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Business News/ Market / Stock-market-news/  Debt-heavy stocks hit hard in market rout

Debt-heavy stocks hit hard in market rout

Steep fall in shares of mid-cap, small-cap firms comes day after RBI hints room limited for more rate cuts

These stocks are down because companies loaded with debt may find it difficult to restructure until interest rates come down, according to an analyst. Photo: Pradeep Gaur/MintPremium
These stocks are down because companies loaded with debt may find it difficult to restructure until interest rates come down, according to an analyst. Photo: Pradeep Gaur/Mint

Mumbai: Markets on Wednesday punished companies that soaked up debt during better times and those with wobbly fundamentals, on worries there won’t be any interest rate cuts in the near future to help prop up their fortunes.

Stocks of Jaypee Group companies, Suzlon Energy Ltd, Unitech Ltd, IVRCL Ltd, DLF Ltd and GTL Ltd fell 10-40% during the day.

The steep fall in shares of mid-cap and small-cap companies came a day after the Reserve Bank of India (RBI) flagged monsoon risks and indicated it will wait for more data before making any rate decision. Sensex, the 30-share equity benchmark of the BSE, fell 661 points, or 2.37%, on Tuesday, despite a 0.25 percentage point cut in repo, or the rate at which the central bank lends to banks.

The fall continued on Wednesday.

The Sensex closed 351.18 points, or 1.29%, lower at 26,837.20 points, its lowest close since 7 May. The index has now lost more than 1,000 points in two sessions. The National Stock Exchange’s 50-share Nifty closed 101.35 points, or 1.23%, lower at 8,135.10 points.

The mid-cap and small-cap indices of BSE fared worse, dropping 1.4% and nearly 2% respectively.

“I don’t think the pain is over for now, for the only thing that could have been a saving grace for the markets would have been a dovish stance by RBI; but unfortunately, that isn’t the case," Shankar Sharma, vice-chairman and joint managing director of First Global Securities Pvt. Ltd, said.

“Earnings have been horrifyingly bad. It is the worst quarter in my living memory. This, coupled with RBI’s relatively hawkish stance, downgraded monsoon forecast and sluggish economic growth have spooked markets," Sharma said in a phone interview from Dubai.

The pain was worst for those who rode the wave of easy liquidity last year despite their shaky fundamentals.

Shares of Unitech were the hardest hit, falling 35.27% to close at 8.70. As on 31 March, the real estate firm had a total debt of 3,565.35 crore, according to Bloomberg. The company had recorded a consolidated net loss of 162.54 crore in the fourth quarter of the last fiscal.

Shares of Jaypee Group companies also fell sharply.

Jaiprakash Associates Ltd fell as much as 32% to its lowest since June 2004, ending the day down 21% at 13.05. Jaiprakash Power Ventures Ltd tumbled as much as 25% to a record low, closing at 6.50, down 8%. Another group company, Jaypee Infratech Ltd, dropped as much as 16% to a record low before ending the day down 7.31% at 13.95.

Both companies blamed market rumours for the steep decline in their share prices.

“Rumours are being spread by certain segments of the market to profit from trading pertaining to Unitech defaulting on repayments to certain lenders, which are false and misleading. On the contrary, Unitech has brought down its debt and other liabilities including telecom-related liabilities significantly during the last financial year," a Unitech spokesperson said.

Jaypee Group reacted along similar lines.

“It has come to our notice that some unscrupulous elements are at play, planting fabricated stories about our group ranging from share revocation, defaults in repayment obligations etc.," a Jaypee Group spokeswoman said. “We categorically deny all such rumours and wish to allay fears of all our shareholders. The steep fall in stock prices cannot be attributed to any development linked to the performance of the company or the action of any of our esteemed lenders," the spokeswoman said.

She said that on a proactive basis, Jaypee Group has initiated steps to sell assets worth over 22,000 crore, which were either being successfully concluded or were due to be completed by September 2015.

According to the latest figures available, Jaypee Group has debt of 60,000 crore at an aggregate level.

Among other stocks that were mauled was Adani Power Ltd, part of infrastructure conglomerate Adani Group, which fell 10.76% to close at 32.35. The company had a total debt of 41,384.51 crore as on 31 March.

Shares of India’s largest wind turbine maker Suzlon Energy Ltd, which owed its bankers 15,362.34 crore as on 31 March, lost 9.37%. Lanco Infratech Ltd, with a debt of 37,673.66 crore, fell 7.96% to 4.28.

Analysts said the sharp fall seen across some of these stocks had more to do with changing economic and interest rate expectations and little to do with any specific news.

“Highly geared companies were up on bets that a recovery in economic growth will help them recover. Growth pickup is not coming any time soon, which implies this pack will stay in distress longer, and hence the mayhem in the counters," said Saurabh Mukherjea, chief executive of institutional equities at Ambit Capital.

Mukherjea added that the market may see more pain till it adjusts to a more realistic assessment of growth. “Economic growth expectations are unrealistic, and that is becoming increasingly evident," he said.

Market breadth was very weak on BSE, with nearly five shares falling for every share that rose. Around 278 firms hit their 52-week lows on Wednesday, the highest in a single session so far in 2015. All sectoral indices, except BSE IT index, closed in the red. The BSE realty index was the worst hit, falling 5.5%.

“The correction is led by foreign institutional investors for the last three-four months. They are unwinding their long positions in a big way. The Nifty open interest for the June series was very low, similar to what we saw in 2013. Markets are consolidating in a big way. We will see big falls and rises," said Siddarth Bhamre, head of equity derivatives and technicals at Angel Broking Pvt. Ltd.

Open interest is the total number of outstanding contracts that are held by market participants at the end of each day. It indicates the total level of activity in the futures market.

Bhamre said stocks of debt-heavy companies fell because they may find it difficult to restructure their loans until interest rates came down.

“When the market sentiment was good and people were anticipating rates to come down, they were holding on to their positions in debt-heavy companies. But now, they are selling debt-heavy stocks because it is going to be very difficult for these companies to revive if interest rates do not ease," Bhamre added.

Foreign brokerage CLSA on Wednesday lowered its Sensex target for December 2015 by 3% to 28,500 points, saying a pickup in growth has been delayed.

“The prospects of a meaningful economic recovery in 2HFY16 are fading and we remain cautious near-term," CLSA analysts Mahesh Nandurkar, Abhinav Sinha and Alok Srivastava said in a note.

According to provisional data, global funds sold stocks worth 727.61 crore on Wednesday, while domestic funds bought stocks worth 412.66 crore.

Apart from Tuesday’s indication from RBI that further rate cuts are unlikely, the view on the markets has also changed following a revision to the monsoon forecast. The India Meteorological Department on Tuesday downgraded its monsoon outlook for the June-September season to 88% of the 50-year average, stoking fears of drought over Asia’s third-largest economy’s rain-dependent farm sector.

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Published: 03 Jun 2015, 01:26 PM IST
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