Report questions RCom's accounting; co sees 'ulterior' motives

Reliance Communications' stock fell sharply today after a Canadian research firm raised questions about its accounting and governance practices, but the company hit back saying it was a malafide report being disseminated with "ulterior and dishonest motives".

While the report from Canada-based firm alleged that RCom had 'whimsical' accounting policies and its governance and risk-management practices were 'sub-optimal', the company reacted strongly saying, "Veritas report lacks any credibility and is mala fide in intent and approach."

Asserting that RCom is full-compliant with all applicable accounting policy standards, governance and risk management norms, a company spokesperson said that "report is is full of factual inaccuracies, and baseless allegations masquerading as research."

RCom also accused that the "orchestrated manner of dissemination of an 'analyst' report in the media reveals the underlying ulterior and dishonest motives." A "delayed release" of the report dated June 8, 2012 mysteriously reached the terminals of brokers and institutional investors this morning, immediately leading to a sharp plunge of about 9 per cent in RCom's share price.

After hitting a record low of Rs 60 a piece on the BSE, the RCOM shares recovered some ground and were trading 4.7 per cent down at Rs 62.10 at 1430 hours. Veritas report said that RCom's core business was worth Rs 15 per share, suggesting a 77 per cent downslide from current levels.

In its reaction, RCom raised questions about the past actions of Veritas, which has previously also released some very negative reports on Indian companies, including on RCom itself, as also on the entire Reliance group, Kingfisher Airlines and DLF.

"In line with its past actions, Veritas is working systematically to destroy confidence in Indian capital markets through distorted and sensationalist reports," RCom said.

"RCom is fully compliant with all applicable accounting policies and standards; adheres to all prescribed governance norms; and follows appropriate risk management policies consistent with the long term maturities of up to 10 years for its foreign currency debt."

Veritas in its report said: "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. "Given significant exposure to un-hedged foreign currency denominated loans, we find the risk management and governance practices of the Company sub-optimal," it added.

Veritas further said that a "write-off Rs 950 crore (USD 179.2 million) in FY'11, which was advanced to a supplier, suggests either incompetence or chicanery. "For FY'12 the company reported a profit before tax profit of Rs 882 crore (USD 166 million), whereas in our normalised estimate we believe the Company incurred loss before tax of Rs 1,529 crore (USD 288 million)."

Veritas also alleged that 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," it said.

Veritas added that RCom is "entering a phase of maximum uncertainty. In our view, macro-economic conditions in India are deteriorating at a rapid rate. Fractured policy making, high inflation, an uncontrollable fiscal deficit, in addition to a hyper-competitive telecommunication business, are highly detrimental to the prospects of RCom."

It further said that its "exceedingly high financial leverage" and debt repayment obligations of approximately USD 2.2 billion over the next 24 months was a significant challenge for the management and it has been badly affected by the entry of new players in the market.

"RCom is a house of cards. Since our last report on the company, the stock is down about 32 per cent. We believe there is significant additional downside," Veritas said. About the forthcoming IPO of RCom's Flag Telecom arm, Veritas said: "We are also skeptical of the company's ability to reduce its financial leverage meaningfully by undertaking an IPO of Flag Telecommunication, given that equity of Reliance Globalcom Bermuda – whose only assets is FLAG as per Federal Communications Commission Filings has been pledged by its holding company, Reliance Globalcom BV Netherlands, to secure debt of USD 500 million."

Although Veritas report gave a "sell" recommendation on RCom shares, a disclaimer in its fine prints said: "This report is for information purposes only and does not constitute and should in no way be construed as a solicitation to buy or sell any of the securities mentioned herein."

It also went on to say that "as such, please do not infer from this report that the accounting policies of any company mentioned herein are not allowed within the broad range of generally accepted accounting principles, or that the policies employed by that company were not approved by its auditor(s)."