Companies & Sectors
The farce of power sector reforms: States have limited room to absorb more liabilities

The state electricity boards’ debt restructuring plan has to be accompanied by more liabilities to be taken on by the states. Most states have already breached their targets under the Fiscal Responsibility Act

The Cabinet Committee on Economic Affairs (CCEA) recently approved the scheme for restructuring the debt of state distribution companies (Discoms). The scheme lists various measures required to be taken by Discoms and state governments for achieving the financial turnaround of the Discoms by restructuring their debts with support through a Transitional Finance Mechanism by the central government. The scheme will remain open up to 31 December 2012, unless extended by the Government of India (GOI), the ministry of power said. The scheme announced by the central government to state power distribution companies is an attempt to restore power purchasing capacity of the debt-ridden Discoms and enable banks to recover their loans.
However according to CARE Research, states involved in the current restructuring plan may find it difficult to adhere to their respective fiscal deficit limits given the acceptance of weaker states in the central restructuring package and the doubts over the tariff hike momentum given the limited room for states given bulging subsidies and anticipated slower revenue growth.
The restructuring would be beneficial for the short term, over the long-term functional autonomy would be essential. The scheme requires the states to take over 50% of the short-term liabilities (STL) through issuance of special securities (non-SLR bonds) in favour of participating lenders in a phased manner, according to the fiscal limits available (under FRBM Act). The balance 50% needs to be restructured by the banks with a three-year moratorium. According to CARE Research, this may bring a short-term relief for the Discoms but in the long-term it will all depend on how the Discoms are able to raise tariffs and cut distribution. According to Nomura Research, as most states have ‘effectively’ breached their Fiscal Responsibility and Budget Management (FRBM) targets at present, getting immediate Statutory Liquidity Ratio (SLR) status for bonds issued by Discoms looks unlikely.
The impact on state governments will be huge as the previously off-balance-sheet commitments to SEBs now increasingly become part of their budgets. According to CARE Research the fiscal deficit of problem states (Punjab, Andhra Pradesh, Madhya Pradesh, Haryana, Rajasthan, Tamil Nadu and Uttar Pradesh) is already more than 2% of their respective Gross State Domestic Product (GSDP). As per the FRBM Act, state governments are mandated to maintain the fiscal deficit of around 3% of their GSDP (3.5% in case of Punjab). However, the fiscal deficit of the above-mentioned seven states is already between 2.1% to 2.98% (3.26% in case of Punjab) as per their financial year 2012-13 budgets. Thus, they have very limited fiscal room to absorb any more liabilities on their books. Of the seven stated only four would meet the required amount as per space available in the FRBM limit for FY2012-13. 
With an expected decline in GDP growth impacting the revenues of states and centre, the situation may be more complex. The state governments would have to go in for additional new taxes/sale of assets to raise resources. However, with state elections due in Rajasthan and Madhya Pradesh in December 2013 and a general election due in 18 months, such revenue-raising measures seem difficult.
Underpaid subsidies and underestimated losses are a key concern for Discoms. The Shunglu Committee Report, which evaluated 15 state distribution companies. The components of “Other Current Assets” are highly ‘opaque’ with likely possibility of subsidy booked, but not received with higher proportion of agricultural losses (than accounted for) being hidden. The accumulated losses of the Discoms are estimated to be about Rs1.9 lakh crore as on 31 March 2011.
Most of the banks have already initiated the restructuring of advances on their own and according to CARE Research banks have already restructured around 45% of the total Discom advances in the past few quarters. The restructuring packages have reduced the asset quality concerns of banks along with a state guarantee on the Discom advances.
Although more clarity is awaited on the interest rate at which the bonds will be issued by the SEBs. According to Nomura research, 50% of the loans to get converted into Discom bonds are likely to attract the state government coupon rate (8.5%-9%), entailing a 5%-6% hit in the Net Present Value (NPV). The 50% loans restructured with three-year moratorium and five-year repayment will not attract an NPV hit if the coupon rates are maintained. However, it might attract 2% provisioning as per RBI norms. In the worst-case scenario, the overall haircut for banks could be in the range of 5%-6% excluding the mark-to-market impact. 


Another chance to sell BHEL?

Euphoria over power sector reforms ignores severe concerns on fuel shortage, says Nomura and downgrades BHEL to ‘reduce’. It sees the current rally as an excellent opportunity to exit the stock

