Leveraged cos tumble as RBI gives mixed signals

Written by Devangi Gandhi | Mumbai | Updated: Jul 31 2013, 20:19pm hrs
The RBIs mixed signals on the future course of interest rates in the economy are dragging down shares of companies with high financial leverage. Although expectations of a status quo on the benchmark policy rates were met at the RBIs first quarter monetary policy review, companies with elevated debt levels saw their share prices plunge on Tuesday as the RBI signaled that a rollback of its recent liquidity tightening measures would only happen once the rupee stabilises.

The rupees slide to 60.48 against a dollar increased the selling pressure on these stocks as traders mulled the negative impact that higher rates and a weaker rupee would have on the balance sheets. Stocks from stressed sectors like infra, power and real estate such as Unitech, HCC, DLF, GMR Infra, IRB Infra and Lanco Infra plunged 4% to 8%.

Companies with high operating leverages have been heavily penalised in the recent past. The weak rupee has especially weighed on companies with significant foreign debt unless they have corresponding export earnings that can take care of the servicing of foreign currency denominated debt, said Saumil Shah, MD & head of equity sales trading, Bank of America Merrill Lynch.

Markets fear that if interest rates rise, it would weigh on the ability of these companies to efficiently service their debt obligations, Tuesday's fall in names like NCC, J P Associates, Jaypee Infra, JP Power venture and IVRCL took the YTD decline on these stocks to between 60% and 70%.

Among the BSE Top 500, names like Bharti Airtel, Reliance Communication, Adani port, Reliance Power, Spicejet, Bhushan Steel and Tata Tele services that hold 90% to 30% of their total debt in the foreign currency also saw selling pressure. In the wake of a steep fall in the rupee, the pressure to either refinance this debt or sell assets in order to repay debt may intensify.

As per Nikhil Vora, MD, IDFC Securities, the investments made by Indian companies in the last five years were primarily funded by debt and now companies are struggling to replenish.