Reliance Communications downgraded by Veritas, Target Rs 15 ..

Canada-based equity research firm Veritas has assigned a value of Rs 15 to the stock of Anil Ambani-promoted Reliance Communications , citing high debt, "whimsical" accounting policies and poor corporate governance standards as the key reasons.

The report was released on June 8. 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.

Veritas had published a report on similar lines on the stock last year too.

Following is the gist of the latest Veritas report:

* Exceedingly high financial leverage, accompanied with debt repayment obligations of approximately USD 2.2 bln 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.

* We believe that RCom has been scaling back its capital expenditures (capex) and has put assets on the block. However, given the weak competitive position of the Company in the Indian wireless sector, we believe that curtailed capex will be detrimental to the Company’s prospects going forward.

* We do not foresee any significant improvement in the tower market over the next 12-18 months, given the stampede by all players in the telecommunication tower market in India to monetize assets. Moreover, we estimate that at best the Company can monetize its Reliance Infratel tower asset at a diminished value of Rs 12,500 crore, compared to rumors in the marketplace ascribing a valuation upwards of Rs 22,500 crore.

* 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 mln.

* We believe that the Company's accounting policies are whimsical and do not provide a clear picture of the underlying operating and business trends.

* Given significant exposure to un-hedged foreign currency denominated loans, we find the risk management and governance practices of the Company sub-optimal. Moreover, the write-off Rs 950 crore in FY11, which was advanced to a supplier,
suggests either incompetence or chicanery.

* For FY12, the Company reported a profit before tax profit of Rs 882 crore, whereas in our normalized estimate we believe the company incurred loss before tax of Rs 1529 crore.
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