With domestic volume declines likely to continue in the near term and not much new incremental LNG re-gas capacity available in Gujarat, volume growth outlook looks muted in the near term, said Nomura in report on GSPL’s Q4 performance
GSPL’s (Gujarat State Petronet) reported PAT of Rs1.61 billion for 4QFY13 (up 25% y-o-y, 36% q-o-q) was sharply ahead of Nomura’s forecast (Rs1.05 billion) and Bloomberg consensus (Rs1.07 billion). “Contrary to our and street view, the overall impact of tariff implementation order has been positive,” said Nomura Equity Research in its report on the company’s performance.
GSPL has applied the tariff order from 27 July 2012, and the net revenue gain of around Rs1 billion has been booked in 4Q.While the tariff order impact is positive, Nomura was surprised by the sharp decline in volumes. 4Q transmission volumes at 22.2mmscmd (its estimate: 25mmscmd) declined sharply by 29% y-o-y and 19% q-o-q. After reaching a peak in 1QFY12, volumes have been declining consistently as domestic supply keeps declining. But, now even demand is getting weaker. From the peak the volumes have declined 40%, and the near-term outlook remains weak, the brokerage report said.
GSPL has applied the Petroleum and Natural Gas Regulatory Board’s (PNGRB) tariff order (initial order on 11September 2012, zonal tariff on 19 February 2012). Rather than applying the order retroactively from 20 November 2008 (as demanded by PNGRB), GSPL has applied the tariff order from 27 July 2012 (the date of authorisation of network) in accordance with the interim order by the appellate tribunal (APTEL). GSPL has also started to book expenses for system use gas (SUG) from mid-February. SUG was hitherto not charged but taken in kind from customers. SUG charge expense is a key reason for the sharp rise in O&M expenses by 66% y-o-y and 52% q-o-q, according to Nomura.
On both retroactive implementation and SUG charges, and on several other aspects of the tariff order, GSPL has already challenged PNGRB in the appellate tribunal where the hearings are ongoing. Nomura believes PNGRB is on a weak footing (especially on demanding retroactive tariff implementation) and an early APTEL decision would bring clarity.
4Q agerage transmission volumes at 22.2mmscmd declined sharply by 29% y-o-y, and 19% q-o-q. From peak levels of 36.8mmscmd in 1QFY12, volumes have declined around 40% due to sharp decline in domestic gas availability. The company attributes the recent sharp volume decline to weak overall gas demand across sectors and very high LNG prices in Jan /Feb 2013. Current volumes also remain around 22mmscmd. With domestic volume declines likely to continue in the near term and not much new incremental LNG re-gas capacity available in Gujarat, volume growth outlook looks muted in the near term.
Unless private investments are of good quality, they can become regressive and lead to crony capitalism, as it has happened all along in the PPP model, says EAS Sarma
EAS Sarma, former secretary of the Government of India, has said that public–private partnership (PPPs) are certainly not a substitute for good governance and as suggested by United Nations Office on Drugs and Crime (UNODC) and others, unless there is total transparency, PPPs will tend to hurt the public interest. Consciously, the government should bring them within the purview of the Right to Information (RTI) Act, he said.
The former secretary, in a letter written to Montek Singh Ahluwalia, deputy chairman of Planning Commission, has said, “...the PPP route that the Planning Commission has so aggressively promoted all these years has opened doors to large-scale corruption in the country. The magnitude of the PPP scam is huge as the investments involved are large and the value of the public lands handed over to the private parties is enormous.”
There are around 758 PPP projects worth Rs4 lakh crore already taken up. They are largely in infrastructure sectors such as roads, energy, airports, ports and metros and in development sectors such as education, health and housing. The magnitude of investment in PPPs in India seems to be much higher than the global average. It amounts to 20%-30% of gross domestic product (GDP), whereas the global average is around 15%.
According to the UNODC report, in the absence of laws to govern either PPPs or public procurement procedures, the way these projects have been formulated and implemented has created an enormous scope for rent seeking and deficiencies in their outcomes.
“The General Financial Rules, 2005, are the rules followed for public procurement by government departments and ministries across the country. These rules do not have the status of legislation and violations do not attract much penalty. India currently has no clear rules for regulating PPP projects,” the report says.
In most cases, there was no competitive bidding for selecting the developers. Where there was competitive bidding, the tendering processes were rigged to select pre-determined bidders. The so called ‘independent’ consultants were not so independent, as many of them had a conflict of interest. In many cases, the companies were found to have colluded with the consultants. The bidders often misrepresented the facts to win the orders and misreported revenue to avoid revenue share to the government. The concerned government officials who were expected to ensure fairness in the selection of bidders and monitoring implementation awere either incompetent or outright corrupt.
In many PPP projects, public land is handed over to the private developer at a nominal rate and the suppressed value of the land is considered in computing the equity share of the government. As a result, the government becomes the minority shareholder. Had the market value of the land been considered, the equity share of the government in the PPP would have exceeded 50%, in which case it would have become a government company under the Companies Act.
As a result of undervaluation of the land and the consequent undervaluation of government equity, the PPP project surreptitiously avoids the rule of reservation for SCs/ STs/ OBCs. Since the government in such a case is only a minority shareholder, the private promoter often takes decisions not entirely consistent with the public interest. The government directors who are required to keep a watch over the affairs of the PPP have often become silent spectators or they have connived with the private promoter for personal gains.
