Lenders have an exposure of more than Rs 5,000 crore to these accounts and more than 60% of which have been identified as NPAs.
The Reserve Bank of India (RBI) last week sent bankers the list of 12 stressed accounts that they must resolve through the Insolvency and Bankruptcy Code (IBC), sources privy to the developments told CNBC-TV18.
The 12 accounts are Essar Steel, Bhushan Steel, Bhushan Power, Alok Industries, Electrosteel Steels, Jaypee Infratech, Lanco Infratech, Monnet Ispat, Jyoti Structures, ABG Shipyard, Amtek Auto and Era Infra, they said.
The share price of companies which are listed plunged on Friday soon after the news came on top business news channels. Some companies are not listed on exchanges which include names like Essar Steel and Bhushan Power.
Lenders have an exposure of more than Rs 5,000 crore to these accounts and more than 60 percent of which have been identified as non-performing assets. The RBI on Tuesday had said it had identified 12 stressed accounts that would need to be resolved via the IBC.
The total exposure to the companies stands at about Rs 2 lakh crore, in comparison with the gross NPA tally of Rs 7 lakh crore in the banking sector. Bhushan Steel with a gross debt of over Rs 44,000 crore is most likely the single largest exposure that lenders have on their books, Moneycontrol reported.
“Referring these 12 accounts to NCLT for adjudicating insolvency and bankruptcy procedure will help banks to resolve bad asset issues. Many assets will be up for sale at a discounted price as bankruptcy code is aimed to resolve the bad assets problem and revive the company in a timely manner,” Abnish Kumar Sudhanshu, Director & Research Head, Amrapali Aadya Trading & Investments told Moneycontrol.
“On the technical front most of these stocks are trading at their lifetime lows and lacking investor interest. They will retaliate on significant development if any new investor comes in,” he said.
The quoted prices for most of these companies reflect the heavily indebted nature of these enterprises, as well as the very risky nature of the investment. Leverage is a four-letter word when it comes to markets, and it works great on the upside but can kill a business on the downside, say, experts.
“We would classify these stocks as speculations rather than investments, given the high degree of risk of going into insolvency and liquidation. Any investor holding positions in these companies is likely sitting on substantial losses,” Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management told Moneycontrol.
“The question that needs to be answered is whether the negotiation will lead to a restructuring of debt and a haircut to allow these entities to sustain as ongoing operating entities or if negotiations will lead to liquidation,” he said.
In the case of liquidation, there will be a complete loss for equity holders. Sharma further added that being risk-averse investment advisors, we never recommend investments that carry the risk of complete loss of capital.
If negotiations lead to a haircut, and a sustainable operating business model, then some of these opportunities will be attractive investments, he said.
What should investors do?
All the stocks from the list are significantly beaten down counters. Some of them have not been traded on the exchanges for a while now.
“In terms of trend, these stocks are in bearish trend on various time frames. The definition of Technical Analysis suggests riding on the trend till weight of evidence proves that trend has been reversed,” Gaurav Ratnaparkhi, Senior Technical Analyst, Sharekhan told Moneycontrol.
The majority of these counters were out of favour for quite a long time and few were delisted or suspended from trading. There shouldn’t be any further panic or pain for investors at this juncture as prices appeared to have already factored in this kind of event much earlier.
Bankers have been given 15 days to take legal recourse on the six stressed accounts to be admitted under the Insolvency and Bankruptcy Code (IBC).
The 6 of the 12 companies, with a combined debt of about Rs 1.9 lakh crore, include Essar Steel, Bhushan Steel, Bhushan Power & Steel, Monnet Ispat, Alok Industries and Electrosteel Steels.
“Stock like Bhushan Steel which doubled from panic bottom of Rs.32 registered in March 2016 are technical can be classified as somewhat stronger and hence investors can hold with a stop below 200-Day Moving Average whereas relatively new investors in these counters should immediately exit,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in told Moneycontrol.
“As the entire metal sector is looking somewhat promising and suggesting more upsides individual scrips like Electro Steel Casting, Monet Ispat can also be held till 200-day moving averages are breached on a closing basis,” he said.Whereas counters like Jyoti Structures and ABG Shipyard which has surprisingly shown positive tick despite this kind of news should be exited on rallies, suggests Mohammad. In the case of Jyoti Structure investors should try to exit around 12.50 levels, he said.