According to India Ratings & Research, due to the current price levels of most commodities, a significant, sustained price correction is unlikely and thus the impact of recent price correction will be limited
India Ratings & Research (Ind-Ra) said it believes that the recent commodity price correction will have a limited impact on BSE 500 corporates. Additionally, given the current price levels of most commodities, a significant, a sustained price correction is unlikely.
According to the ratings agency, crude and its derivatives, metals, coal and agri-commodities can affect Indian corporates.
Crude and its derivatives
Ind-Ra said, the combined effect of a crude price rise (in US dollar terms) and rupee depreciation shaved off 4 percentage points on an average from the EBITDA margin of the corporates which use crude derivatives. These sectors are paints, plastics and lubricants. With the average crude price declining to $103 per bbl in FY13 from $107 per barrel (bbl) in FY12, these sectors have enjoyed some benefit to their margins. However, FY14 margins are unlikely to improve over the margins in Q4FY13.
On an annualised basis, the prices of crude and metals such as aluminium, nickel and steel are not likely to decline significantly from the current levels. Indian corporates who are the buyers of such metals would receive much limited benefit from the price correction. Owing to depreciating Indian rupee and physical premium, metal buyers generally receive at best half of the price correction benefits. The capital goods sector would be the highest beneficiary of these corrections. Other metal users such as auto, auto ancillary are likely to have limited benefit.
The current price of aluminium and nickel is at or below the respective 90th percentile marginal cost of production. However, potential for further price corrections remains for some base metals such as lead/zinc, copper, prices of which are currently 8%-12% above the marginal cost of production, Ind-Ra said.
According to the ratings agency, if the Indian rupee remains stable and coal prices fall further by another $10, which is likely, the earnings before interest, taxes, depreciation and amortization (EBITDA) of power generators may expand by 14% to 16%. For cement producers, a similar fall in coal prices may translate into a saving of around Rs2 per bag.
Key agriculture-based commodities considered by Ind-Ra are foodgrain for FMCG companies, sugar and edible oil for the food processing industry, rubber for tyre manufacturers and wood pulp for paper and newsprint industries. Most agri-commodities with the exception of grains and edible oils showed a price correction during March-September 2011. However, the secondary users of these commodities could not accrue the benefits of falling raw material prices in FY12 in the face of muted demand which has increased competitive intensity.
According to the ratings agency key beneficiaries of agri-commodities price correction are likely to be tea and coffee processors and tyre manufactures. FMCG companies in the food sectors may receive limited benefit driven by challenging volume growth and enhanced competitive pressure.
Starting operations from this June, Honda’s new plant shall have 12 lakh units production capacity in Phase I
Honda Motorcycle & Scooter India Pvt Ltd (HMSI), the second largest two-wheeler company in India inaugurated its most advanced and latest third two-wheeler production plant at Narsapura Area, District Kolar (Karnataka) today.
The new plant enables HMSI to more efficiently serve the vast scooter and motorcycle market of India together with the existing Manesar and Tapukara plants in northern India.
Spread across 96 acres, Honda’s third two-wheeler plant in Narsapura is situated at Narsapura Industrial Area, which is around 52km from Bangalore. The new plant employs approximately 4,500 associates and entails a total investment of Rs1,350 crore.
Starting operations from this June, Honda’s new plant shall have 12 lakh units production capacity in Phase I. Aiming at market leadership, Honda also announced additional increase of 6 lakh units capacity in Phase 2 of this plant taking its annual capacity to 18 lakh units by end of this fiscal year. With its three plants, Honda will significantly increase its cumulative annual production capacity by 64% in just one fiscal.
Speaking on the occasion Yoshiyuki Matsumoto managing officer, Honda Motor Co and representative of development, purchasing & manufacturing, Asia Oceania Region said, “In the current fiscal year 2014, Honda’s global two-wheeler sales growth is expected to increase more than the previous years and headed to new heights by its operations in India. There is no doubt that India is one of the most important markets for Honda’s overall business. Today we establish a new milestone with the inauguration of our 3rd manufacturing facility in India in the state of Karnataka. Out of the total 4500 new positions at this facility, nearly 90% are being offered to the local youth.”
During 2012-13, about Rs160 crore was paid to depositors of 13 failed co-operative banks. The DICGC used money collected from depositors of other banks under the credit insurance scheme. Not a single rupee was paid on account of any failed nationalised or private banks. This only shows that dual regulation means poor regulation
Maharashtra leads the states for the maximum number of failed cooperative banks that are gobbling up depositors’ money. As many as 13 co-operative banks failed to pay customers and have shut down operations in the 2012-13 fiscal. It is reported that the Deposit Insurance and Credit Guarantee Corporation (DICGC), a government-owned entity which guarantees deposits, paid as much as Rs160 crore to deposit holders of the 13 banks during 2012-13. This means deposit holders from other better managed banks and taxpayers have to bear the burden of mismanagement and failure of these co-operative banks.
