Canadian research firm Veritas charges that RCom is entering a phase of maximum uncertainty. The company calls the report mala fide.
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".
The independent researcher applies an innovative 50% “governance discount” to the intrinsic value of Rs30
Reliance Communications Ltd (RCom) the crown jewel of Anil Ambani (if there is indeed any such jewel in his crown of thorns) should be valued at just Rs15, against the current market price of Rs65, according a new report by Veritas, the Canada-based independent research firm. Veritas has taken stunned the excel-driven and management-guided Indian analysts and institutional investors with its searing reports on R Com, Reliance Industries, DLF and Kingfisher among others.
How has Veritas arrived at the figure of Rs15 for RCom? It has introduced a new idea called "governance discount." Veritas suggests that investors should apply a governance discount of as much as 50% to the intrinsic value of the stock.
According to Veritas, the approximate value of stock is around Rs30. Applying a 50% governance discount, it values the core business at Rs15, "suggesting 77% downside from current levels."
In its calculations Veritas has refused to include any "other income", a favourite tool for management manipulation. According to Veritas, RCom "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."
This is the second report by Veritas on RCom. The previous one was in July 2011 when R Com was quoted at around Rs100. The stock is down 35% since then.
The SIDBI (Amendment) Bill, 2012, would streamline procedure for loan recovery and also seek to confer power upon the SIDBI board to specify investment limit for small units
The Small Industries Development Bank of India (SIDBI) will be able to take speedier action against defaulters after Parliament passes a Bill to amend the SIDBI Act, although its business model would remain same and it would continue to finance Micro, Small and Medium Enterprises (MSMEs), a top official was quoted in a PTI report.
Last month, the government introduced SIDBI (Amendment) Bill, 2012, in the Lok Sabha to amend certain sections of the Act under which the bank was set up. The Bill would streamline the procedure for recovery of loans by SIDBI and also seeks to confer power upon its board to specify by unanimous resolution the investment limit for small units. It also enables SIDBI to accept repayment of foreign currency loans in foreign currency and maintain foreign currency loan accounts. The amendment would also empower SIDBI to render financial assistance by way of venture capital, risk capital, factoring and discounting.
Earlier, during the Union Budget, the Finance Minister announced a Rs5,000 crore India Opportunities Venture Fund with SIDBI, in order to enhance availability of equity to the MSMEs.
The official said the new Bill will not result in any change in SIDBI’s business or activities but would empower it and its board of directors to take speedier action against defaulters and dispose off cases through authorisation by the district magistrate or the chief metropolitan magistrate.
SIDBI's domain consists of small scale industrial units, which are defined as those where investment in plant and machinery does not exceed Rs1 crore. In addition, SIDBI’s assistance flows to the transport, healthcare and tourism sectors and also to the professional and self-employed persons setting up small-sized professional ventures.
SIDBI was set up in 1990 as the principal financial institution for the promotion, financing and development of the MSME sector and for co-ordination of the functions of the institutions engaged in similar activities.