Reliance Communications sinks as Veritas slams co's financial health, again

MUMBAI: Almost a year after calling Reliance Communications the "poster child of everything that is wrong with corporate India," independent equity research firm Veritas has published another report slamming the financial state of India's second-largest telecom operator by subscribers.

"We value the core business at 15 per share, suggesting a 77% downside from current levels," the research report said. The report, which hit all major news sources on Tuesday morning, sent the Reliance Communications stock to a 52-week low of Rs 59.45 a share in early trade. However, the stock recovered to close at Rs 64, down 1.8%.

Anil Dhirubhai Ambani Group-owned Reliance Communications responded strongly in an e-mailed statement. "The Veritas report lacks any credibility and is mala fide in intent and approach... The report is full of factual inaccuracies, and baseless allegations masquerading as research."

The report, which is marked by the trenchant language that has become the signature of the Canada-based research house, said steps taken by Reliance Communications to tide over its financial problems were short-sighted. "In order to tide over the cash crunch, we believe that RCom has been scaling back its capital expenditures ("capex") and has put assets on the block," it said. "Given the weak competitive position of the company in the Indian wireless sector, we believe that curtailed capex will be detrimental to the company's prospects, going forward."

For the year ended March 31, 2012, the company's capital work in

progress, was down nearly 40% compared to the immediately preceding quarter. Capital expenditure in the Indian telecom industry has tapered off because of regulatory uncertainty. However, leading operators are spending on their 3G networks in some areas.

"To tide over its spectrum deficit the company needs to incur higher capex to maintain quality of service. RCOM has been disproportionally affected by the entry of new players in the market and its ARPU has suffered more than its peers," Veritas said.

The company has among the lowest average revenue per user (ARPU) at Rs 99 in the quarter to March. It recently lost its third place in revenue market share to smaller competitor Idea Cellular.

The Veritas report says that given the soft market conditions, Reliance Communications' attempt to hive off its only monetizable assets will leave very little value in the company.

"The management's admission of a soft market for tower assets substantiates our assertion that buyers for Indian telecom assets are scarce. We do not foresee any significant improvement in the tower market over the next 12-18 months," said Veritas.

Reliance Communications has been trying to sell its tower assets for nearly two years now. The company had planned a public listing for the business just before capital markets tumbled in wake of the global economic crisis of 2008. In its most recent attempt to raise funds Reliance Communications has got approval from the Singapore Stock Exchange to list its undersea cable assets in the form of a trust. Reliance Communications is hoping to raise over a billion dollars from the sale of undersea cables owned by its subsidiary Flag Telecom. It plans to use the proceeds to retire high-cost rupee debt.

"We are also skeptical of the company's ability to reduce its financial leverage meaningfully by undertaking an IPO of Flag Telecommunication ("FLAG"), given that equity of Reliance Globalcom Bermuda - whose only assets is FLAG as per Federal Communications Commission ("FCC") Filings - has been pledged by its holding company, Reliance Globalcom BV Netherlands, to secure debt of $500 million," said the report. Veritas reasserted claims made in its first report in July 2011 that financial disclosures made by the company were unreliable.

"We believe that the company's accounting policies are whimsical and do not provide a clear picture of the underlying operating and business trends. We neither believe in the reported book equity of the company nor in its reported fixed asset base."

In response, Reliance Communications said, "RCOM is fully compliant with all applicable accounting policies and standards; adheres to all prescribed governance norms; and follows appropriate risk management policies consistent with the long-term maturities of up to 10 years for its foreign currency debt."