The latest bombshell of a research report on Reliance Communications (RCom) by Canada-based Veritas Investment Research titled, "A House of Cards", alleges that the company is entering a phase of maximum uncertainty. The report further states that fractured policy making, high inflation, an uncontrollable fiscal deficit and the highly-competitive telecommunications sector, are all working against RCom.
The report states that the management will have to work out the debt repayment obligations of nearly $2.2 billion over the next two years even as the EBIDTA in its core telecom business is languishing.
RCom is reportedly downsizing its capital expenditure (capex) and is looking to hive off some of its assets. However, with the precarious position of the company in the Indian telecom sector, the reduction in capex would work against the interests of the company, the report stated. Veritas adds that RCom will have to improve its GSM spectrum position, and for this it would need higher capex to maintain its quality of service.
With most players in the telecom tower business out to monetize their assets, buyers for this business are scarce. Veritas goes on to say that its tower business arm, Reliance Infratel, would be able to monetize its tower assets at a lower value of Rs12,500 crore compared a valuation of Rs22,500 crore that the company is hoping to get.
RCom's subsea telecommunications infrastructure network business, Flag Telecom, which is expected to listed on the Singapore Stock Exchange through an initial public offer, is looking to garner around Rs7,500 crore to Rs10,000 crore. However, Veritas reveals that Flag has been pledged by its holding company, Reliance Globalcom BV Netherlands, to secure debt of $500 million, leaves very little deleveraging room for the ultimate parent RCom.
The Canadian research firm is also doubtful of the company's accounting policies, which "do not provide a clear picture of the underlying operating and business trends". Veritas questions the risk management and governance practices of the company. The write-off of Rs950 crore ($179.2 million) in FY10-11, which was advanced to a supplier, points out to incompetence of the company.
While RCom reported a profit before tax profit of Rs882 crore for FY11-12, Veritas believes that the company incurred loss before tax of Rs1,529 crore ($ 288 million).
The report concludes, "The company has a tendency to report high levels of other income which is not sustainable on a long term basis, given the significant drop in its current cash balance. Furthermore, based on the company's inclination to book expenses to reserves and include other income in its EBITDA, reported EBITDA is an unreliable indicator of the company's operating prowess. Therefore we ignore other income in our valuation."
However, refuting the allegations, a RCom spokesperson said, "Veritas report lacks any credibility and is mala fide. Orchestrated media dissemination reveals ulterior and dishonest motives. Report full of factual inaccuracies and baseless allegations masquerading as research. RCom is fully compliant with all prescribed accounting policies and governance norms. Attributed valuations reflect Veritas' complete lack of understanding of RCom's assets and businesses. Veritas is systematically working to destroy confidence in Indian capital markets through sensationalist reports".
Reliance Communications: “A House of Cards” - Moneylife Personal Finance site and magazine