1/11/14

| App | Premium | Education

RCom inflated book equity by Rs 22,000cr: Veritas - Moneycontrol.com

Search Quotes, News, NAVs... News Sign in | Register | Feedback

News
Home

Markets

Mutual Funds

Commodities
Stocks

Property Personal Finance

Fund News Economy

Portfolio

Messages
Politics

Live TV CNBC-TV18
Legal NRIs

SME Shop

Business

General News

Market Trends

Personal Finance

Lifestyle

MasterYourMoney

CNX NIFTY

6,171.45

CRUDEOIL

3.10 (+0.05%)

5,704.00

Nasdaq

-1.00 (-0.02%)

4,174.66

Aurobindo Pharm

18.47 (+0.44%)

389.90

Beta Customize

-2.70 (-0.69%)
TOP NEWS >>

November IIP at -2.1%, RBI likely to hold rates

GET QUOTE

Moneycontrol > New s > Business

Enter Company

Jun 20, 2012, 03.26 PM IST

RCom inflated book equity by Rs 22,000cr: Veritas

Neeraj Monga of Veritas Investment Research believes various mergers and amalgamations have led to the Rs 22,000 crore 'inflated book equity' of Reliance Communications. Waste Plastic Pyrolysis
Pyrolysis Plant For Waste Plastic Welcome To Visit Our Factory! www.oil-pyrolysis.com/Pyrolysis
Ads by Google

Most Popular

Top News

Five things that keep Goldman Sachs up at night

FY14 CAD seen below $45bn; fiscal deficit a worry: Experts

IndusInd Bank Q3 beats forecast, net up 30% but NPA rises

Tags

Veritas Investment Research, Reliance Communications, telecom tower assets, Reliance Infratel

Bazaar at 08:00 am

SHARE . EMAIL . PRINT . A+

Sensex ends flat as Q3 nos begin; Infosys leads, banks drag Kumar Mangalam Birla still under CBI scanner How will Devyani Khobragade's return impact India? India's economy is out of the woods: ICICI CEO Individuals can be tried without being named as accused: SC S&P ends up, led by defensive stocks; earnings in play

eeraj Monga of Veritas Investment Research believes various mergers and amalgamations have led to the Rs 22,000 crore inflated book equity of Reliance Communications . The stock is trading at Rs 60. So the market doesnt really believe in the book value of the company. Weve just come out and said it very clearly, he claims. In its June 8 report, the Canada-based equity research had assigned a value of Rs 15 to the stock of Anil Ambani-promoted telecom firm, citing high debt, "whimsical" accounting policies and poor corporate governance standards as the key reasons. We believe there are several governance issues at R-Com, he told CNBC-TV18 in an interview. Over the last two years, R-Com has been looking to hive off its telecom towers business in order to bring down debt, but hasnt been able to conclude a deal so far. We expect R-Coms tower deal to happen at not more than 3 million per tower, Monga says. He believes the situation in India is grim with respect to telecom tower assets and multi-tenancy is going to become a difficult issue for most tower companies. 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. Below is an edited transcript of Mongas interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos. Q: Your report says that you do not believe in the reported book equity of Reliance Communications or their fixed asset base which has been reported. That is a fairly serious allegation, what do you base it on? A: One of the things which we had discussed previously and we highlight in our current report as well is that a significant proportion of the book equities reported by a company is on account of various mergers and amalgamations that the company has done of subsidiaries, of holding

Action in Reliance Communications

Views RComm may test Rs 118-120: Abhijit Paul Jan 07, 14:15 Announcements Reliance Comm makes full repayment of

www.moneycontrol.com/news/business/rcom-inflated-book-equity-by-rs-22000cr-veritas-_720042.html

