Morgan Stanley Downgrades India's Telecom Sector; Reliance Communications, Idea Shares Fall

By : Subscribe to ambrosia's | May 29, 2012 5:05 PM IST

India's telecom industry suffered a blow on Tuesday, with Global firm Morgan Stanley downgrading its outlook on two of the nation's telecom companies.

The international brokerage slashed its ratings for the companies from "attractive" to "in-line". It gave Reliance Communications  an "underweight" from "equalweight" view, and Idea Cellular an "equalweight" from a previous "overweight" outlook.

Morgan Stanley said that the downgrade for Reliance Communications was on account of a weak balance sheet and the high regulatory risk the company is enduring. The Investment bank cut back its target price to 51 rupees from the earlier 109 rupees.

On the other hand, Idea Cellular's target price was cut down to 87 rupees from 134, with Morgan Stanley citing "regulatory risks, smaller balance sheet and a 32 percent outperformance in the last 12 months" as reasons for the downgrade, the bank said according to the Economic Times.

Bharti Airtel also had its target price reduced to Rs 366 from Rs 488, but has retained the "overweight' rating on account of increased cash flows and a better balance sheet.

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"Increased interest outgo led by huge debt levels continued to impact these companies' performance despite an incremental topline and operating profits. However, on the operational parameters these companies performed well with strong volume growth on their networks," analyst Nitin Prakash Daga of Microsec Capital said according to the publication.

"With the regulatory environment staying uncertain, the performance of the stocks in the sector may remain under pressure in near term," Daga added.

Companies' shares dropped low on Tuesday morning's trade. Reliance Communication was trading 1.1 percent lower at Rs 66.60, while Bharti Airtel was trading 0.6 percent lower at Rs 300.40 with Idea Cellular at Rs 78.50, down by 1 percent.   

Meanwhile, the  Empowered Group of Ministers on June 5 will take a call on the base price of the spectrum to be auctioned off. Sectoral regulator Trai suggested a starting price of Rs. 3,622.18 for one megahertz, which is about 10 times the base price of the basic band airwaves that was allocated in 2008, Press Trust of India said.

"Telecom regulators are suggesting too high a price for future spectrum, we believe. TRAI's current recommendation is 9x higher for 1800MHz than the global average of $79 million and 18x higher for 900MHz. This could equate to $63 billion for the industry, more than twice the current wireless revenues," the Economic Times quoted the report of the investment bank.

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