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Reliance Communications

Corporate Analysis

Team Members:

Gaurav BansalA006Prachi KhaitanA035Raghvendra RaghaoA045Piyush UpadhyayA061

Reliance CommunicationsSustainability Analysis(1/2)100% resolution of stakeholder complaints and 99% resolution of customer complaintsThe Company strictly do not hire Child labour, forced labour or involuntary labour.No case reported of Sexual harassment .No discrimination reported in the recruitment process of the Company.It has launched initiatives for reduction of Carbon Emission by deploying High Efficient Batteries and Energy Conservation measures such as Sourcing Power through Green resource.It has supported community development, education, healthcare, livelihood support, rural development, environment safety initiatives . Total expenses incurred in these activities was Rs. 2.59 cr during the year 2012-13.

3Sustainability Analysis(2/2)CSR Initiatives by RCOM

PRAYAG-Providing Grassroot Advancement to Youth Aspiring GrowthProject SwavlambhanReliance ASHABlood Donation CampaignsLittle GeniusGreen MileEmployee VolunteeringSocial Awareness Campaign

MD&A and Directors Report Analysis

Launch of new initiatives -Launch of All Share Post-paid Plan , Launch of New Reliance 3G Tab Partnership with Lenovo for launch of Smart Tablets and Phones supporting CDMA and GSM Launch of exclusive Whatsapp plan Due to cancellation of 122 licenses , 8 players have either shut down or reduced operations. So competition has reduced Massive growth of smart phones Data and Wireless Broadband Global Enterprise Business Mandatory Digitalization

Mobile Number Portability (MNP) Threat Increase in tariffs Massive growth of smart phones Rising Power and fuel cost, High Landing access charges Higher activity of cable MSO Changes in foreign currency exchange rate and interest rates Rapid Technological Changes, 4G roll out Rural Penetration Increasing CAPEX

Positive AspectsNegative AspectCorporate Governance ReportChairmans Role has been separated from executive in managing day to day business affairsThe Board members are periodically given formal orientation and training with respect to the Companys vision, strategic direction, core values including ethics, corporate governance practices, financial matters and business operations.None of the directors is related to any other director. None of the directors has any business relationship with the Company. As per the Company, None of the directors has received any loans and advances from the Company during the year.More or less in every board meeting and in AGM all the directors were present.None of the directors hold directorships in more than 15 public limited companies.It complies with the listing requirements of Luxembourg Stock Exchange and Indian Exchanges.It has functional Risk Management , Internal Audit Committee, and has formulated Whistle Blower Policy.

A critical Observation : Every Important committee has the same set of personnels with rotating chairman power. ConsolidatedINR Cr.ParticularsFY 2009FY 2010FY 2011FY 2012FY 2013Total Income from Operations22,250.5521,496.3822,430.3519,677.0020,561.00Expenses13,650.9814,311.7914,019.3313,892.0014,619.00Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)8,599.577,184.598,411.025,785.005,942.00Depreciation3,607.703,746.526,503.833,978.003,845.00Finance Costs-506.95-1,186.331,072.231,630.002,499.00Other income697.9635.9677.287051,217.00Exceptional items-37.47-5.37--PBT6,196.725,222.831,517.61882815Tax-51.79445.3911.79-10671PAT (before Minority Interest and share of Associates)6,248.514,777.441,505.82988744Profit/ (loss) attributable to Minority Interest205.17119.25150.276173Share of profit / (loss) of Associates-1.593.199.9-1-1Consolidated Profit / (Loss) for the year6,044.934,655.001,345.65928672Key FinancialFinancial Trends(1/2)Financial Trends(2/2)Peer Comparison(1/2)Peer Comparison(2/2)Critical Observations (1/6)AS 5 : Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting PoliciesAmount Withdrawn from general reservesPending Clarification from ICAIEmphasized by the independent auditor

ItemsINR CrExchange rate variations203Feul Cost62Depreciation on Exchange losses275Capital Work in progress written off325Amortization of foreign currency monetary Items Transalation Difference Account(FCMITDA)638Deffered Tax liability354Total Amount Withdrawn from General Reserves1857ParticularsINR CrReported PAT672Impact of Withdrawal-1857Actual PAT-1185EPSINRReported3.26Actual-5.74Unhealthy corporate practice as the company is window-dressing to present a rosy pictureCritical Observations (2/6)Observation on Investigations by CBI on a litigation against a director of companys subsidiary and the subsidiary companyAuditors opinion is not qualified in respect of this matterThe disclosure has been given in Note 2.35 Contingent LiabilitiesA writ petition in Honble High Court of DelhiObjection by CBI in Honble Supreme CourtNo quantification of any amount The same has not been qualified by the auditorA disclosure for non-quantification has not been givenCritical Observations (3/6)AS 29 Provisions, Contingent Liabilities and Contingent Assets

