New Delhi/Mumbai: The financial statements of Reliance Communications Ltd (RCom), the subject of a special audit by the government, have been questioned further by Citi Investment Research and Analysis.

The Citigroup unit, which reviewed the Reliance-Anil Dhirubhai Ambani Group company’s accounts for 2008-09 and the first quarter of the current fiscal year, said the divergence between revenue reported to the Telecom Regulatory Authority of India (Trai) and to the stock exchanges has widened significantly.

The difference increased from Rs2,570 crore (17%) in FY08 to Rs4,360 crore (25%) in FY09 and further to an “alarming" Rs1,740 crore (36%) in the first quarter of FY10, according to the report, released on Wednesday, by Citi analysts Rahul Singh, Gaurav Malhotra and Anand Ramachandran.

The revenue reported to Trai, the so-called adjusted gross revenue, or AGR, is used to calculate the amount the company pays the government as licence and spectrum fees.

The report added that while data and value-added services (VAS) revenue would have increased during this period, “this alone seems inadequate to explain the widening difference, thus amplifying these concerns beyond FY08, with a potential impact on valuation".

Citi has a “sell" rating on the stock with a target price of Rs210. RCom’s stock fell 2.5% to Rs203.05 on the Bombay Stock Exchange on Wednesday. The benchmark index, the Sensex, dropped 0.43% to 16,283.49 points.

RCom denied any wrongdoing on its part, saying that the findings of the Citi report are “relying on the incorrect, biased and prejudiced special audit report".

The department of telecommunications (DoT), which had ordered the special audit into the company’s statements for the two fiscal years to March 2008, may extend the scope of the review. After the RCom audit was ordered, DoT decided to apply the same check to all telecom companies.

“There is a proposal for extending the years that are being audited," a senior DoT official said on condition of anonymity, as he is not authorized to speak to the media. “We will wait till all the audit reports are submitted and studied before taking a call on that. That should take another two or three months."

The DoT audit of RCom by Jaipur-based Parakh and Co., submitted on 9 October, said that the company may have underpaid licence and spectrum fees to the tune of around Rs316 crore. There was a difference of Rs2,915 crore in the revenue reported to the regulator and stock exchanges, with the bourses being given a higher figure, according to the audit report, which was reviewed by Mint.

The special audit was ordered after the securities research divisions of Kotak Securities Ltd (in June 2008) and UBS Securities published reports saying that there were discrepancies in the numbers reported by RCom to Trai when compared those reported to the stock exchanges.

RCom booked certain revenue items totalling Rs2,650 crore in FY08, which appear to comprise either one-off items (sale of debtors, sale of expired prepaid cards, refunds) or non-wireless items (handset sales/incentives, dealer network sharing and foreign sub-income), the Citi report says. This is key to the revenue reconciliation, it adds.

If the audit report is correct, “we estimate this may have resulted in ‘true’ mobile Arpu (average revenue per user) and Ebitda (earnings before interest, taxes, depreciation and amortization) being lower by 15% and 26%, respectively, in FY08," the Citi report points out. “They (Citi) have been very fair. We have also done the studies and found these differences. There are issues with the entries in the balance sheet and not with revenues reported from other businesses. VAS or data revenues cannot be higher than the industry’s numbers," an analyst with the Mumbai-based branch of an international brokerage firm said on condition of anonymity, as he is not authorized to speak to the media. “There is definitely a penalty they would have to pay in terms of licence fee and spectrum charge. The clarification that they gave does not match the data."

The special audit and the ongoing tariff war in the Indian telecom sector were among factors making it hard to assess the financials of the company, said a Singapore-based sector analyst with a foreign brokerage, who declined to be named, citing his firm’s policy.

“There are so many unknowns, quite a few overhangs and we don’t know what to recommend to the investors unless we get more clarity from the company," he said. “The difference (in revenues) was known for long but it is increasing in magnitude and that is a matter of concern. We are looking to the quarter results and interaction thereafter" to get some answers.