Morgan Stanley downgraded Google Inc a notch to equal-weight, saying the search giant's margins will shrink as it undertakes aggressive hiring and ramps up advertising for new products.

Given Google's aggressive hiring plans, rising compensation expense, and significant advertising spend on Chrome and other Google products, we expect EBITDA margin to decline in 2011 and 2012, Morgan Stanley analyst Scott Devitt said in a note.

Devitt also raised doubts over the ability of the company's newer businesses, such as DoubleClick, Android Market and YouTube, to add to its revenues.

We see lots of promise from Google's display/mobile/apps businesses, but we believe the consensus incorrectly attributes upside to those businesses and therefore may be overestimating their contribution in future periods, said the analyst, who slashed his target price on the company's stock to $600 from $645.

Shares of the company were down 2.5 percent at $533.12 in morning trading on Nasdaq. They earlier touched a low of $531.24.

(Reporting by Himank Sharma in Bangalore; Editing by Viraj Nair)

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