RCom stock gets Veritas shock

In stinging criticism of the accounting practices of Reliance Communications, Canada-based equity research firm Veritas has said the company may have overstated its numbers — a charge the Anil Ambani-promoted firm has trashed.

In a report titled ‘House of Cards’, analysts Neeraj Monga and Jaishankar Krishna-murthy said, “For FY12, the company reported a profit before tax of Rs 882 crore, whereas in our normalised estimate we believe the company incurred a loss before tax of Rs 1,529 crore.” The analyst duo valued the firm at Rs 15 a share — 70 per cent lower than its closing price of Rs 63.55.

The stock reacted to the report, falling six per cent in initial trading. However, it recovered after RCom responded sharply, accusing the research outfit of “working systematically to destroy confidence in Indian capital markets through distorted and sensationalist reports”. The stock finally closed at an all-time low of Rs 63.55, down Rs 1.60, or 2.46 per cent, on the BSE.

Monga and Krishnamurthy have blamed poor corporate governance standards, whimsical accounting practices, high leverage and an uncertain prospectus as key reasons for slashing the price target. “Exceedingly high financial leverage, accompanied with debt repayment obligations of approximately $2.2 billion over the next 24 months, at a time when the Ebitda in core business operations is stagnating, is a significant challenge for the management team,” said the report, dated June 8 but circulated on Tuesday.

The report added the company’s accounting policies were whimsical and did not provide a clear picture of the underlying operating and business trends.

RCom, which is the second largest telecom operator by the number of subscribers, responded aggressively in its emailed response, “The report is full of factual inaccuracies, and baseless allegations masquerading as research.”

The response added the company was fully compliant with all applicable accounting policies and standards, and adhered to all prescribed governance norms, and followed appropriate risk-management policies consistent with the long-term maturities for foreign currency debt.

In its report last year on RCom, Veritas had claimed it had inflated profit and some key ratios such as Ebitda, EPS and book equity by accounting manoeuvres and poor governance.

The Canadian research firm has come out with several sensational reports on India Inc. In March, it came out with a report on India’s largest real estate firm DLF with a price target of Rs 100, less than half its prevailing price. The realtor, whose stock price took a beating after the report, had also dismissed the report, terming it “presumptive and mischievous”.

Veritas also came out with adverse reports on Reliance Industries and Kingfisher Airlines earlier.