Smaller power and steel companies, whose profitability was largely driven by the now cancelled coal blocks, have debt of around $10 billion and would face bigger challenges, while servicing these debts, says Nomura
The Supreme Court on Wednesday cancelled all but four coal block allocations and
also imposed a penalty of Rs295 per tonne on any coal extracted since allocation of these mines. While large power and steel companies will not face much issues while servicing their debts, it is the smaller one who would face significant challenges, says Nomura in a research note.
"Some of the smaller steel and power companies are now facing significant debt
servicing challenges after the cancellations as their profitability was largely driven by these block allocations. We estimate $10 billion of system lending to these companies," the report said.
According to Nomura, large power and steel companies, which have coal blocks that were cancelled, cumulative have a debt of about Rs4 lakh crore. It said, "Despite the blocks being cancelled, most large power and steel companies will not face significant debt servicing challenges, in our view, though their equity returns are likely to impacted due to cancellations and penalties imposed."
Talking about exposure of banks and non-banking finance companies (NBFCs), Nomura said exposure of Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) is highest to the smaller power companies linked to these cancelled coal blocks.
In state-run lenders, Punjab National Bank, Union Bank of India, IDBI, UCO Bank and United Bank of India has highest exposure to steel and power companies affected by the Supreme Court decision. "PNB and Union Bank of India has the highest exposure to these assets as a percentage of their net worth at 10-15% of FY14 net-worth (NW) compared with 6%-7% of NW for State Bank of India (SBI), Bank of Baroda (BOB) and Bank of India (BOI)," Nomura said.
Private banks like ICICI Bank and Axis Bank do not have exposure to affected steelmakers but these lenders have exposure of around 4-5% of NW to power producers. According to Nomura, exposure of other private banks to these assets is relatively negligible.
"Although the cancellation of coal blocks weakens the business models of some of the names mentioned and will likely lead to some credit or restructuring charges, we think the impact on our top picks Axis Bank and ICICI Bank is manageable," the report added.
The union government is preparing a roadmap for identifying PSUs not capable of revival and for closing them down after giving benefit of VRS to its employees
The Indian government has started the process to revive five out of 11 sick public sector units (PSUs) and would form a joint venture of Maharatna PSUs to help revive the sick units, says Anant Geete, union minister for Heavy Industries and Public Enterprises.
Speaking about terminally ill PSUs, the minister said, "It would be better to make one-time settlement and eliminate even higher recurring expenditure."
Geete said, his ministry is preparing roadmap for identifying PSUs not capable of revival and for closing them down after giving benefit of voluntary retirement scheme (VRS) to its employees. "We are making a proposal for one-time settlement costing around Rs1,000 crore for employees of six PSUs that are not capable of revival," the minister added.
The functioning of the Board for Reconstruction of Public Sector Enterprises (BRPSE) has been reviewed, Geete said, adding that the government want to streamline multiple mechanisms for revival of sick central public sector enterprises (CPSEs) and have identified the action points in this regard.
The minister also said that there is a proposal to establish Ultra Mega Green Solar Power Park with an ultimate capacity of 4000 MW in Rajasthan.
In the past, Iran has threatened to cancel award of Farsi block but has not carried out those threat as it cannot get any credible international oil company to invest until the western sanctions are eased
In a bid to pressure India to invest in a Persian Gulf gas field, Iran has put Oil and Natural Gas Corp (ONGC)-discovered Farzad-B gas field on a list of fields it plans to auction citing delays by the Indian companies in its development.
ONGC Videsh Ltd, the overseas arm of state-owned ONGC, had in 2008 discovered the Farzad-B gas field in its Farsi exploration block in the Persian Gulf.
In August and September, 2010, the company submitted a revised master development plan (MDP) for producing 60% of the 21.68 trillion cubic feet of in-place gas reserves. However, ONGC Videsh had not signed the contract because of a threat of being sanctioned by the US, which is against any company investing more than $20 million in Iran’s energy sector in any 12-month period.
Iran, in February 2012, issued a one-month ultimatum to the OVL-led consortium over the development of a gas field. For more than two years, it did not carry out the threat of cancelling allocation of the Farsi block to OVL.
Tehran has now put the field on the list of blocks it wants to auction in future, sources with direct knowledge of the development said.
It has however not yet cancelled OVL’s exploration license for the Farsi block which gives it the right to develop the discoveries it has made.
Sources said inclusion of the block in the list of areas Iran wants to auction is an attempt to pressurise New Delhi into investing in the project.
In the past, Iran has threatened to cancel award of Farsi block to OVL over delays in signing of the Farzad-B gas field development contract. But Iran has not carried out those threat because it knows it cannot get any credible international oil company to invest until the western sanctions are eased.
While OVL cannot invest in developing in the gas field because of the US sanctions, it plans to Iran engaged and will make investments once sanctions are eased, they said.
OVL is the operator of the Farsi block that lies north of Qatar. It has 40%interest in the 3,500 sq km block.
State refiner Indian Oil Corp (IOC) too has 40%, while the remaining 20% is with Oil India Ltd (OIL) in the Farzad-B field.
The Farzad-B gas field may hold an estimated 21.68 Tcf of in place reserves, of which 12.8 Tcf can be recovered. The reserves in Farzad-B are almost thrice the largest gas field in India.
The Indian consortia would get a fixed rate of return on the $5 billion it will invest on developing the Farzad-B gas field as Iranian law prohibits foreigners owning oil and gas resources. Foreign companies develop the fields through service contracts.