1/4

1/11/14

RCom inflated book equity by Rs 22,000cr: Veritas - Moneycontrol.com

various mergers and amalgamations that the company has done of subsidiaries, of holding companies. At the end of the day, these are all related parties controlled by the same management and stock and no fair valuation reports are available on these assets.
Reliance Comm makes full repayment of USD 500mn syndicated ECB loan Jan 03, 14:45 Technicals Reliance Comm closes below its 30Day,50-Day,150-Day Moving Average today. Jan 02 Technicals Reliance Comm closes above its 30Day,50-Day,150-Day Moving Average today. Jan 01 Views Reliance Communications may go above Rs 150: SP Tulsian Jan 01, 17:00 News DoT to calculate one-time spectrum fee afresh after auction Dec 23, 08:00 Views Sell Reliance Communications: Sudarshan Sukhani Dec 19, 10:45 Views Buy Reliance Communications: SP Tulsian Dec 13, 16:15 Views See lower levels in Reliance Communications: Sukhani Dec 12, 10:30 Technicals Reliance Comm closes below 30-Day Moving Average of 139.45 today. Dec 10 News Reliance Communications mulling $1bn debt issue: Sources Dec 10, 14:30 "Devyani Khobragade returns from US but India's still the loser" Technicals Reliance Comm closes above 30-Day Moving Average of 139.56 today. Dec 09 AgustaWestland: Gave money to Technicals Tyagi's family not him, claims Reliance Comm closes below 30-Day Haschke Moving Average of 141.15 today. Dec 03 Hrithik may not be a good producer, but he'll be a terrific News director: Rakesh Roshan RCom raises 3G internet rate by 26%,cuts benefits by 60% Dec 03, 17:00 News Rel Comm and subsidiaries under service tax scanner Dec 02, 20:15 Technicals Jan 9 2014, 13:39 Reliance Comm closes above 30-Day Betting on large Moving Average of 141.59 today.cap DecIT, 02 vice

Ads by Google

We believe approximately Rs 22,000 crore over time has been contributed by various schemes of mergers and amalgamations of subsidiaries to the companys book equity. Over time, the company has also written off some of its cash expenses through these reserves. But basically there are 206 crore shares outstanding in the market place and Rs 22,000 crore of book equity of approximately Rs 100 per share. I guess this fact is kind of reflected in the companys current valuation in the market place. The company disclosed the book equity of approximately Rs 174 or thereabout and the stock is trading at Rs 60. So the market doesnt believe in the book value of this company, we have just come out and said it very clearly. Q: You have also talked about Reliance Infratel and ascribed a much lower value than what is being talked about. Is that a function of what you see as the real value of the asset or a function of how poor you think the market is and in that Reliance Communications will have a tough time selling this? A: I think the situation in India is grim with respect to telecom tower asset specifically. With the Supreme Court of India cancelling the licenses of many of the operators in India, clearly multitenancy is going to become a difficult issue for most tower companies. With a growing telecommunication business and many companies getting into the business, there have been very few deals which have actually been done between arms length parties in order to assess the valuation of these assets. One of the deals which was done was by SBI Macquarie which bought some assets from an operator at approximately Rs 34 lakh per tower. GTL Infra and Aircel had also undertaken a deal a couple of years ago whereby Aircel had actually agreed to rent 20,000 additional towers from GTL for a period of three years valued at around Rs 30 lakh or thereabouts as well. Now looking at Reliance, which is now going to lose Etisalat and STel as its tenants on the towers, and given the balance sheet of Reliance Communications itself, any tower buyer will be exposed to a company which is in financial stress. We do not believe that the assets sold for much more than they have been sold in the past in the Indian markets, and thats approximately Rs 30 lakh a tower. Q: You are talking about a 50% governance discount on the stock, so your primary concern with this company is corporate governance issues or do you think it just lacks the momentum to perform from hereon in terms of its core business? A: Clearly the company is having a difficult time in its core business. Most recent press release from Vodafone says that they have also joined Reliance Communication and Bharti Airtel in lowering their price for their 3G services, which is supposed to be the next growth engine for the wireless operators in India where the competitive environment is pretty intense. The governance discount comes from the whimsical accounting policies that we have discussed in our report. In FY11 for instance the company wrote off approximately Rs 950 crore of advances which was a fine to a supplier. What we failed to understand is how a company can have such poor risk management practices whereby they have advanced monies of Rs 950 crore, which is more than 20% of the EBITDA, to a supplier who failed to deliver. Why isnt the company initiating actions to undertake this recovery? Also, when we look at companys loans and advances, which amount to approximately Rs 7,200 crore of assets on its book, then what is the legitimate reason to believe that any of these loans and advances are ever going to come back. Secondly, why should a company which has approximately Rs 40,000 crore in debt have advances outstanding of Rs 7,000 crore to parties related or unrelated or otherwise. They should call in all these loans and repay their lenders and improve the balance sheet of the company. So we believe there are significant governance issues in this organization and that the management needs to deal with them before we will change our expectation of this companys performance. Our valuation of Rs 30 from core operations excludes any other income that the company might be generating because we are not sure what the sources of this other income are. The company has actually drawn down its cash balances during FY12. Right they have approximately Rs 1,400 crore of cash balance, but I would believe that they would need that cash balance in order to ensure liquidity in the business to run operations, so they cant generate enough other income on that. Also, the company tends to include its other income in its EBITDA, but its cash expenses are written through reserves, and therefore you have to jump through a few hoops to actually figure out the underlying operating trends of this company. Q: The hope in the market has been that the company will be able to successfully deleverage its balance sheet with the Flag IPO and the Infratel sale. You think the