Revival of new orders in the power equipment sector is unlikely and the euphoria on SEB (State Electricity Boards) restructuring ignores severe concerns on fuel shortage, says the Nomura Equity Research. BHEL outperformed the Sensex by about 20% over the past three weeks on the back of the new restructuring plan for SEBs. While the plan is likely improve the health of the power sector, it does not change the outlook for new equipment orders, in Nomura’s view, as fuel supply concerns continue:
 As per estimates, despite building in an optimistic 620 million tonne increase in coal supply per annum over FY12-17F (at 18.3% CAGR), the annual order inflow for BHEL is unlikely to exceed 6GW per annum
 In contrast, a realistic assessment suggests that actual coal increase will be less than 377 million tonnes (at 12.5% CAGR) implying 32GW of existing orders will have to be cancelled; BHEL faces risk to about 28% of its order book.
•  Further, rising competition and falling utilisation during times of negligible order pipeline could have a cascading effect on margins.
BHEL is expensive even on best-case coal supply outlook, argues Nomura. It maintains its estimates which build in the best-case coal outlook and, despite that, it arrives at a DCF-based (discounted cash flow) target price of Rs199 per share. 
Nomura factors in deteriorating margins (down to 12-14% post FY14 from 21% currently) and medium-term order inflow of about 6GW per annum. Given about 20% potential downside, the brokerage firm downgrades BHEL to ‘Reduce’ and sees the current rally as an excellent opportunity to exit the stock. Instead, Nomura recommends playing the SEB reform story through power lenders such as PFC (Power Finance Corporation) and REC (Rural Electrification Corporation).
The most critical warning from Nomura in this context is that coal supply estimates indicate limited incremental equipment opportunity over FY13-17F. Fuel supply for power plants has not kept pace with the significant capacity addition that developers in India are planning. Nomura has been highlighting its concerns for a while, and still emphasises that coal availability will be the key bottleneck apart from land and environmental clearances in deciding the finalisation of new projects. In the best-case scenario, Nomura estimates that coal supply can increase to 1.09 billion tonnes per annum from 469 million tonnes per annum currently (for the power sector). Despite building these numbers, the brokerage firm thinks that there is scope for only 22GW of additional equipment ordering over the next two to three years.
Whatever little order inflow comes up in the power equipment sector, post the challenges in the coal sector, will face the litmus test of severe competition in the domestic market. Compared with a near-monopoly status in the past in the context of NTPC orders, BHEL’s market share has fallen to just 36% in the recently concluded bulk tendering for NTPC orders (both the phases put together). Ironically, this is despite the preferential treatment given to BHEL. It was awarded 2-4 units in all the orders subject to it matching the lowest bid. Nomura sees a bigger threat looming in the future, since NTPC does not have any more similar tenders lined up and, moreover, all the future tenders will have no preferential treatment for BHEL. 
Moreover, Nomura notes that the 36% share in NTPC orders is fraught with the risk of lower margins, since BHEL will get these orders by matching the prices quoted by the lowest bidder, which seems way below BHEL’s normal pricing. 




4 years ago

A clear fortnight ahead this article gave advice to use current rally to exit the stock, BHEL.

Today the prediction came true with a bang.

BHEL had steep fall of 6.58% {Rs15.95} in big volumes {1,09,55,053}

Well done Money life digital team.

Mohan Raj

Commercial vehicle sales: Headed down?

If the economy does not improve and the present trend continues, then LCV volume growth in FY13F/FY14F could turn out to be 17%, while MHCV volume growth could be 15%, says Nomura Equity Research

SIAM  (Society of Indian Automobile Manufacturers) has cut forecasts across segments  and the downside risk to both MHCVs (medium and heavy commercial vehicles) and LCVs (light commercial vehicles) volume estimates is fairly high, based on September 2012 volume data from SIAM, says Nomura.
Nomura believes that the downside risk to both MHCVs and LCVs volume estimates are fairly high. If the economy does not improve and present trend continues, then LCV volume growth in FY13F/ FY14F could turn out to be 17%/flat (current forecasts 20%/15%) while MHCV volume growth could be -15%/ flat (current forecasts are -10%/+8%). Thus downside risks to Ashok Leyland estimates are increasing.
Domestic volume growth for all passenger vehicles was 4% y-o-y (year-on-year).Utility vehicles (UVs— including vans) led with 38% y-o-y growth while cars declined 5% y-o-y. Domestic MHCV volumes declined 15% y-o-y and those for LCVs increased 16% y-o-y leading to 4% volume growth for CVs. With these volume numbers SIAM also reduced FY13 volume growth forecasts to 1%-3% for cars (from 9%-11%), 3%-5% for CVs (from 6%-8%) and to 5%-7% for two wheelers (from 11%-13%).
Nomura expects the downside risks in CVs and two-wheelers; negative for Ashok Leyland and Hero MotoCorp.
For two wheelers, based on current trend, Nomura sees flat volumes in FY13 compared to the estimate of 5% growth. The brokerage notes that Bajaj Auto has improved its motorcycle market share to 27.5% in September 2012 from 25% in FY12, while that for Hero MotoCorp has dropped to 45.7% from 56% in FY12. 
Nomura maintains the view that ramp up of Honda will hurt Hero MotoCorp but will have limited impact on Bajaj Auto. Downside risks for Hero MotoCorp estimates are very high, in Nomura’s view. It expects volume growth momentum in UVs to continue; positive for M&M (Mahindra & Mahindra).
UVs (including vans) have reported 30% y-o-y volume growth FYTD (Apr-Sept 12) and the trend remains strong to beat is forecasts of 25% volume growth for FY13F. The brokerage firm thinks that M&M should continue to benefit from this trend. 
Nomura believes that SAAR (seasonally adjusted annual rate of sales) for cars will improve with MSIL (Maruti Suzuki India) ramping up production, but car volume growth could turn out to be 2%-4% compared to its estimate of 5% currently. However, Nomura still doesn't see downside risks to volume growth estimate of 10% for MSIL in FY13F, given the low base, new Alto launch, and production ramp up at Manesar.


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