Supreme Court Ruling on Telecom Revenues Shakes Stock Markets

While quarterly earnings continued to give an improved picture, the mood on the markets was impacted by the telecom sector, after the Supreme Court’s ruling on the definition of adjusted gross revenue. The second half of Thursday’s sessions witnessed a sharp dip and then a recovery only to close the day in the red. The pressure on the financial stock was partly responsible for the declines. NSE Nifty ended the day with a drop of 21.50 points or 0.19 per cent at 11,582.60. BSE’s Sensex lost 38.44 points or 0.10 per cent and closed at 39,020.39.

The Supreme Court has ruled that adjusted gross revenue of a telecom company would include most operations, except a few, sending a shiver down the telecom sector stocks. The gross revenue is used to calculate spectrum charges and licence fees. The verdict ends a 14-year old legal battle between the telecom operators and the government. The government had raised a demand of Rs 92,000 crore on the operators, which in view of the Apex Court decision, might have to be paid.

The trouble is not only what would happen to telecom companies, but how it would impact on the banks if the huge liability is to be paid. Many telecom operators have already shut shop or have come under the Insolvency and Bankruptcy Code. The banks with large exposure to telecom companies – both direct and in form of bank guarantees -- are likely to take a hit. This made the banking stocks come under pressure and in turn made Bank Nifty the biggest causality of Thursday trading session. The index lost 357 points or 1.21 per cent) to close at 29,101.

After several days, the market breadth came under pressure. While it is very likely that markets will revert if one looks at the earnings, any issue with a tech major – or fears of this happening – might lead to higher volatility in the coming sessions. The big companies have a heavy weight on the main market indices and have the capacity to spoil the improving mood of investors.

Given the fact that one segment of the financial sector faces uncertainty any fresh aggressive buying may not take place and consolidation may be order of the day coming on the back of signs of recovery.

As the market gets ready for an extended weekend – Monday is a market holiday because of Diwali -- volumes are likely to be low, which means that even a small bit of buying and selling could send stocks moving in either directions. Investors would do well to use the earning seasons’ readjustment to rejig their portfolio.

(Shilpa Nagpal is an analyst at Market Wizards Securities Pvt Ltd)