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23 Sep 2020 by Pradeep U
Why Investors Lost Money in the Stock of RCOM? - Research & Ranking

“Karlo duniya muthi mey”

The above tagline of Reliance Communications (initially known as Reliance Infocomm) meant “Capture the world in your fist”.

With a disruptive pricing strategy, Reliance Communications (RCom) had indeed managed to capture a significant chunk of India's telecom sector by providing cheap data and calls to millions of subscribers.

The year was 2003 and the tariff structure of 10 paise for talking 15 seconds offered by the company was unheard of before in the Indian telecom sector. The company had ushered a revolution making mobile phones affordable for a majority of Indians in line with Dhirubhai Ambani's vision of telecommunications for all.

Sixteen years later in 2019, the company shut down its telecommunications business and filed for bankruptcy.

So, what went wrong with the stock of RCom?

After a split in the Reliance Group in 2005, the telecom business went to Anil Ambani group of known as ADAG (Anil Dhirubhai Ambani Group) along with financials and energy business while Anil's elder brother Mukesh Ambani retained the petrochemicals business. However, the majority of users were on CDMA technology, while competitors in the market were using GSM technology.

Not wanting to miss out, Reliance Communications rolled out GSM services coupled with an aggressive pricing strategy in limited circles.  By the end of 2008, RCom’s GSM services covered 11,000 towns and 340,000 villages, while CDMA services were offered in 20,000 towns and 450,000 villages. Further to encash on the opportunity in the 3G segment, Reliance Communications spent Rs 8,500 crore to buy 3G spectrum in over 13 circles in India.

The gamble paid off, and by 2010, Reliance Communications had a subscriber base of over 100 million. However, all this came at a high cost. 

Reasons for the downfall of RCom:

Delay in adopting new technology

While starting, Reliance Infocomm chose CDMA technology, which paralleled the GSM (Global System for Mobile) platform, used by competitors to a great extent but at a cheaper cost. However, CDMA technology had certain limitations restricting it to 2G and 3G technology in telecommunications. When other telecom operators started rolling out 4G services in India, RCom began to lose the plot.

While GSM technology advanced with passing years and became the most preferred platform for telecommunications, RCom was not ready to shift entirely from CDMA to GSM technology. As a result, its demand also started decreasing gradually.

Heavy debt

Telecom sector is highly capital-intensive sector which needs massive investments. It is estimated that almost 50% of RCom’s debt was incurred for purchasing spectrum. To fund its mega expansion plans, RCom had taken huge debts which kept piling with time. A series of failed mergers which included the merger of RCom and Aircel only further added to the company’s woes.  As per media reports, RCom’s merger with Aircel and its tower sale to Brookfield was expected to reduce the company's debt by almost 60%. This dealt a severe blow to RCom as it had a lost a significant opportunity to reduce its debt.

Intense competition in the telecom segment

RCom had to face intense competition from other players in the market such as Bharti Airtel, Vodafone and Idea, which were separate companies before the Vodafone-Idea merger took place apart from several other regional telecom operators. The final nail in the coffin came from the launch of Reliance Jio in 2016, which offered high-speed 4g data bundled with free voice calls at dirt cheap rates.

Bottom line

RCom could have become what Reliance Jio is today with right strategy at the right time. However, failure to adopt new technology, a piling mountain of debts and few bad decisions resulted in its downfall.

At its peak, stock of RCom was trading at a price of Rs. 844.70 on 10th Jan 2008. Today the share price of RCom hovers around the Rs.2 level after touching a 52-week low of Rs. 0.55. An investment of Rs. 1,00,000 made in Jan 2008 in the stock of RCom would be worth just Rs. 236. And yes, many investors have indeed lost money in the stock of RCom just like in the stock of Kingfisher Airlines. Read more about that story here.

It is said that "When you lose, don't lose the lesson". A majority of investors may have forgotten what happened to the stock of RCom, but the same story is played out regularly when people invest in stocks with poor fundamentals or remain invested in stocks which have lost their fundamentals.

An important lesson for investors here is that don't invest blindly based on the brand name. No company is failure-proof in this every changing world of technology and human choices. After investing in a company's stock, it is equally important to keep track of how the company's performance from time to time. Most importantly, never put all your eggs in one basket. So, diversify your portfolio adequately by having a mix of different sectors and stocks to reduce the risk and maximize the gains.

Click here if you wish to invest in a well-diversified portfolio of 20-25 multibagger stocks.

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