Set SMS Alerts on Reliance Comm

Video of the day

News Videos

industry, pharma: Axis Cap

- in MARKET OUTLOOK News Reliance Comm Q2 net up 6-fold to Rs 675 cr on other income Nov 12, 17:30 Jan 4 2014, 17:04

Foreign cos eye India`s Technicals Reliance Comm closes below 50-Day distressed power projects Moving Average of 144.82 today. Nov 07
- in CNBC-TV18 Comments

Views RComm may move to Rs 158-160: SP Tulsian Nov 06, 18:00 Views Buy RComm, Lupin; sell Union Bank, Jindal Steel: SP Tulsian Nov 06, 15:30

www.moneycontrol.com/news/business/rcom-inflated-book-equity-by-rs-22000cr-veritas-_720042.html

2/4

1/11/14

RCom inflated book equity by Rs 22,000cr: Veritas - Moneycontrol.com

deleverage its balance sheet with the Flag IPO and the Infratel sale. You think the company will be unsuccessful in deleveraging its balance sheet significantly? A: As far as Flag is concerned, it is interesting because most recently Vodafone bought the business of Cable and Wireless and they are competitive to Flag internationally. Their assets are pretty similar except for the fact that Cable and Wireless also had some legacy work assets in the UK. The multiple that Vodafone paid for that business was around 3.5 times EBITDA and we value Flag at approximately 5 times and give it a 20% premium. We think that is a realistic valuation, although I do not believe that unless the company sells off its entire asset they are even going to get their 5 times EBITDA multiple that brings in approximately USD 891 million enterprise value. But what is interesting is that Reliance Global Comm has bled the equity of Flag, which is the subsidiary, and raised USD 500 million from banks to fund its operations there or somewhere else. So once that asset is put on the block and goes on sale in the market, then debt at the subsidiary level which has been pledged or equity which has pledged needs to be released. So we dont see a great possibility for this company to be delisted significantly. But I think the most important thing to understand is that an asset sale is not going to be value accretive for equity owner unless the assets that are being disposed off in the market place are trading at a discount in the current valuation of the company. But if you look at Reliance Communications valuation from a core business standpoint, it is trading at approximately 8-9 times FY13 core EBITDA already. It is looking to dispose off assets at EBITDA multiples of 5-6, so there is no way there is going to be any value accretion for current equity owners of the business. Anybody who thinks otherwise is going to be wrong over time.

