed between the two companies in April 2013 to utilise intercity optic fibre network of Rcom. Given the increasing synergies between the two companies, does it make sense for investors to add Rcom to their portfolio at a time when the stock is showing weakness? 

Before taking fresh bets, investors need to understand that the benefits of the recent deals with Jio are largely long term in nature. These agreements will help Rcom to improve the efficiency of its existing infrastructure, which should result in higher operating cash flow. However, the rate of improvement is difficult to ascertain at this stage. This puts a question mark on the effectiveness of these arrangements in bringing down Rcom's gross debt of over Rs 40,146 crore. 

Some analysts have retained their "neutral" rating citing the long term nature of the agreement. The current stock price of Rcom seems to have factored in the gains from the deal. Motilal Oswal Securities estimates revenue increase of over Rs 800 crore every year and a target stock price of Rs 111.