Nomura is positive on RIL and Cairn. Among oil PSUs, it believes that upstream PSUs are vulnerable to higher subsidy share
With a sharp decline in oil prices and continued monthly diesel price hikes, Nomura Equity Research estimates first quarter (1Q) under-recoveries (U/Rs) to decline 27% q-o-q at Rs263 billion. While upstream companies are demanding a lower subsidy share (currently billing at same $56 per barrel as last year), the brokerage believes it is unlikely a decision will be made soon. This may lead to a sharp decline in net realisations for ONGC and Oil India (OIL).
Nomura estimates nearly flat gas transmission volumes for GAIL & GSPL. It expects Petronet LNG’s (PLNG) utilisation to improve sequentially to near 100%, but well below earlier highs of 110%-114%. For Indraprastha Gas (IGL), volume growth is likely to recover but EBITDA/scm could moderate due to an increasing share of LNG and weaker currency. The brokerage expects Gujarat Gas (GGAS) to report good results, as it should benefit from price hikes and softer LNG prices, believes Nomura.
Nomura estimates Reliance Industries’ (RIL) PAT at Rs52.2 billion (up 18% y-o-y, but down 7% q-o-q), with the sequential decline driven by weaker refining margin ($8.5/bbl, down 16% q-o-q) and a further decline in E&P EBIT. For Cairn India, the brokerage estimates a 9% q-o-q drop in EBITDA due to lower oil realisation, but the bottomline would likely be boosted by forex gains.
The UPA government which cleared and passed the National Food Security Bill ordnance is expected to put a severe dent to fiscal scenario in over the next few years and have wide reaching implications, including inflation and imbalances in the agriculture sector
Nomura Fixed Income Research expects that the National Food Security Bill (FSB) to have ramifications on the Indian economy over the next few years, which includes runaway inflation, distortion in demand-supply scenario and increases in imbalances in the agriculture sector. Nomura also expects the FSB to cost the exchequer a whopping 1.8% of the GDP over the next three years. The report addressed to clients, titled “India: Implications of the proposed Food Security Bill”, said, “We do not expect a substantial fiscal impact in FY14 as implementation will take time: our current estimate of the food subsidy bill is Rs 1 trillion in FY14, slightly above the government’s budget estimate of Rs900 billion (0.8% of GDP). However, once fully implemented, the total cost is likely to rise from 0.8% of GDP to 1.3-1.8% of GDP over the next three years due to a higher food subsidy bill and other ancillary expense.” Many investors and savers should be concerned over this dire forecast.
The United Progressive Alliance (UPA) government passed the ordnance on the controversial Food Security Bill and has raised several eyebrows, apart from the insurmountable costs involved. An ordnance does not require parliamentary debate, but requires parliamentary approval, which is expected in the monsoon session of the parliament. Many political parties have called this ‘undemocratic’ because the cost-benefits of the bill have not been discussed in parliament. Moreover, most have viewed the ordnance as a political ploy to earn brownie points before the elections next year. Despite the expected impact on the exchequer, Nomura, however, expects the bill to go through. It said, “Unless there is a parliamentary logjam, we expect it to pass as most political parties would not like to be seen opposing a pro poor bill.”
On a related note, despite being “pro poor”, not all infrastructures are in place to ensure that the grains actually reach the poor. It is pertinent to note that India’s public distribution system (PDS) is still a mess. Nomura further stated, “The current targeted public distribution system (PDS) has a significantly large level of leakage (estimated at 40%). If the government can computerize the entire food distribution system, roll out the cash transfer scheme and eliminate these leakages, then the financial impact of the food subsidy burden may not be as large. However, this is a time-consuming process and most likely the government will rely on the existing PDS to roll out the NFSB in the initial phase. As such, this will lead to a higher food subsidy burden.”
Moreover, the FSB is expected to lead to distortion in the agricultural system which could further impact inflation. The economics is stacked against farmers because costs have increased a lot but minimum support prices (MSP) have barely caught up with costs. According to Nomura, costs have increased 16% while MSP have increased just 5% for food grains. There is no incentive for farmers to produce food grains. Therefore, there will be a shortage of food grains for the government to procure. While much of the food grains will be budgeted under the FSB, the private sector will not get their due. This will simply lead to demand-induced inflation due to shortage of supply. In cases of drought, this could exacerbate the demand-supply situation. Nomura states, “We see the proposed FSB as inflationary, because it creates a demand-supply mismatch, requires raising minimum support prices, could create a shortage of non-grain food items and reduces the marketable surplus for the private sector“
There is even a possibility of the private sector importing grains from abroad, due to lack of domestic supply, especially with a weak rupee abroad. Though at the moment, there is surplus food grain; but there will be situations where droughts and poor monsoons can lead to shortage. Already India imports large quantities of food items from abroad.
The fiscal impact of the FSB is expected to cause a stress on India’s finances. One of the major expected fallout of the FSB, apart from fiscal stress, is inflation, as mentioned above. Much of India’s economic growth has been dogged by persistent inflation, which the Reserve Bank of India (RBI) has been targeting for a while. Inflation could worsen if the government (as well as the next government post-elections) is not able to manage food supply properly.
The FSB proposes foodgrain entitlements to 67% of India’s population at hugely subsidised rates for the first three years. The rates are: 5 kg per person per month of foodgrain, at an issue price of Rs3 per kg for rice, Rs2/kg for wheat and Re1/kg for coarse grains. The FSB is also expected to lead to reforms in the targeted PDS, including doorstep delivery of food grain, use of IT for end-to-end computerization and so on but, according to Nomura, is expected to take time and the benefit of the revamped PDS system will be felt only after years.
The court, however, said that its decision will not apply to MPs, MLAs or other lawmakers who have been convicted and have filed their appeals in the higher courts before the pronouncement of this verdict
The Supreme Court on Wednesday struck down as ultra vires a provision of the Representation of the People Act (RPA) which protects convicted lawmakers against disqualification on the ground of pendency of appeal against their conviction in the higher courts.
“The only question is about the vires of section 8(4) of the RPA and we hold that it is ultra vires and that the disqualification takes place from the date of conviction,” a bench of justices AK Patnaik and SJ Mukhopadhaya said.
The court, however, said that its decision will not apply to MPs, MLAs or other lawmakers who have been convicted and have filed their appeals in the higher courts before the pronouncement of this verdict.
The provision of RPA says that a lawmaker cannot be disqualified in the event of his conviction in a criminal case if he or she files an appeal in the higher court.
The apex court’s verdict came on the petitions filed by Lily Thomas and NGO Lok Prahari through its secretary SN Shukla who had sought striking down of various provisions of RPA on the ground that they violate certain constitutional provisions which, among other things, expressly put a bar on criminals getting registered as voters or becoming MPs or MLAs.
The PILs had said that certain sections of RPA allow convicted lawmakers to continue in office while their appeals are pending and thus those provisions are “discriminatory and encourage criminalisation of politics”.