Diesel under-recoveries could soon be history, says Nomura

With continued diesel and petrol price hikes, the oil subsidy problem does not look that menacing now, says Nomura Equity Research in its note on Indian oil PSUs

This year, the Government of India (GoI) has surprised with several steps, including monthly diesel price hikes and controls on subsidised product volumes, among others. More importantly, it has shown resolve to maintain the momentum. Consequently diesel under-recoveries could soon be history for oil PSUs (public sector units). This is according to a note prepared by Nomura Equity Research. On related issues, Nomura points out that direct benefit transfers for LPG have commenced, and this should help to curb cooking fuel subsidies. Gas price hikes are also positive.


Assuming a rupee-dollar rate of 60 (vs 55 earlier), Nomura estimates that U/Rs (under-recoveries) are declining by 56% by FY16F. At INR/USD of 58, Nomura expects diesel U/Rs to vanish and total U/Rs to fall to a third of FY13 levels. U/Rs have been a bane of oil PSUs for many years and declines are a long-term positive.


Nomura has made a ‘BUY’ recommendation for the GAIL scrip in the stock market as tariff cuts, volume declines, and gas price hikes are largely over and already priced in by the investors in the stock market. For ONGC and OIL, despite the short-term earnings fillip Nomura sees from lower subsidies and higher gas prices, their production volumes continue to disappoint and growth visibility remains low. Nomura has upgraded ONGC and OIL shares to ‘Neutral’.


With the GoI showing strong resolve to bring reforms, Nomura believes that the oil subsidy problem looks less menacing than before. Nomura forecasts that earnings predictability for OMCs (oil marketing companies) remains low.


The following table gives the stock market recommendations for oil PSUs from Nomura:

Similarly the summary valuations and financials for the oil PSUs are as follows:


India produces record pulses in 2012-13; foodgrain output down

The record pulses production augurs well for the country which depends on imports to meet the shortfall of around 3-4 MT. Higher supply will reduce imports and also prices

India has achieved a record pulses production of 18.45 million tonnes (MT) in the 2012-13 crop year ended June. However, foodgrain output fell by 1.5% to 255.36 MT due to drought in some states last year.


The agriculture ministry today released the fourth advance estimates of foodgrain production for 2012-13.


Pulses output has been revised upward to record 18.45 MT in 2012-13 as compared with 18 MT in the third estimates released in May. Pulses output stood at 17.09 MT in 2011-12.


The record pulses production augurs well for the country which depends on imports to meet the shortfall of around 3-4 MT. Higher supply will reduce imports and also prices. Higher support price prompted farmers to grow pulses.


“As per the latest estimates, India has produced 255.36 MT of foodgrain during the 2012-13,” an official statement said.


The foodgrain output is same as it was in the third estimate, but it is lower than the record 259.29 MT achieved in the 2011-12 crop year (July-June).


In the foodgrain category, rice production has been revised upward to 104.4 MT from 104.22 MT in the third estimates. However, rice output is lower at 105.3 MT compared with 2011-12.


Coarse cereals production estimates have also been revised upward at 40.06 MT in 2012-13 from 39.52 MT in the third estimate, but it is still lower than the previous year's 42.01 MT.


However, wheat output has been revised downward to 92.46 MT from 93.62 MT in the third estimate. Production stood at record 94.88 MT in 2011-12.


Foodgrain output in 2012-13 is lower than previous year due to poor monsoon in Maharashtra, Karnataka and Rajasthan.


However, the production is expected to rebound this year as the country is currently receiving good monsoon and sowing area has exceeded last year's level so far.


