Reliance Communications: Recommendation Review

We had covered the Reliance Communications (RComm) scrip in Dalal Street Investment Journal’s Vol. 27, Issue No. 5 (dated 26 February, 2012), where we had said that the counter will keep underperforming as its financial performance is not satisfactory. Besides, the company is also facing several issues like high debt, lower ARPU, unhealthy cash flows, etc. which are all negative factors for the stock.

Recently, RComm tanked heavily over the latest report by a leading foreign research house. The firm has said that the company is entering into a phase of maximum uncertainty, as the macro-economic environment in the country is deteriorating. The main problem that it is facing is its highly leveraged balance sheet, which looks very negative for a company that is facing erosion in its EBITDA margins. Most of its debt is in foreign currency, which will eat into its profits in the current scenario where the rupee is at a historic low. Even the proposed IPO will not help the company to reduce its debt, as it has already pledged some of its assets. The research firm has also said that RComm’s move to lower its capex will be detrimental for it in the highly competitive Indian telecom market.

Considering all these factors, we believe that the company’s shares may go down further. Our view on the stock has not changed, as we believe that the company’s problems may not be resolved going ahead and buying shares may not prove to be a profitable idea. The latest report by the research firm reaffirms our original call to sell/avoid the stock.