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‘Adverse AGR judgment can hit SBI, HDFC Bank, Axis Bank, Yes Bank’

State Bank of India, HDFC Bank, Axis Bank, Yes Bank, which have high loan exposure to telecom companies, will bear the brunt if the order goes against service providers.

June 23, 2020 / 01:01 PM IST
 
 
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An adverse AGR judgment against banks can not only affect their operating profits for the next financial year due to the interest foregone during the moratorium period but will also impact their stability, Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor, tells Moneycontrol’s Kshitij Anand in an interview. Edited excerpts:

Q) We are again above 10,000 levels but the Nifty is facing some resistance above 10,200. What led to the rally on D-Street in the week gone by despite a spike in coronavirus cases, Fitch downgrade and the India-China border dispute?

A) Fitch Ratings revised the outlook for India to negative from stable on June 18, 2020. The Nifty closed higher that day as investors were optimistic about the outcome of FM Nirmala Sitharaman's press conference.

The latest developments on the AGR (adjusted gross revenue) payment dues, wherein the Supreme Court allowed more time to the Department of Telecommunications to review the payment proposals by telecom companies, also helped to keep the trend on positive grounds.

A rally by the two Bajaj twins in the BFSI segment helped the D-Street close above the 10,000 mark that day.

Domestic markets registered sharp gains on June 19 backed by strong buying interest in financial and energy stocks, amid gains in global markets on hopes of a recovery from the damage caused by the coronavirus pandemic.

The Nifty50 ended with over 1.5 percent gain on June 19 and ignored the potential fallout of India-China tensions and the rising viral infections to close well above its 100-DMA.

Close

The gains were led by Reliance Industries, which alone contributed to half of the gains for the Nifty. Global cues also supported markets to close out a news-heavy week.

Geo-political tensions may increase volatility in the markets and investors are advised to watch out for the same.

Q) What are the important levels that investors should watch out for in the coming week, which is also an expiry week?

A) On the weekly chart, the index has formed a bullish candle. For the moment, the Nifty is heading to its recent high of 10,328, and if it continues to sustain above these levels, the index may touch 10,500 and 10,750 and on the lower side, 10,000 will be the key support.

The market has been ignoring the India-China border tension and the increasing number of cases in India but traders should watch these two closely in the coming weeks.

Q) The big news of June 19 was RIL, which has become debt-free and proposes to list Jio and Retail business in the next five years. What is your view and do you think it warrants rerating of the stock?

A) On Friday, the oil-to-telecom behemoth chairman announced that Reliance Industries had become debt-free, which resulted in a jump of more than six percent in the share price on the benchmark index with a new high of around Rs 1,788.

Within a short period, say 59 sessions, RIL doubled the wealth of the shareholders that, too, during a pandemic. RIL has become India’s first $150-billion company. In Indian currency, the valuation is more than Rs 11 lakh crore.

To make RIL debt-free by March 2021, Ambani-led company raised more than what was required through various investments and a rights issues.

It raised Rs 1.15 lakh crore through global tech investors and another Rs 53k crore from the right issues, which together made up Rs 1.68 lakh crore.

With investors like Facebook, which is a tech giant, it indicates the future of the company may be focussed more on digital and retail segments and its vision to become the leader in these sectors.

Q) Small & midcaps outperformed the benchmark indices in the week gone by. Is valuation fuelling optimism in the small & midcaps space?

A) It has not been a pleasant experience for smallcap and midcap stocks due to the coronavirus pandemic for the past few months.

The Indian economy saw the sharpest monthly downfall in March after 2008 which also had a huge impact on small and midcap stocks. Prices of most of these stocks nearly become half due to the crisis.

But, in the past three months small and midcap indices had recovered almost 20-25 percent from the lows seen in March. These stocks got investors’ attention as most of them were undervalued.

Hence, investors started putting money into these stocks. But valuation tactics didn’t pull up the prices; it is also due to the current rally in the market.

A number of investors who lost money in the crisis started to recover their losses when the market started moving up.

Q) What is your call on the telecom space following the AGR hearing? Banking and financial stocks did well on June 18.

A) The Supreme Court heard the AGR matter related to a petition filed by the Department of Telecommunications which lashed out against telecoms and deferred the hearing to July last, after some banking and financial stocks rallied. Bajaj Finance share price surged over 5 percent followed by the other top gainers like Kotak Bank and SBI.

The total AGR dues of telecoms amount to around Rs 1.47 lakh crore and if the order asks them to pay dues upfront or provides a shorter time frame, it will have a major impact on their annual cash flows.

Among the top service providers, the major impact will be on Vodafone-Idea, which already has a weaker balance sheet. Also, any adverse judgment against banks could not only affect their operating profits of the next financial year due to the interest foregone during the moratorium period but will also impact their financial stability.

Major stocks to get impacted are State bank of India, HDFC Bank, Axis Bank, Yes Bank, etc. that have higher loan exposure to telecom companies.

Q) How do you view Dixon Technologies, GMM Pfaudler and Adani Green? These stocks have been hitting fresh 52-week highs almost daily. What is driving the rally in these pockets, fundamentals or is it technical?

Dixon Technologies 

The rise in the share price of Dixon Technologies was backed by the announcement that Samsung is set to bring down the tally of TVs imported from its plants in other countries and locally manufacture almost 85-90 percent of the televisions they sell in India, expanding their partnership with Dixon Technologies.

Dixon's revenues were in line with expectations. For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 857.41 crore, down 13.72 percent from last quarter sales of Rs 993.81 crore and down 0.16 percent from last year's same quarter sales of Rs 858.82 crore.

The company reported net profit after tax of Rs 27.58 crore in the latest quarter. The PLI scheme could be a game-changer if Dixon is able to add large customers.

As India is expected to become a hub of contract manufacturing for consumer electronics, the outlook for Dixon Technologies seems positive for the future.

GMM Pfaudler 

GMM Pfaudler share price has surged 137 percent to Rs 4,629 in 2020, so far. However, from January 1 to March 23 period, this stock was up just 7 percent.

It is a leading supplier of process equipment to the pharmaceutical and chemical industry segments. The company’s order book continues to remain healthy on the back of strong demand from the chemical and pharmaceutical sectors. Hence, the surge in its stock prices was the result of its strong fundamentals.

Adani Green 

This stock has appreciated 209 percent in the past three months. The firm bagged “the world’s largest solar tender” from the Union government to construct an 8-gigawatt (Gw) photovoltaic power plant and set up a 2 GW solar cell and module manufacturing capacity in five years.

This will entail an investment of Rs 45,000 crore at a time when companies in almost all sectors are looking to cut down capital expenditure.

The company is now the largest renewable power generator in the country, with 15 Gw of renewable capacity in various stages of development.

It has also reported an improvement in operational performance with EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin increasing to 91 percent in March 2020 quarter from 89 percent in December 2019 quarter. All these factors led to an increase in the share price.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
Kshitij Anand is the Editor Markets at Moneycontrol.
first published: Jun 23, 2020 01:01 pm

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