Taking Stock: Reliance Communications

Dear Mr. Berko:

In January 2008, I bought 20 shares of Reliance Communications, India's mobile phone company, at $729 per share, and it rose quickly to nearly $875. You said not to buy the stock, telling me that you did "not want to collect dividends in rupees or read an annual report in Hindi." It appears you were right because Reliance is now $102 and I'm out $13,000. Can you tell me what happened and if you would recommend the purchase of 150 shares to bring my cost basis down to $176 per share from $729? My broker says the stock trades at 50 percent of its book value.

J.D., Oklahoma City

Dear J.D.:

Stocks on the Russian, Pakistani, Chinese, Indian, Malaysian, Turkish, etc., exchanges are not investments; they're speculations. Those exchanges are hot, but "hot" does not equate value or common sense. So I can't imagine a single company in any of those countries that is a worthy investment in any long-term growth portfolio.

I spent a lot of time in India in the l970s, l980s and l990s, and still maintain correspondence with a few folks there on a semi-irregular basis. And while American Industry and politicians (federal, state and local) are crooked as a shillelagh, their counterparts in India make Americans look like cherubs guarding the Ark of the Covenant.

In America, the tacit and judicious gift of thousands of unmarked hundred-dollar bills to numerous elected officials will guarantee the results you want. Influence peddling, bribery, graft and payola are institutionalized, and specific rules are followed between American Industry and our politicians. But in India, it's the Wild West out there, the Big Casino in the Sky, and influence money changes hands like a blackjack dealer passes cards to players at the table.

Reliance Communications (RCOM.BO-$110) crashed from $900 per share to $102 because India's Telecommunications Minister Andimuthu Raja made tens of billions of rupees selling his country's mobile spectrum to friends for 20 percent of its market value. Then Raja and his friends issued licenses to foreign investors for huge multiples of the sums they paid. It's estimated that more than $45 billion was lost by the Indian government, and various chunks of hundreds of millions of dollars have been secreted in private accounts belonging to Raja's friends and business associates. And among the reasons that RCOM collapsed is that the Indian government may do the "unthinkable," demanding that RCOM, Raja and his associates return some of the skim.

Last year, RCOM posted about $200 billion in revenues providing the same services to Indians that Verizon, Comcast, Cablevision and AT&T provide to Americans. Now, I don't read Hindi or Sanskrit but it seems that RCOM's balance sheet is quite weak with $375 billion in debt.

Meanwhile, quarterly growth is in the negative column, return on assets is 1.3 percent, levered free cash flow is a negative $173 billion and according to the financial mishmash reported by RCOM the stock trades at 50 percent of its book value. However, it takes optimal courage or enormous stupidity to trust any numbers provided by RCOM, their management or accountants.

So you gotta be industrial-strength dumb to buy 150 shares of RCOM. The second $15,000 investment reduces your basis to $179, but I think pigs will sooner learn to fly before your RCOM position returns to break even. And I suspect the pokes who run RCOM don't care a whit, a bit, a tot or jot if RCOM runs to $200 or falls to $20.

The best investment in India is not its stock market, which is down by 24 percent in the last 12 months, but a call center. A call center staffed with 26 cubicles will cost you about $11,000 per month (including leased equipment) and will earn close to $16,000 per month. Three of those call centers can produce $600,000 in annual profits. And in India, you can live like a caliph on that kind of money.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Wed, Apr 27, 2011

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