Supreme Court AGR Case Highlights, Fitch Ratings on India's Growth, and Top Cues in Focus Today

Fri, 12 Jun Pre-Open

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Indian share markets ended their trading session deep in the red yesterday.

Indian stock markets witnessed selling on the back of weak global cues and Supreme Court's verdict on the adjusted gross revenue (AGR) case.

Sectoral indices ended on a negative note with stocks in the telecom sector and banking sector witnessing most of the selling pressure.

At the closing bell yesterday, the BSE Sensex stood lower by 708 points, down 2.1%.

Meanwhile, the NSE Nifty closed down by 214 points, down 2.1%.

The BSE Mid Cap index ended the day down by 1.4%, while the BSE Small Cap index ended down by 1%.

European stock markets also declined yesterday, moving away from their three-month peak following a downbeat economic outlook from the US Federal Reserve and on worries of a second wave of COVID-19 cases.

The central bank expects the US economy to shrink 6.5% in 2020 and the unemployment rate to be 9.3% at the year's end.

Market participants were tracking penny stocks in yesterday's market trade.

This comes as penny stocks have delivered eye-popping gains in the recent market rebound from the lows of March 24, when Sensex and Nifty had scaled their fresh 52-week lows.

Shares of Vodafone Idea have rallied as much as 200% from Rs 3.36 on March 24 to Rs 10.08 earlier this week on June 9.

Another penny stock, Birla Tyres has rallied more than 780% from Rs 2.78 on March 24 to Rs 26.90.

Penny stocks are those stocks that are trading for below or around Rs 50. This follows the traditional idea of penny stocks i.e. stocks under US$ 1.

To know more, you can check Rahul Shah's penny stock recommendation service Exponential Profits (requires subscription).

Speaking of Indian stock markets, after the long coronavirus lockdown, the Unlock 1.0 phase has been surprisingly positive for the stock markets.

Most have justified the sharp run of last few sessions in Indian stock markets on the grounds that all negative news is already priced in.

But is that truly the case? Or is there something more to it?

In her recent video, Tanushree Banerjee answers these questions and talks about how investors should act on the Unlock 1.0 market rally.

Tune in to know more...

Top Stocks in Focus Today

Future Retail share price will be in focus today. This comes as Kishore Biyani's Future group is reportedly in talks with Mukesh Ambani's Reliance Industries to sell its retail and supply chain businesses. Biyani is said to be looking at an enterprise valuation of Rs 100 billion.

From the chemical sector, Dhanuka Agritech share price will be in focus as the company reported a 45.8% growth in its profit after tax (PAT) at Rs 390 million for the quarter ended March (Q4FY20).

Market participants will also be tracking shares of IndusInd Bank. The share were trading higher for fifth straight day yesterday, rallying 8% intraday, after its promoters said that they would acquire additional shares of the bank from the secondary market. In the past one week, shares of the private lender have surged about 30%.

Supreme Court Adjourns Hearing in AGR Case for June 18

In news from the telecom sector, the Supreme Court yesterday directed telecom companies to provide details with respect to three key points - the roadmap for payments in terms of the period required to repay AGR dues; timeline of payment, and security they can provide to guarantee payment.

The Supreme Court expressed grave concerns over government's move to slap spectrum dues worth over Rs 4 lakh crore from PSUs as adjusted gross revenue (AGR)-based dues on par with private sector telco's dues.

Justice Mishra dubbed the government move to slap similar dues for recovery from PSUs as a misuse of its earlier ruling against the private telcos.

He warned of action against Department of Telecommunications (DoT) officials responsible for the move while seeking clarity on this move from the Solicitor General who appeared for the government.

Here are the key highlights from the AGR Case:

• Justice Arun Mishra said, nobody has seen the next 20 years, can't allow extension based on a "gentleman's promise". "How can 20 years be said to be reasonable?", he asked referring to the government demand that staggered payment be allowed over a period of 20 years.
• On Justice Mishra's doubts about the guarantee that telecom companies will make the payment, Vodafone Idea counsel Abhishek Manu Singhvi and Bharti Airtel counsel Mukul Rohatgi said the court can go ahead and cancel their licences if the companies do not pay up within the stipulated period.
• Questions were raised on how the department made demands from oil PSUs when the judgement never dealt with PSUs. Demands to the tune of Rs 4 lakh crore are being raised with ulterior motives, Justice Mishra said, ordering that the demand against PSUs be withdrawn.

