Analysts give thumbs down to Veritas report on RCom

Canadian firm Veritas’s report on Reliance Communication (RCom) got thumbs down from stock market analysts. The report titled ‘House of Cards’ said the company was overstating its numbers and based on their valuations, pegged the stock price of RCom at Rs 15. At this price, RCom’s equity value would be Rs 3,000 crore, whereas the company has debt of around Rs 35,000 crore.

Analysts, however, felt that the report was unjustified in many of its assumptions and in cases, not in sync with reality. For instance, the valuation of the tower business by Veritas is being considered too low.

“It is true that currently there is no buying interest for telecom towers but that is only due to lack of clarity on policy issues. I believe that Rs 12,500 crore valuation given to RCom's tower business is way too less. More, the Rs 15 price target is based on several assumptions and is ridiculously low," said S P Tulsian of Premium Investments, who has been tracking Reliance Group stocks closely.
 

FALSE ALARM?

• The report titled ‘House of Cards’ says the company is overstating its numbers
• Veritas pegs the stock price of RCom at Rs 15
• At this price, Rcom’s equity value would be Rs 3,000 crore
• The company has a debt of around Rs 35,000 crore
• Analysts feel many of the assumptions in report are unjustified
• The valuation of tower business is being considered too low
• Veritas says any improvement in the tower market over the next 12-18 months is unlikely
• RCom can monetise its Reliance Infratel tower asset at a diminished value of Rs 12,500 crore
• Rumours in the marketplace ascribing a valuation of Rs 22,500 crore for the Infratel tower

“The report seems to be driven by some ill-gotten motive," said Deven Choksey, managing director, K R Choksey Shares and Securities who does not consider voice telephony companies his favourite because of scalability issues. However, he felt the research outfit had ignored RCom’s wide consumer base, which gives the company the much needed leverage and valuations.

“Before arriving at such a valuation for RCom, Veritas should have considered the over two million consumer base. And, these are customers being served, unlike some other government-promoted telcos in India. Also, it has taken some 10 years for RCom to set up such a wide consumer base. Is it possible in the current scenario any company can do this in two years?

Research on RCom was discontinued by several financial firms in India after the company's stock was removed from key benchmark indices including BSE Sensex.

Ambareesh Baliga, COO, Way2Wealth Securities question the, change in the analysts — Neeraj Monga and Jaishankar Krishnamurthy’s valuations. “In its last report on RCom a few months back, Veritas had set a price target of Rs 40 for the stock. So, what has happened in these months for it to again slash the stock price? Also, is there any benchmark to arrive at a valuation for tower business in India?" asked Baliga, chief operating officer of Way2Wealth Securities.

Veritas has said any significant improvement in the tower market over the next 12-18 months is unlikely. The company can monetise its Reliance Infratel tower asset at a diminished value of Rs 12,500 crore, compared to rumours in the marketplace ascribing a valuation upwards of Rs 22,500 crore, Veritas said.

According to the report RCom was entering a phase of maximum uncertainty with exceedingly high financial leverage, accompanied with debt repayment obligations of approximately $2.2 billion over the next twenty-four months, at a time when Ebitda in core business operations is stagnating, is a significant challenge for the management team.

RCom stock is down by 32 per cent since Veritas had put out a negative report on the company last year. But brokers said that it was much to do with the controversy surrounding the 2G spectrum scam rather than the report.