RCom's opaque accounting practices lead to derating

While Icra has downgraded the company's debt, a leading brokerage house has raised concerns about its accounting practices. The company's future depends on its ability to raise equity and reduce debt.

FP Editors June 09, 2011 08:39:45 IST
RCom's opaque accounting practices lead to derating

Reliance Communications (RCom), an Anil Ambani group telecom company, is looking at a cloudier future, according to two different reports.

On the one hand, rating agency Icra has announced a downgrade of the company's long-term debt rating from LAA+ to LAA, with the possibility of worse to come.

RComs opaque accounting practices lead to derating

Trouble for Anil Ambani. Reuters

"The long-term rating continues to remain under watch with negative implications," the agency said. "The rating action takes into consideration the delay in the proposed equity infusion and continuing regulatory uncertainties, which in Icra's opinion, may impact the company's ability to de-leverage its balance-sheet," the agency said.

On the other hand, the company's stock has been downgraded to "Underperform" because of what Daiwa Securities believes are opaque accounting practices.

See complete Daiwa report

The brokerage says that it is unable to assess objectively the accounting change announced by the company. The change recognises "indeafesible rights of use" (IRU) as upfront licence fee income instead of lease revenue spread over the life of the contract.

In telecommunications, an indefeasible right of use is effectively a long-term lease (or temporary ownership) of a portion of the capacity of an international cable. Reliance Communications has leased its cables to another company which has paid fees for a stretch of time. But Reliance has accounted for the income upfront instead of following the more prudent practice of letting it accrue over the lifetime of the IRU contract.

The brokerage raises the following issues:

• There is no clarity on whether the cash payments for these contracts are paid fully in advance. Otherwise, there could be a mismatch between future revenues and cash flow, and this raises the question of what happens in the event of a customer default.

• RCom also said it intended to sign an IRU contract with its subsidiary, Reliance Infratel, in 2009. It is unclear if this contract exists today, and what changes, if any, have beenmade to the accounting treatment of the corresponding revenue and costs.

RCom shares rose 2.3% at close on Wednesday. The rally was on the back of reports of the company talking to private equity players like TPG and Carlyle to sell a significant stake in its telecom tower assets. The company is looking to raise cash by selling telecom tower assets and sell a strategic stake in the company.

Rating agencies have been promised by the management that the company is looking to sell equity and that any money raised will be used to reduce the debt.

But till that happens, the agencies will take a dim view of the company's finances. The Icra downgrade announced on Wednesday relates to the Rs 5,000 crore non-convertible debenture (NCD) programme and the Rs 28,116 crore long-term fund-based/non-fund based limits of RCom. The latter refers to the company's ability to borrow upto that limit from various sources.

Icra said that the rating action takes into consideration the delay in the proposed equity infusion and continuing regulatory uncertainties, which, in Icra's opinion, may impact the company's ability to deleverage its balance-sheet (i.e., reduce debts).

An analyst tracking the company closely said that Icra is joining the debate a bit late as this was already factored in by the market.

However, market concerns about the company continue in view of the fact that it is at the centre of the 2G scam. Three of its senior executives are currently in jail based on a charge sheet filed by the Central Bureau of Investigation.

Thanks to these uncertainties, and also the accounting practices, Daiwa has given RCom shares an 'Underperform' rating with a price target of Rs 79. The current market price is Rs 94.

Updated Date:

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