Is buying Reliance Communication(RCom) Shares worth it?

The following graph shows the closing of the Reliance Communication (RCOM) stock on the Indian Stock Exchange (Bourses) on August 2nd, 2021.

RCOM Stock on the National Stock Exchange (NSE)

The stock may very well qualify in the category on a ‘penny stock’ along with its peer – Vodafone Idea Limited(VIL). Despite have a low-price, there is a huge difference between RCOM and all the other stocks that exist in the communication space.

Let us start from the beginning,

The Individual in the following image is Anil Ambani. He is the chairman of the Anil Dhirubhai Ambani Group(ADAG). The group was once a force to reckon with owing to its spread from Telecom to Retail to Infrastructure to Defense. He was considered one of the richest Indian’s in the first decade of the 21st century with worth exceeding USD $40 Billion.

RCom - Latest News on RCom | Read Breaking News on Zee News
Anil Ambani, Head of ADAG

This though did change in the second decade of the 21st century with his group companies being found guilty in the infamous – 2G Scam (Telecom Spectrum Scam) & Coal Scam. Also, a slew of bad investments were also linked to slide of the group and his personal assets. The situation was further deteriorated with the entry of Reliance Jio in the Telecom space which was led by his elder brother, Mukesh Ambani who headed Reliance Industries (RIL).

At the end of the second decade, the group was in a tough spot regarding servicing the debt for all the expansion that it had undertaken earlier. Creditors and Equipment Manufacturers were vying for blood owing to the non-payment of dues. There came an instance where he was rescued from going to jail by his elder brother.

Why are we talking about this today?

Since the last few months, on back of the efforts to reduce debt, some of the company stocks belonging to the group having bounced back.

Reliance Infra (ADAG Company)
Reliance Capital (ADAG Company)

With 5G roll-out in the next few years, people are inclined to believe that RCOM can also be a turnaround story thereby turning into a multi-bagger. This thought may not be the case.

Let me list the reasons why Investors are better off staying away from the stock and protecting their wealth

  • AGR Dues
  • Expiry of License

RCom’s telecom license was set to expire on July 27, 2021 and the Department of Telecommunications (DoT) gave all hints to avoid renewal of the license as the company was in no position to pay the dues it owes to the government. RCom owes payment of Adjusted Gross Revenue (AGR) amounting to Rs 26,000 crore

AGR dues: Can spectrum be sold by telcos undergoing IBC proceedings?  Supreme Court asks SG Tushar
Supreme Court who has asked Telecom companies to pay AGR

As RCom is currently in NCLT for insolvency resolution, the cancellation of the spectrum can lead to a severe haircut for all the lenders. The resolution hopes to handover tower business to Reliance Jio & spectrum to UV Asset Reconstruction Co. Ltd’s (UVARCL).

No photo description available.
Asset Reconstruction Company(ARC) – UVARCL

Without the spectrum, the deal with UVARCL will be null and void.

To avoid this, the company has done some judicial ping-pong. They took the issue up with NCLT from where it was then taken up in Delhi High Court which passed it back to NCLT.

The company is trying to argue that AGR dues fall under operational dues and not current dues as mentioned by DoT as it has been under moratorium since May 15, 2018(start of NCLT hearing)

NCLT has granted interim relief making way for RCom to continue providing telecom services till Aug. 12th 2021.

Conclusion

Considering some serious uncertainties, the company is unlikely to bounce back anytime soon even if somethings go their way. Also, once the handover to Reliance Jio and UVARCL happens, the stocks will be delisted like DHFL (Deewan Housing Finance Ltd.)

Dewan Housing Finance Corporation - Wikipedia
Delisted Company – DHFL

It is best to stay away and invest in established players like Airtel or Vodafone-Idea(If you have a risk appetite).

Hope this helps.

Further Read:

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