Reliance Communications (RCom) is one of the stocks that are probably most widely held by retail/HNI investors. They should give up hope now

From a high of Rs844 that it hit in January 2008, Reliance Communications (RCom) has crashed to below Rs75 in March 2011. A lot of retail investors are holding shares in this stock, bought at different levels, hoping that it would come back some day. For it to reach its previous high, the stock would have to rally by 673%. This is a pipe dream.

Given the fact that it belongs to the media-hyped ADAG group, high competition in the telecom markets, regulatory probes which never seems to end and poor financial performance, the chances of RCom coming back to anywhere near its previous high is remote.

If one is holding RCom in anticipation that it will come back to its previous highs and rise some 673%, only a miracle could possibly lead to a 673% rise in a company's profitability whose profits over the last trailing 12 months have fallen by over 54%.

Moreover, it is perhaps one of the most talked-about stocks across all the business news channels and there exists a support and resistance theory at every Rs15-Rs20 level, just trapping investors at every fall and compelling them to average more and more.

Why RCom Should Be Shunned

• Starting at the same level as Bharti Airtel, RCom's net profit has gone up by only around 30% in the past four years compared to a more than a 100% rise for Bharti.

• The reason for the fall in RCom's share price, which has fallen a lot faster than profits, is that the company has being in continuous news for a number of years in relation to some or the other probe. Whether it be the 2G scam probe, tax evasion probe from the I-T Department, probe from the DoT (Department of Telecommunications) for misrepresenting its revenues, etc.

A Google search with the keywords "RCom, probe and news" will give you a lot of interesting hits.

• The company has complained regarding bear cartels which are "hammering its share price" and often cries foul, approaching SEBI (the Securities and Exchange Board of India) and other regulatory authorities. However, one should understand that even that market is far superior to any bull or bear cartels and cannot allow a good company's stock to go down from Rs844 to Rs75 unless there is some structural problem in the company.

• In terms of corporate governance, ADAG group's stocks are by far among the worst in India, and this leads to absolutely no interest by foreign or domestic institutions in RCom. Their holding over the last three years have also come down and are expected to come down with every rally in shares.

• Its total debt in its books have grown up from around Rs17,000 crore to around Rs30,000 crore as on March 2010 (excludes debt for 3G spectrum).

• Return on Capital Employed (ROCE) of a pathetic 8% for FY10 in the same industry where the biggest competitor Bharti Airtel operates at an ROCE of over 28%.

• With Mobile Number Portability coming in, most of its CDMA customers who were somewhat stuck with an ageing technology and somewhat disappointing network and customer service can now switch to a plethora of GSM service providers.

To summarise, RCom is like a dead stock in an industry whose growth is gone. It's better to avoid such a stock; the market offers far better investment opportunities rather than buying or even continuing to hold RCom.