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JP Morgan Downgrades Reliance Communications

May 7, 2007

JP Morgan [JPM] in a research note has downgraded Reliance Communications from Overweight to Neutral. The main reasons cited by the analysts are poor operating performance and higher valuations.

RCOM’s operating results were below estimates for the second consecutive quarter; 4Q FY07 consolidated revenues/EBITDA came in 2.7%/1.7% below estimates. JPM trims forecasts but raised price target to Rs525 from Rs475 previously, because of a 10% premium to DCF (to partly capture upside from the FLAG listing) and rollover to Jun-08 from Dec-07.

JPM forecast 2-year (FY07-09) EBITDA CAGR of 35% for RCOM versus 44% for Bharti. At JPM’s price target, RCOM would trade at a 16% discount to Bharti on FY08E EV/EBITDA. RCOM stock is likely to trade in a narrow range without further rerating in sector (Bharti) valuations or until the company starts exceeding consensus estimates. JPM downgrades RCOM to Neutral from Overweight noting unattractive relative valuations and only 10% absolute upside potential versus our revised target price of Rs525/share for Jun-08.

Buy RCOM stock at/below Rs400 level. On the other hand, if the share price were to exceed Rs500 level in the near term, book some profits.

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