“The Emaar MGF scam in AP is an example of this. In AP, there is a law, the AP Infrastructure Development Enabling Act of 2001which requires competitive bidding procedures to be followed in selecting the promoters of ‘mega’ projects but, rarely, has this law been complied with," Mr Sarma added.
There has been undue delay in the Centre enacting the Public Procurement Bill. One is not sure about the intentions of the government towards probity in procurement when ministries/departments such as coal, mines, telecom and atomic energy have openly defied all norms of transparency and competition in procurement by championing subjective procedures in allotment of coal and mineral blocks, sale of spectrum and placement of orders on multi-national companies (MNCs) on a nomination basis for nuclear power projects worth billions of dollars. The central ministries have in fact gone to the extent of swearing before the courts that such opacity and subjectivity are a necessity and a virtue.
Mr Sarma, the former secretary said, “I hope that the earlier IMF study on PPPs in 2006, my own EPW review of that study and the latest UNODC study wake up the government and the Planning Commission to the ground realities and trigger corrective steps before any further damage is caused.”
Here is the UNODC report on India: Probity in Public Procurement...
Amidst growing uncertainty over consumer demand and economic signals, the banking sector continues to grow. While the credit offtake did not grow as expected, earnings too disappointed during the March quarter, says Kotak
The banking sector continues to grow, amidst growing uncertainty over consumer demand and economic signals. Despite the Reserve Bank of India’s (RBI) decision to cut repo rates in January, credit offtake did not grow as anticipated. Most importantly, earnings disappointed too. It grew only 6% year-on-year (y-o-y) according to Kotak Institutional Equities (Kotak) research report.
Kotak said, “Our cautious outlook remains on the (banking) sector. While growth moderates, buoyant net interest margins (NIMs) due to a sharp decline in interest rates will drive NBFC earnings.”
The earnings growth has disappointed this season, which prompted many investors to take a cautious approach to investing in the financial sector, especially banking. Earnings grew just 6% y-o-y, which meant Kotak has taken a subdued forecast of banking. One of the pertinent issues, which Moneylife has talked about in the past (Public sector banks - Loans turning bad), is the issue of non-performing assets (NPAs) that could endanger the financial system and spill over to the real economy. Kotak said, “Earnings growth is likely to be subdued at 10% CAGR over FY2013-15E due to slower revenue growth (less than15% CAGR), increase in cost-structure and elevated provisioning costs for dynamic provisions, improvement in coverage ratio and NPL/restructured loans.”
The integrity of banks balance sheet is felt more in public sector banks than private banks. “The divergence in operating performance (earnings, revenue and loan impairment) continued between public and private banks,” Kotak said in its report. According to the report, overall cost-income ratio increased to 48% from 45% in 4QFY13 for public banks while private banks reported a modest increase to 44% from 43% in December 2012.
More important is how bad loans have affected the balance sheet of banks. Kotak said, “The next leg of loan impairment being likely to emerge in the large corporate portfolio as balance sheets of these companies show a high degree of stress.” Most private banks reported slippages of between 0.9% and 1.5% of loans. Indian Overseas Bank saw 5% in slippages, while Punjab National Bank (4%), Andhra Bank (4%) and Oriental Bank of Commerce (3%). “Overall slippages were marginally lower at 2.6% of loans with slippages primarily from the SME and large corporate portfolio. Most banks continue to report better performance in the agriculture and retail portfolios—a key comfort,” said Kotak. It is pertinent to keep an eye on how the monsoon is this year even if forecasts remain optimistic, as agriculture sector largely depends on it.
When a loan is likely, or is estimated, to go bad, banks usually restructure it. When the incidence of restructuring is high, it is time to worry. The Kotak report said, “Credit costs were at elevated levels to factor the revised restructured guidelines and write-offs. Fresh restructuring was high but the new guidelines helped to show a decline in outstanding restructured loans.” Even though restructuring can be negative over the short run, it could prove beneficial in the long run as balance sheet is gradually rid of toxic loans.|
More worryingly, the overall banks’ deposit base is found to be shrinking. One of the important parts of a bank’s business model is the deposit base. This is because this is the source of income for banks to lend to others (albeit at a higher rate) and make profit on the differential. When it is shrinking, they have less to loan out. Despite the Reserve Bank of India’s (RBI) cut in repo rate in January (and subsequently again in May) credit off take did not take off as anticipated.
However, on the brighter side, Kotak is optimistic on the prospects of some NBFCs, mainly because of increased credit off take and decline in interest rates. The report said, “We believe a sharp decline in interest rates in the bond markets over the past two months will drive earnings over the next few quarters even as loan growth will moderate and NPLs rise. We raise our target price by 1%-3% to roll over to June 2014 (rolling 12 months).” Credit off take in this sector is, surprisingly, strong, growing between 16%-37%. However, an auto and infrastructure slowdown could stymie NBFC growth, according to Kotak. Bad loans continue to be an issue for NBFCs though, with Kotak stating: “With improvement in collections in 4QFY13, several NBFCs reported a sequential decline in NPAs. However, on a yoy basis, NPL increased for several players.” Amongst NBFCs, Kotak is optimistic on IDFC, LIC Housing Finance, Magma Fincorp and Bajaj Finserv.
Amongst non-NBFCs, it likes ICICI Bank and SBI. The report said, “Among private banks, we like ICICI Bank (steady growth, strong CASA and high tier-1 ratio) and maintain our negative view on HDFC Bank (expensive valuation). Among public banks, we like SBI but note that earnings/growth performance in the current quarter is discomforting.”