The Credibility Dilemma

The barrage of negative coverage of India's telecom market seems unrelenting, some of it justified but sometimes maybe not.

In a recent turn of events, Toronto-based equity research firm Veritas lowered its target price for the stock price of Reliance Communications Ltd., India's second-largest telecom operator, to INR 15 per share (US$0.26).

The stock currently trades at around INR 64 ($1.11), more than four times the value ascribed by Veritas, which has had a negative view of RCom for some time.

The question is: Is RCom massively overvalued? Or does the Veritas analysis lack credibility?

Veritas has cited RCom's massive debt pile as the biggest reason for the dwindling fortunes of the telecom operator. It has also questioned the operator's valuation of its tower assets, accounting policies and corporate governance standards in the report.

According to the report, RCom has debt repayment obligations of around $2.2 billion during the next 24 months.

A negative outlook on any Indian operator might not be so surprising, though, given the current pressures facing the market. Earlier this year, Bharti Airtel Ltd. was the subject of a negative rating by the global agency Fitch Ratings Ltd. due to the adverse regulatory changes in the country. (See Telecom Uncertainity To Hit Bharti's Fortunes.)

This time, however, the focus is more on the financial management of an individual operator.

While RCom suffered a share price dip when the report was first published on Tuesday, it recovered. So how much notice is taken of the likes of Veritas?

Several experts have raised doubts about the credibility of foreign research agencies. "I would not be completely dismissive of these ratings but it's speculative for many reasons. What we really need to understand...what factors do these rating agencies consider while awarding ratings or downgrading the share price of a particular company? How much do they understand about the Indian market?" comments Gyanendra Kumar Kashyap, an independent analyst who tracks equity.

RCom, naturally, slammed the Veritas report, saying the analyst house is working systematically to destroy confidence in Indian capital markets through distorted and sensationalist reports.

However, RCom's troubles are well known. It has been consistently trying to raise funds to reduce its $7 billion debt pile and exploring various options to sell its stake in the tower business, Reliance Infratel and is now believed to be considering an IPO for its sub-sea networks business. (See IndiaWatch: Aircel Appeals For More Spectrum, RCom Receives RBI Approval For Refinancing and RCom Scouts Buyer for Tower Unit.)

While research notes published by foreign firms can be an eye-opener for investors, there is no doubt it can sometimes be misleading as well. In order to deal with such issues, the Securities Exchange Board of India (SEBI) has recently announced plans to clamp down on independent research analysts, though there is no detail about the actions SEBI might take.

Whatever the outcome, India's operators must have the right to fair analysis by any researchers while at the same time being as transparent as possible in their accounts and statements. That is the only fair course for investors.

Jatinder Singh, Principal Correspondent, Light Reading India