Analysts at some of the leading foreign brokerages have downgraded the country’s leading telecom stocks and slashed their price targets, as heightened regulatory risks have raised questions on the viability of most operators’ business models.
Morgan Stanley today downgraded the Indian telecom sector to ‘in-line’ from ‘attractive’, citing increased regulatory risks and a relatively weaker 3G outlook.
“The regulatory risks prevailing in the industry largely offset the upside from the operationally strong performance likely to be delivered in the form of traffic and Ebitda growth,” Vinay Jaising and Anirban Roy, analysts at Morgan Stanley, said in a report. “We would advise investors to avoid companies with relatively weak balance sheets.”
Morgan Stanley reduced its rating on Reliance Communications (RComm) to ‘underweight’ from ‘equalweight’ and slashed its price target to Rs 51 from Rs 109. It cut Idea Cellular’s rating to ‘equalweight’ from ‘overweight’, reducing its price target to Rs 87 from Rs 134.
Even as it retained its ‘overweight’ rating on Bharti Airtel due to its stronger balance sheet and cash flows, it reduced its price target to Rs 366 from Rs 488.
According to Morgan Stanley analysts, the Telecom Regulatory Authority of India (Trai) has suggested a very high price for future spectrum. “Trai’s recommendation for 1,800 MHz is nine times higher than the global average of $79 million (Rs 435 crore). For 900 MHz, it is 18 times higher. This could equate to $63 billion (Rs 3,49,776 crore) for the industry, more than twice the current wireless revenues,” they said.
On April 23, Trai had recommended a reserve price of Rs 3,622 crore for one MHz of spectrum. Last week, the Telecom Commission put the onus of deciding upon the contentious issue of the base price for auctioning 1,800 MHz of 2G band spectrum on an Empowered Group of Ministers (EGoM) headed by Finance Minister Pranab Mukherjee.
Last week, Goldman Sachs had downgraded RComm and Idea on rising regulatory risks. It cut its rating on RComm to ‘sell’ from ‘neutral’ and reduced its price target to Rs 50 from Rs 79. Idea was downgraded to ‘neutral’ from ‘buy’ and the price target cut to Rs 80 from Rs 112.
Like Morgan Stanley, Goldman analysts also retained their ‘buy’ rating on Bharti, but reduced the price target to Rs 360 from Rs 420.
“Telcos may be asked to pay a higher amount for spectrum in the upcoming 2G auction, as well as when the spectrum comes up for renewal. Such a scenario would likely raise questions on the viability of the business models of most operators,” Goldman analysts had said in their report.
Telecom stocks have underperformed the benchmark indices ever since Trai’s recommendations were out. Since April 23, RComm has slumped 19.08 per cent, Idea has lost 6.43 per cent and Bharti has fallen 4.06 per cent. The Bombay Stock Exchange Sensex, which last closed at 16,438.58, has declined 4.06 per cent during the period.
Morgan Stanley analysts believe the prevailing prices of telecom stocks do not fully reflect the regulatory risks. “We believe there is a lot more pain in store than the market is currently pricing in. We expect the industry, having finally turned free cash flow (FCF) positive in Q3 FY12, will again turn FCF- negative in the second half of FY13 due to spectrum-related payments to renew licenses,” they said.