Bank stocks that have been rallying sharply on expectations of key policy reforms in core sectors lost some of their sheen after the Supreme Court de-allocated coal blocks given to all private companies since 1993.
The profitability of some of the power and metal companies will be impacted significantly. This is expected to cast a cloud on the lenders who have given loans to these corporates.
Stocks of public sector banks, that have a higher exposure to these sensitive sectors, fell the most on Thursday. The CNX PSU Bank Index, lost 3 per cent — banks such as IDBI, Allahabad Bank, Andhra Bank and SBI fell 3 to 6 per cent.
The reaction of banking stocks appears knee-jerk in nature. While the stress in the banking system is likely to increase, it is still early days to assess the actual impact of the Supreme Court order on individual banks.
The worst hit
Select power and metal stocks will see significant impact on earnings, as they will now have to source coal at market prices. Also, these players will have to pay a one-time penalty of Rs 295 per tonne of coal mined so far, which will also impact profitability of these players. Let us consider the debt position of two large companies which are worst impacted by this order — Jindal Steel and Power (JSPL) and Hindalco.
Reports suggest that JSPL is likely to pay a one-time penalty of about Rs 3,000 crore, which is about 158 per cent of the company’s consolidated profit in 2013-14. After the mines are handed over to Coal India as per the court order, the increase in cost due to coal sourced from the market is expected to hit profits by 30-35 per cent.
However, JSPL has a sound financial position which should provide some cushion. The company has a comfortable debt to equity ratio of about 1.5 times as of March 2014 and a healthy interest cover of 2.5 times.
In the case of Hindalco, the impact is lower. The one-time penalty works out to 20 per cent of the consolidated profit in 2013-14, and the additional cost that the company may incur for sourcing coal, may also dent profitability. For Hindalco too, its debt position is not a concern. The company’s debt equity is 1.5 times and interest cover is about 1.9 times. The one-time penalty is just about 1 per cent of the company’s total debt. Hindalco has also generated positive cash from its operations in 2013-14.
Stress in the system
While the impact of the court order may not lead to large companies such as JSPL and Hindalco defaulting on their debt, some small players may be forced to seek restructuring of their debt. This is why public sector banks that have high exposure to these sectors are expected to bear the brunt of the order, given the already weak financial performance and high stressed assets. Power, iron and steel and mining are among the five sectors that contribute substantially to the level of stressed loans. Most public sector banks have more than 11 per cent of their loans under stress.
Some of the public sector banks that have high exposure to these sectors are SBI, Bank of Baroda, Punjab National Bank, Union Bank, IDBI Bank and Canara Bank. SBI, for instance, has about 6.5 per cent exposure to iron and steel and about 4.8 per cent to power. IDBI Bank has 5.1 per cent to iron and steel and 11 per cent to power. Within private sector banks, Axis Bank, and ICICI Bank have a higher exposure to the power sector.
While some of these banks are likely to be impacted, given their higher exposure to these sectors, it is difficult to assess the real impact of the order at this juncture.