The week began with a bang as key indices hit fresh intraday all-time high levels on Monday. However, the Supreme court’s ruling which termed the allocation of coal blocks post 1993 as “illegal” proved a sucker punch for market and a knockdown for metal and power stocks such as Jindal Steel and Power that day, setting the precedent for the remaining week.
For the truncated week ended 28 August, both Nifty and Sensex managed to eke out 0.5-0.8percent gains amid the volatility due to August series Futures and Options (F&O) contracts expiry on Thursday. Strong rollovers in Nifty index, from the August series into September indicate that market participants continue to remain bullish.
The benchmark Nifty swelled almost 3percent in the August F&O series, marking its consecutive seventh win in month-to-month F&O contracts trading. Benchmarks swelled over 2 percent, in the month of August, owing to continued FII investments and buying by domestic mutual funds .
Foreign Institutional Investors’ (FIIs’) unwavering faith in Indian market continued. Foreigners bought stocks worth Rs 1,478.58 cr (ex-Thursday) in the week, according to SEBI data. But for the month of August their investment stood at Rs 6,408.15 cr, at its lowest levels in the last five months which could be on account of fewer working days due to public holidays.
Gautam Chaocharia of global investment bank -UBS- has a December 2014 Nifty target of 8000; said will continue to be a buyer in cyclicals like financials and PSU banks.
SC sucker punch
The apex court said that the screening committee in its 36 meetings since 1993 had allocated 218 coal blocks to private players and PSUs, which lacked transparency norms.
The court is set to give its verdict on the fate of blocks on September 1, post which the impact on respective companies would be assessed.
Unsurprisingly, the biggest loser blue-chip loser of the week was JSPL, which nose-dived over 22 percent post SC order. On JSPL, Morgan Stanely believes the potential hit could be approx 34 percent on the stock’s fair value while it could hit FY16 EPS by 29percent.
Edelweiss also said that coal purchased at market price could hit consolidated FY16E EBITDA by 20 percent or more.
BSE power and metal indices fell between 3 – 4.6 percent. From the packs, stocks such as Tata Steel, Sesa Sterlite, Hindalco and Tata Power shrunk between 4.6-7.6 percent. Adani Power was down 14 percent.
In an interview to CNBC-TV18, Ravi Uppal, MD, JSPL, said investments worth around Rs 250,000 crore is at stake. “Hundreds of thousands of people are employed by this group so I don’t think Supreme Court has done any consolation.”
“The coal blocks given to us had coal of extremely inferior quality with ash running between 45 percent and 50 percent. And when the list was drawn up in 1993, these coal blocks were among the list which were not on the agenda of production of Coal India and its subsidiary SECL. So they were not even considered worthy of production. That is why it was given to private companies. We happened to be the one who took the coal out of this ash. Normally you talk of ash in coal, but here in the blocks we had coal in ash,” he said.
Banking stocks’ double whammy
Investors factored in a potential hit to banks on account of their exposure to SC coal ruling-related power and mining companies and a scam that hit PSU banks.
It is estimated that PSU banks’ exposure to metals/mining stands 5-10percent as compared to private banks’ at 1-6 percent.
Amongst public lenders, SBI, PNB and Union Bank are expected to have highest exposure to power and steel. PNB and Bank of Baroda tanked 3.7-5.3 percent, during the week.
SBI said that its exposure to Power Sector stood at Rs 92,000 Cr. The public lender said that it “expect(s) SC To come Out with a workable Strategy.” It bank fears a negative outcome on September 1 could lead to higher refinancing/ restructuring Of loans.
Bank of Baroda said that it’s exposure to power sector stands below 7percent and iron & steel sectors at around 5.25percent of loan book. They do no anticipate the SC ruling to surprise negatively.
Analysts also estimated that around $ 10-12 billion of loans extended within captive power could be at risk, should the verdict on September 1 were to scrap coal block allocations.
PSU banks came under selling pressure on Thursday after reports revealed that the Economic Offence Wing (EOW), Mumbai, is probing the role of public sector banks relating to the fixed deposit (FD) scam.
It’s raining scams on banks
Sources told CNBC-TV18 that there was a fraud on loan against Fixed Deposits in the Malabar Hill branch of Dena Bank. The misappropriation of funds was estimated to be around Rs 180 crore. When investigated further, the Mumbai EOW found that the scam was spread across various state-owned lenders. It is being estimated to be worth more than Rs 800-1,000 crores.
Around 10 FIRs were registered against many individuals and some public sector bank officials which included employees of Vijaya Bank, Dhanlaxmi Bank , Indian Overseas Bank (IOB) and Dena Bank, among others . Meanwhile, finance ministry’s order of a forensic audit in non-performing assets (NPAs) of UCO Bank was also a negative overhang for PSU bank sector stocks in general. For the week, CNX PSU Bank slipped 5 percent.
Return of the defensives
Market participants took a defensive stance this week as BSE IT, Pharma and FMCG indices gained between 1.3-3.2percent, significantly outperforming the benchmark Sensex’s 0.5percent performance.
DLF dragged the BSE Realty index lower this week. DLF crumbled 9percent this week after SC upheld CCI’s decision (Aug 2011) to slap the Gurgoan-based construction heavyweight with a Rs 630 cr fine and asked the company to deposit the fine within three months. The total fine of Rs 800 cr included penalty of Rs 630 cr and interest amount to 10 percent of its FY14 revenue.
Broader markets came under selling pressure as both BSE small-cap and mid-cap indices fell between 0.5-0.8percent. Suven & Shriram EPC up from the space surged 24percent each. Shriram EPC surged as media reports suggested that the corporate debt restructuring (CDR) cell approved Rs 2,530-cr debt recast proposal of the company.
Scam hit Bhushan Steel continued to slide, sinking 18 percent this week.
Busy Monday ahead
After a long weekend, market stakeholders should brace themselves for a spate of data hit. Market will factor in the impact of SC ruling on coal blocks allocation, Q1 GDP numbers (to be released on Saturday) auto sales numbers for the month of August. A CNBC-TV18 poll estimates the first GDP print of the Modi government is set to be at its highest levels in last 10 quarters at 5.8 percent versus 4.7percent y-o-y.