The Supreme Court's stance on adjusted gross revenue (AGR) is not only a blow to the telecom players, but also to some financial heavyweights, market experts and brokerages say.
Dealing a blow to telecom firms, including Vodafone Idea and Bharti Airtel, the Supreme Court of India on February 14 slammed telecom companies for not paying dues worth thousands of crores to the government and summoned their top executives to explain why they did not follow the court's order to pay up.
The apex court's rebuke to telecom companies had a domino effect on select financial heavyweights also as the Nifty Bank index fell 1.27 percent on February 14.
The Supreme Court's stance on AGR dues weighed on financial stocks because of their exposure to the sector as it will impact the asset quality of banks having decent exposure in the sector.
Experts are of the view that bank stocks will remain under pressure given high inflation and a feeble possibility of a rate cut by RBI in the near-term.
"The Supreme court ruling on telecom players instructing them to pay dues by March 17 will impact the asset quality of banks having decent exposure in the sector. Banks stocks will be under pressure given high inflation and RBI is unlikely to cut rates in the near-term," said Vinod Nair, Head of Research at Geojit Financial Services.
Sameer Kalra, Founder, Target Investing, has a similar view on financial firms.
"There will be some knee-jerk reaction to banks because the telecom industry does not provide a good asset for sale even if bankruptcy is ordered for any company. Banks might report higher provisions in Q4," he said.
Not only the analysts and industry experts, but even the bank chiefs have also begun to voice their concerns.
SBI Chairman Rajnish Kumar on February 15 said banks will "have to pay the price" in case any telecom firm files for bankruptcy.
"If there is a negative impact on any enterprise, it impacts a larger ecosystem, whether it is banks, whether it is employees, whether they are vendors, consumers, so everybody gets impacted. So, that impact, when it comes, we will have to pay the price," PTI reported Kumar saying so when asked about the impact on banks if telcos move towards bankruptcy.
Other than the State Bank of India (SBI), lenders like ICICI Bank, Punjab National Bank (PNB), Yes Bank and IDBI Bank also have exposure to Vodafone Idea.
Banks’ exposure to the telecom sector is broadly estimated to be at 1-2.5 percent of total exposure, with SBI having exposure at about 1.6 percent, ICICI Bank at 1.8 percent, IndusInd Bank at about 2.1 percent, Axis Bank at 2.5 percent and HDFC Bank at nearly 2.3 percent.
What should investors do now?
Media reports are suggesting the government could look at the encashment of bank guarantees of telecom companies for not paying up the AGR dues.
Also, experts point out that it is less likely that the Vodafone Idea will shut shop, giving a blow to banks.
"I think the government will intervene and Vodafone Idea will not go down. It will exist. In fact, their numbers were good in terms of data retention and an increase in subscription. Some of the banks have been prudent in taking a write-back, however, it is too early to expect that everything is written off," said Sanjiv Bhasin, Director at IIFL Securities.
Among all the banks, SBI is better placed for enduring this shock, said brokerage firm Motilal Oswal Financial Services.
"We believe that the SC verdict on AGR liabilities will further impact banks’ asset quality and could drive an uptick in credit cost over FY21. However in comparison to other peers, SBI has better ability to provide for the stressed telecom companies owing to its higher recovery potential from other stressed accounts or divestment in cards business," Motilal said.
All is not lost for banks. Some brokerages are advising to look at banks with a good retail franchise and a strong CASA.
"We prefer banks having a good retail franchise on the asset side and a strong CASA and retail term-deposit franchises on the liability front as the banking space is still plagued by asset quality challenges owing to a macroeconomic slowdown," said Centrum Institutional Research.
The brokerage firm said it prefers SBI and ICICI Bank among larger banks and Federal Bank among mid-cap banks.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.