Access Deficit ChargesThe Honble Telecom Disputes Settlement and Appellate Tribunal (TDSAT) confirmed a liability.The Company created a provision of Rs 540 Cr

The company has correctly accounted this item as a provision instead of a contingent liability.The DOT has issue a demand of Rs 1932 Cr as Spectrum Charges for certain violations

The company has filed a petition in Honble High Court of Kolkata

The Notes to account does not disclose whether the legal advice states the incident as Probable or Not Probable

Critical Observations (3/6)Critical Observations (5/6)Borrowing Cost AS16 4(e)

It covers exchange differences on the principal amount of foreign currency borrowings to the extent of the difference between interest rates on local currency borrowings and interest rates on foreign currency borrowing

This component of foreign exchange differences is considered to be in the nature of borrowing costs

The company has capitalized an amount of Rs 992 Cr from the General Reserves instead of the P&L, thus inflating the profit figure

The auditor has not raised any point on this aspect

Critical Observations (6/6)

Incorporation of Para 46A of AS 11 The effects of Changes in Foreign Exchange Rates

Exchange Differences arising on reporting of long term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they related to acquisition of depreciable capital assets, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset

Is that all???The following items have ALSO been withdrawn from the General reserves

Addition of Provision of business restructuringOther Income 550 Cr ????? Why not adjust it against the General Reserves now?

ItemsINR CrProvision for business restructuring99Additional depreciation arising on fair value of assets1264Additional depreciation of subsidiaries 123Total Profit inflation1486

Accounting Standards ViolationAbused AS 21: In intra group asset sales, assigns higher fair value to its assets books revaluation gains subsequently allotted to general/specific reserves used to offset expenses, inflates value of Assets and boost up Book equity.Violated AS 12: Accounting for Gov Grants by following methods: Deduction from Asset ValueGrants treated as deferred income Recognized the entire subsidy from the USOF as other operating income.(Source: Page 15, Annual Report FY07)Violation of AS 9: FY11, boosted its EBITDA by R 2,530C, based on a legal opinion, and changed its policy of revenue recognition from a deferral basis over the term of the contract, to license income based on activation of circuits for IRU contracts (Source: Annual Reports. FY-11)Change In Accounting Policy: RCom changed its accounting policy associated with depreciating its electronic equipment to 18 years, from 10 years earlierOther ObservationsIn 2005 Demerger of RCom from RIL took place, ownership of promoters rose from 38.27% to 63% in RCom, under the guise of improving shareholder value.During the formation of RCom, RIL shareholders invested Rs 13,675Cr into the business, compared to Rs 186Cr by management,RIL minority shareholders declined to 37% from 61.73%As per the cash flow statement for FY10 the Company incurred Rs.1,441Cr in interest expenses associated with its debt, on the P&L it magically turned into income of Rs.1,093CrWritten off cash fuel expense from Non cash reserveTo avoid paying capital gains taxes in India, the Company booked income on the sale of shares in a subsidiary RTIHL, through an offshore trust.

Actions Affecting Performance And Market CapitalizationRcom raised call rates - by an average about 4% in April-June quarterEffect: Growth in revenue per minute (RPM) and average revenue per user (ARPU)

Rcom Ltd to demerge Real Estate Assets into a separate listed company called Reliance Properties. Shareholders will be allotted Reliance Properties shares for free in the ratio 1:1.Effect: Share price 31.5 month high of Rs 148 on BSE

Completed full repayment of two syndicated ECB loan facilities of USD 500 million each, during the quarter ended June 30 2013,Effect: Shares price rose 5.50 percent to touch an early high of Rs 124.60

RCOM & Reliance Jio entered into cooperation for tower sharing, Intercity fibre, Intra city fibre in return for Rs 1200 crores and access to optic fibreAuditors Remuneration?Bharti Airtel Rs 6.6 CroresIdea CellularRs 3.8 CroresTata Communication Rs 1.4 CroresReliance Communication

Rs 9 Crores

ReferencesAnnual Report http://www.rcom.co.in/Rcom/aboutus/ir/ir_financials.htmlInvestor Presentation http://www.rcom.co.in/Rcom/aboutus/ir/ir_presentations.htmlBusiness Sustainability Report http://www.rcom.co.in/Rcom/aboutus/ir/pdf/Business_Responsibility_Report.pdfhttp://www.indiainfoline.com/http://www.moneycontrol.com/stocksmarketsindia/Outcome of AGM http://www.moneycontrol.com/livefeed_pdf/Aug2013/Reliance_Communications_Ltd_270813.pdfCapital Line DatabasePeer Annual Reports : http://www.bseindia.com/

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