Reliance Comm stock price

On January 10, 2014, Reliance Communications closed at Rs 121.85, down Rs 2.55, or 2.05 percent. The 52-week high of the share was Rs 164.45 and the 52-week low was Rs 50.25. The company's trailing 12-month (TTM) EPS was at Rs 3.49 per share as per the quarter ended September 2013. The stock's price-to-earnings (P/E) ratio was 34.91. The latest book value of the company is Rs 160.57 per share. At current value, the price-to-book value of the company is 0.76.

Watch Video

Excerpts from Bazaar on CNBC-TV18 Watch the full show Bazaar at 08:00 am SHARE . EMAIL

Related News Bull's Eye: Buy Amara Raja, Tata Chemicals; short RComm RComm may test Rs 118-120: Abhijit Paul

More from the web

What to Expect in 2014: Six Key Statistics
(TradeGood)

More from Moneycontrol

LIC Housing may go upto Rs 265-270: Abhishek Karande IT firms to report moderate sales growth in Q3: analysts Tata Steel may correct to Rs 360-370: Sudarshan Sukhani

Make the Most of Your 401k Savings (Xconomy) Turkmenistan gas: Galkynysh gas output will boost growth in 2014 (HSBC Global
Connections)

www.moneycontrol.com/news/business/rcom-inflated-book-equity-by-rs-22000cr-veritas-_720042.html

Bluefin Tuna Sells For $70,000 At Tokyo

3/4

1/11/14
Bluefin Tuna Sells For $70,000 At Tokyo Auction (Inquisitr)

RCom inflated book equity by Rs 22,000cr: Veritas - Moneycontrol.com

Sell YES Bank; buy Power Grid, Tech Mahindra: Rakesh Gandhi 'I want to be the number one salon in the world by 2020'
Recommended by

How Smart a Home Buyer Are You? (Kiplinger)

Free Demat Account

religareonline.com/Demat_Account With Money Back Guarantee*. Trade Across Multiple Devices. Open Now!

1/2/3 BHK In Bhiwadi

www.hdfcred.com/Delhi Nimai Greens By Nimai Developers Rs. 19.5 Lacs Onwards, Call Us Now!
Ads by Google

Set email alert for

Reliance Comm

Interest on tax free bonds is not taxable but CG is India's economy is out of the woods: ICICI CEO

Post Your Comments

Do you believe RCom's book equity is inflated? Type your message here

Follow moneycontrol.com

Explore Moneycontrol
STOCKS A B C D E F G H I J K L M N O P Q R S T U V W X Y Z Others A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Market Statistics Plan Insurance Bonds Global Market Business News Mutual Fund Crude Oil Best Portfolio Manager Bse Sensex

MUTUAL FUNDS
Live Sensex

Public Sector Banks

Nse Nifty Share Market Live Company Fixed Deposits Moneybhai POSCO Think India Latest Videos Sales

Commodities Price

Silver Price/Rate in India

Gold Price/Rate in India History India Natural gas

USD to INR IBNLive News

Bank Fixed Deposits News in Hindi Cricket News Infosys Mumbai

Small Savings Schemes Latest Movie Songs IndusInd Bank

Budget: 2011, 2012, 2013 Online Study Material C. Rangarajan

RBI Credit Policy

News Archive

Financial Glossary Message Board

India`s Premiere Technology Guide MTV India India Veerappa Moily

Latest News

Business Technology News & Videos SpiceJet

Restaurants in Mumbai Online Shopping in India

Site Map | About Us | Contact Us | Feedback | Advertise | Bookmark | Disclaimer | Privacy Statement | Terms of Use | Careers
Copyright e-Eighteen.com Ltd. All rights reserved. Reproduction of new s articles, photos, videos or any other content in w hole or in part in any form or medium w ithout express w ritten permission of moneycontrol.com is prohibited.

www.moneycontrol.com/news/business/rcom-inflated-book-equity-by-rs-22000cr-veritas-_720042.html

4/4