Morgan Stanley downgrades RComm, Idea Cellular

Higher regulatory risks tied to spectrum auction, weak 3G outlook pull ratings down

Analysts at some of the leading foreign brokerages have downgraded Indian telecom stocks and slashed their price targets as heightened regulatory risks put a question mark on their business models.

Morgan Stanley on Tuesday downgraded Indian telecom sector to “in-line” from “attractive” citing increased regulatory risks and relatively weaker 3G outlook.

“The regulatory risks prevailing in the industry largely offset the upside from operationally strong performance likely to be delivered in the form of traffic growth 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.  The brokerage also downgraded Idea Cellular to “equalweight” from “overweight” and cut its price target for the stock to Rs 87 from Rs 134.    
 
Morgan Stanley retained its “overweight” rating on Bharti Airtel due to its stronger balance sheet and cash flows, but reduced its price target to Rs 366 from Rs 488 earlier.

According to Morgan Stanley analysts, Telecom Regulatory Authority of India (TRAI) has suggested too high a price for future spectrum. “TRAI’s current recommendation is 9 times higher for 1800 MHz than the global average of about $79 million (Rs 435 crore) and 18 times higher for 900 MHz. This could equate to about $63 billion (Rs 3,49,776 crore) for the industry, more than twice of current wireless revenues,” they said.

On April 23, TRAI had recommended a reserve price of Rs 3,622 crore for one MHz of spectrum. The Telecom Commission last week put the onus of deciding the contentious issue of the base price for auction of 1,800 MHz of 2G band spectrum on the Empowered Group of Ministers (EGoM) headed by Finance Minister Pranab Mukherjee.

Last week, Goldman Sachs had downgraded RComm and Idea on rising regulatory risks. The foreign brokerage had cut its rating on RComm to “sell” from “neutral” and reduced its price target to Rs 50 from Rs 79. It had downgraded Idea to “neutral” from “buy” and cut its price target to Rs 80 from Rs 112.

Like Morgan Stanley, Goldman analysts had also retained their “buy” rating on Bharti, but reduced their 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 for most of the operators,” Goldman analysts had said in their report.