The next hearing in the telecom AGR dues case is scheduled for June 18.

Note that this hearing comes after the one held on March 18, where the apex court pulled up the DoT for allowing telcos to self-assess payable dues.

In March, before the commencement of the ongoing coronavirus-forced lockdown, the Department of Telecom (DoT) had moved the Supreme Court proposing staggered payment over 20 years for telecom firms to discharge their AGR dues.

The DoT had said that immediate payment would result in possible bankruptcies and could potentially hurt crores of customers.

Therefore, it proposed the 20-year formula on the back of license fee and spectrum usage charges dues worth 1.4 trillion that was upheld by the apex court in its October 2019 judgment.

However, the Supreme Court on March 18 come down heavily on the DoT for allowing telcos the facility of self-assessing their dues payable.

The court, however, had observed that it was open to consider the issue of staggered payment over 20 years, as proposed by the DoT.

Vodafone Idea has paid 68.5 billion of its dues, while the DoT's demand of the firm stands at Rs 582.5 billion. The company's self-assessment pegged its dues at Rs 215.3 billion.

Meanwhile, Bharti Airtel has paid Rs 180 billion so far against the DoT's demands of Rs 439.8 billion. The company estimates its dues at Rs 130 billion.

How this all pans out remains to be seen. Stay tuned for more updates from this space.

Fitch Ratings Warns India of Downward Sovereign Rating

Fitch Ratings cautioned that lack of a credible medium-term strategy to stabilize the rising public debt in India after the coronavirus crisis subsides could put downward pressure on its sovereign rating.

This comes days after Moody's downgraded the country's credit rating.

In a sovereign credit overview for the Asia Pacific region, Fitch said sovereign ratings in developing economies in the region remain under pressure.

Fitch, which has the lowest investment grade rating for India with stable outlook, has so far this year downgraded Hong Kong, the Maldives, and Sri Lanka, and removed positive outlooks on the Philippines, Thailand and Vietnam.

Fitch said general government debt already stood at 70% of GDP in FY20, well above the 'BBB' median of 42%. Fitch expects India's ratio of public debt/GDP to rise to 84% of GDP in FY21, up from a forecast of 71% when we affirmed the rating in December.

This is based on our expectation of slower economic growth in FY21 and wider fiscal deficits, assuming the government's fiscal response is restrained.

Fitch said the pandemic has drastically weakened India's growth outlook and laid bare the challenges caused by a high public-debt burden. After the global crisis, India's GDP growth is likely to return to higher levels than 'BBB' category peers, provided it avoids further deterioration in financial sector health as a result of the pandemic, Fitch stated.

Fitch said that Indian economy would register a growth rate of 9.5% next year if it manages to avoid further deterioration in its financial sector.

Fitch Ratings forecast a 5% contraction in the GDP in the ongoing fiscal.

Last week, Moody's cut India's sovereign credit rating by a notch to the lowest investment grade with negative outlook, citing growing risks that Asia's third-largest economy will face a prolonged period of slower growth amid rising debt and persistent stress in parts of the financial system.

As per our co-head of research, Tanushree Banerjee, Moody's decision to downgrade India's sovereign rating could be a boon in disguise for Indian banks.

Here's a snippet from the article she wrote:

• "So, how does Moody's downgrade help?
  
  Well, one look at the data of India Inc's overseas borrowing in the past year will answer the question.
  
  The government is not a big borrower in the overseas markets.
  
  Rather, the top corporates in India raise funds overseas (via instruments like ECBs and FCCBs) using India's sovereign rating.
  
  So, a downgrade in India's sovereign rating raises the overseas borrowing cost of the bluechips.
  
  And in turn, they will find borrowing from Indian banks more attractive."

Look at the chart below...

India Inc's Overseas Borrowing Over Past Year

Further, she also noted that the data from the RBI shows that Indian companies borrowed almost US$ 44 bn overseas in the past fiscal.

That is almost 50% of the incremental credit disbursed by PSU banks and private sector banks during the year.

So, if the rating downgrade brings even a fraction of the credit demand from overseas markets back to India, it could massively stoke economic activity.

In fact, it could even kickstart a virtuous credit cycle which eventually could bring about India's Swoosh recovery.

We will keep you posted on such triggers of Covid-19 rebound. Stay tuned.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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