Under the norms of DICGC, a wholly-owned subsidiary of the Reserve Bank of India (RBI), a maximum of Rs1 lakh is paid to a depositor in case a bank goes insolvent. Last year in August, finance minister P Chidambaram informed the Rajya Sabha that deposit insurance coverage provided by DICGC is also applicable to the eligible deposits held in all eligible co-operative banks.
In the same breadth, Chidambaram said that the DICGC had sent a proposal to increase the deposit insurance coverage limit to Rs2 lakh from existing Rs1 lakh. He had said, “The proposal was examined and to rationalise the deposit insurance premium structure, the government has suggested to the DICGC and the RBI to adopt the Risk-Based Deposit Insurance Premium Structure, before the proposal of the DICGC is considered for approval.”
Unfortunately, the only beneficiaries of the deposit insurance premium collected by the DICGC are badly-run and politically-influenced co-operative banks. Since its inception, the Corporation has paid out about Rs4,051 crore till August 2011, in claims to depositors after bank failures. As much as a quarter of this—a whopping Rs1,025 crore—has been paid out in the past three years, from April 2008 to March 2011, which was given to 83 banks. And all of these 83 banks were co-operative banks.
The payment is possible because DICGC collects the insurance payment from banks to guarantee deposits up to Rs1 lakh per account holder. The DICGC collects a premium from 2,249 banks, of which a whopping 2,080 are co-operative banks.
Here is the irony. Less than 200 commercial banks account for 88% of the insurance premium collected and co-operative banks account for under 8%. Yet, when it comes to payment because of failures, 100% of the money is paid on account of co-operative banks.
Moneylife Foundation has strongly opposed any attempt to increase the deposit guarantee since this will only ensure that badly run, politically controlled cooperative banks get money for their depositors from the banking system. Moneylife believes that the cost of this high insurance will eventually have to be borne by customers who make smart choice to put their money in better banks.
What is worse, co-operative banks are poorly regulated under the dual regulation of the Reserve Bank of India (RBI) and the Registrar of Cooperatives. It is an open secret that RBI's supervision is completely ineffectual when it comes to co-operative banks, because of the enormous political influence wielded by their promoters.
This year, of the 13 cooperatives, the ones in Maharashtra are the worst offenders, with nine banks from the state defaulted on deposit holders, followed by Gujarat (two co-operatives), Andhra Pradesh and Odisha (one each). According to media reports, the DICGC paid the maximum amount of Rs54.88 crore to Bhandari Co-op Bank of Maharashtra. This was followed by another Maharashtra-based lender Solapur Nagari Audyogik Sahakari Bank whose depositors were paid Rs45.76 crore. Depositors from two other failed banks, Siddhartha Sahakari Bank and Bhusawal Peoples Co-op Bank were paid Rs23.99 crore and Rs10.05 crore, respectively during 2012-13. A year ago or during 2011-12, the DICGC paid Rs277.31 crore to depositors of 18 co-operative banks that were closed.
Moneylife had carried a prescient story more than two years back (Co-operative banks are in terrible shape; account-holders will be at the receiving end. RBI should act decisively, and soon), written by Prof Anil Agashe, that co-operative banks were in terrible shape and that the Reserve Bank of India (RBI) badly needed to tighten its screws, so to speak, and act boldly to protect deposit-holders. Unfortunately, the RBI did not act fast enough. Not only did co-operative banks default on deposit holders but, unbeknownst to Indian citizens, they were used for far more sinister purposes.
RBI recently discovered, albeit too late, that the money-laundering racket, discovered by Cobrapost, had spread to cooperatives too, and appeared to be the main conduit for the private sector banks to launder money. Shockingly, it was also discovered that cooperative banks happily accepted fake PAN cards and dodge detection by opening hundreds of accounts without proper KYC with each deposit carefully under Rs50,000. Moneylife had written about this story here: RBI money-laundering probe shows cooperative banks as the key facilitator of shady deals.
Regulation of co-operative banks is appallingly poor. One of the worst offenders is Maharashtra State-Co-operative Bank (MSC Bank), which had reported over Rs1,070 crore loss, mainly due to non performing assets (NPAs). Not only did it suffer losses but, according to advocate Vinod Sampat, the bank was “window dressing” its accounts. This prompted the RBI to swiftly act and highlighted the need to bring all co-operative banks, a majority of which are controlled by politicians, under the central bank's direct control. Moneylife had written about it over here (MSC Bank: The RBI finally steps in to clear the mess in Maharashtra’s apex co-operative bank)
Unfortunately, it still isn’t clear who really regulates co-operatives because there are actually two regulators: the Registrar of Co-operative Societies (RoCS) and the RBI. Because of this dual set-up, there is little regulation, accountability and willpower to take action against errant co-operative banks.