Morgan Stanley: Telecom, real estate and utilities have stressful balance sheets
Moneylife Digital Team 06 September 2012

A new report released by Morgan Stanley Research has found out that Bharti Airtel, DLF, Adani, Lanco Infratech, Aditya Birla Nuvo, Indiabulls Power, Jaiprakash Associates are at high risk of deterioration

Arecent research report by Morgan Stanley Research (Asia), titled, “Where Is The Balance Sheet Stress?” used the Altman Z-score methodology for measuring the strength of company balance sheet and found out that telecom (2.13), utilities (1.53) and real estate (2.21) have high balance sheet ‘stress’ while information technology (8.87), consumer staples (7.70) and consumer discretionary (5.12) have the strongest balance sheets. However, it found out that, on an overall basis, the Altman Z-score for the entire universe was 3.21, which largely remained the same from last year. Balance sheet is crucial for stock picking, whether you’re a growth or value investor. The report said, “Balance sheet stress is a cyclical factor in stock picking—it comes to the fore in a rising rate and slowing growth environment. The market’s preference for quality will shift if rates soften further and growth bottoms out.”

Altman Z-score is a quantitative methodology used to measure risk of bankruptcy by quantifying various parameters of the balance sheet. According to the report, a company is considered “safe” when the score exceeds 3.0, while anything below 1.8 would imply increased probability of financial stress. The formula for arriving at Z-score for services companies was tweaked and anything above 1.6 was considered “safe”, while south of 1.1 was considered risky. Methodology tweaked as balance sheets of services and banking are inherently different from manufacturing and industrials.

According to the report, it found out that 17 companies have Altman Z-scores of less than 1.8 and had serious balance sheet issues. Some of these were Adani Enterprises (1.53), Adani Power (0.52), Jaiprakash Associates (1.48), Indiabulls Power (0.64), IL&FS Transportation Networks (1.39), Lanco Infratech (0.88), IRB (1.36) and Bharti Airtel (1.53). These companies had both balance sheet and cash flow problems. The companies which were “border-line” (i.e. having Altman Z-score between 1.8 and 2.2) were Tata Power (1.87), DLF (1.93), Reliance Infrastructure (2.17) and NTPC (2.20), to name a few.

Not surprisingly, companies which had fantastic balance sheets (i.e. high Altman Z-score) were usually the fast moving consumer goods companies as well as information technology. Colgate Palmolive was the highest (a whopping 28.29 Z-score), followed by Hindustan Unilever (27.86), Jubilant FoodWorks (19.56), Nestle India (15.92), Titan Industries (12.16), Infosys (11.56), ITC (11.00) and Infotech Enterprises (10.28), to name a few. Likewise, these companies had no problems with refinancing whatsoever.

Gaurav Parikh
9 years ago
Morgan Stanley Research is pretty mediocre at best ~ In May 2011 they predicted on a modified earnings yield basis a Sensex of 30000 by Dec 2012 ! It was @ 18000 then
Even their Wealth Creator Ideas in December 2011 of OnMobile Global @ Rs 66 and Jain Irrigation @ Rs 120 + (Enam too was heavily bullish here) have sunk 50% inside 9 months while Sensex and Nifty have held levels ~ Wonder what their Alt-Z scores were and what are they saying about these now ! ~I have differed on both their macro and micro calls and have commented on these on my blog for those who care to visit it for my fundamental reasons ~ use the search engine on the blog for quicker access to the relevant posts ~ Cheers !
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