UPA govt’s FDI liberalisation move: Too little, too late
While the UPA government is trying to put up a brave show on the FDI front, the bottom-line of India Inc shows a pathetic picture. The current economic situation is so bad that there is not even an elbow room for the RBI to cut interest rates and for the government to embark on large-scale policy stimulus
Worried over the falling rupee, capital outflows and the sagging morale of foreign institutional investors (FIIs), the Manmohan Singh-led United Progressive Alliance (UPA) government has announced liberalization of foreign direct investment (FDI) caps in 13 sectors. In addition to hiking FDI limits in some sectors, the government has changed the FDI route to the automatic route. This means only a notification to the Reserve Bank of India (RBI) is required for the FDI as against the earlier route of requiring approval from the Foreign Investment Promotion Board (FIPB). For eight of the 13 sectors, the government has changed the FDI route to automatic, and for four sectors, it has liberalised the cap.
The latest announcement on increasing FDI in insurance is nothing but a reiteration of an earlier move. Last year the Cabinet approved hiking FDI limit in insurance to 49% but the proposal is still awaiting Parliament’s nod.
According to Morgan Stanley, liberalization of FDI caps is another small measure by the government to support the investment sentiment for investors. “With high current account deficit-CAD (4.8% of GDP in FY2013) and real short-term interest rates (on CPI) close to zero, the currency has been under severe pressure since the US Fed relayed its decision to taper quantitative easing in the second half of the calendar year," it said.
Nomura Research, on the other hand feels that these measures, apart from boosting near-term sentiment, are medium-term positive as they will help attract stable long-term capital inflows. “However, we doubt there will be any significant impact on flows this year,” Nomura said.
In the last two fiscals, contrary to the economic theory, despite rupee depreciation, India's exports have suffered because of the lack of global demand and a virtual halt of iron ore exports. Simultaneously, the import of coal, crude oil and gold has increased. While some of these shocks are exogenous to India, domestic issues have also aggravated the currency depreciation.
While the UPA government is trying to put up a brave show on the FDI front, the bottomline of India Inc shows a pathetic picture. India Ratings & Research (Ind-Ra) said it believes the current business environment is more challenging and stressful than the conditions in 2001-2003 and second half of FY2009. The current economic situation provides limited elbow room to the RBI to cut interest rates and for the UPA government to embark on large-scale policy stimulus. 
According to Ind-Ra credit metrics of BSE 500 corporates, excluding banking and financial services, have deteriorated to their lowest since FY2008. This is attributed to a steady rise is debt levels without a commensurate increase in cash margins. “Given the mounting economic stress, the credit metrics of such corporates are unlikely to show a significant improvement in FY14. With external liquidity likely to remain tight, corporates have to depend upon the strength of their own balance sheet as well as on their ability to generate free cash flows and maintain a liquidity cushion,” the ratings agency said.
Here are the measures announced by the Manmohan Singh government and its likely impact...
1. Allowing 100% foreign direct investment (FDI) in telecom from 75% currently
- The telecom sector is in doldrums. Several new entrants left the race due to dwindling finances and legal hurdles. Almost all brokerages are cautious on telecom given weakening growth outlook, regulatory uncertainty, sharp depreciation of rupee and entry of a new, powerful entrant—Reliance Industries (RIL). In this scenario, it would be difficult for new foreign investors in pour money in the telecom sector. It may help incumbents like Vodafone to get additional capital, though. The FDI inflow in the telecom sector would depend more on the regulatory environment than the change in the FDI route.
2. Increasing the cap on FDI in the defence sector to 49%, with approval from the Cabinet Committee on Security from 26% (via FIPB)
- When domestic manufacturers are finding it difficult to get clearances from the defence ministry, FIIs stand a miniscule chance to pass the litmus test of Cabinet Committee on Security 
3. FDI cap for power exchange was retained at 49% but brought under the automatic route
- This would help reduce the time for approval.
4. FDI (up to 49%) in petro refineries, stock exchanges and insurance to be through the automatic route
- This would help reduce the time for approval. Insurance will have to wait.
5. FDI cap for asset reconstruction companies raised to 100%, and through FIPB route beyond 49%
- This would help reduce the time for approval.
6. FDI in tea sector beyond 49% through FIPB route while the clause about divesting 26% to an Indian company in the first five years has been deleted
- A fragmented sector. No major inflows expected. Perhaps designed to help specific businessmen.
7. FDI in single brand up to 49% through the automatic route, beyond that through FIPB
- Retail sector is also laden with uncertain regulatory environment. However, the increase in FDI in single brand should see some new players entering the ever-lucrative Indian market 
8. FDI for credit information companies hiked to 74% from 49%, and in courier services 100% FDI limit will be allowed under the automatic route
- This can attract only small amounts of money  



nagesh kini

4 years ago

Extremely well put across very rightly -
too little, too late in time.
it tantamounts to locking the stable after the horse has bolted.
While FDI is one matter, FIBP and other procedures are time consuming - Bloomberg's list of the top 20 new investment destinations are now Nambia and Zambia! Not India!
It is well known that the so-called FII money is nothing but Indian black money stashed abroad legitimized via circuitous devious routes.

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