Why Veritas has valued RCom at Rs 15/share

Shares in Anil-Ambani owned Reliance Communications today plunged 6 percent t0 Rs 61.65 on the BSE after equity research firm Veritas downgraded the stock to sell with a target price of Rs 15, which is a 77 percent discount to the current levels.

Terming the company a “house of cards”, it said high debt, “whimsical” accounting policies and poor corporate governance standards are the key reasons for cutting the target price.

“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,” it said.

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Even though the company reported a profit of Rs 882 crore for the financial year 2012, Veritas believes the company actually incurred a loss before tax of Rs 1,529 crore.

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In response to the Veritas report, Reliance Communications told CNBC-TV18 that the report “lacked credibility”, was “full of factual inaccuracies, baseless allegations masquerading as research” and that Veritas was destroying investor confidence through sensationalism".

According to the research firm, the highly competitive telecom sector is detrimental for the future prospects for RCom because of its disadvantage in terms of its GSM spectrum position and the entry of new players, which affected its earnings and ARPUs way more than its peers.

In such a scenario, the telco needs to expand operations and incur high capital expenditure if it wants to maintain the quality of services and be at par with its peers.

But with a debt obligation of around $2.2 billion and stagnating Ebitda margins, the company is looking to cut back its capital expenditure and has also put assets on the block. This corporate strategy is surely going to have a negative impact.

Moreover, any significant improvement in the tower market over the next 12-18 months is unlikely. The company can at best monetise its Reliance Infratel tower asset at a diminished value of Rs 12,500 crore, against market rumours of a valuation exceeding Rs 22,500 crore, the report said.

Veritas has also questioned the ability of Flag Telecommunication’s IPO to delverage RCOM’s balance sheet. This is because Reliance Globalcom Bermuda- whose only asset is Flag - has been pledged by its holding company to secure a debt of $500 million. Hence the proceeds from the 75 percent stake sale in FLAG, for which RCom will receive $668 million, will be utilised to repay secured debt. The company had recently got approval to list FLAG in Singapore.