Govt Ratnas Fail to Sparkle on the St

Due to undervaluation of such stocks, govt could raise only . 1.4k cr of the planned . 40k-cr, thereby derailing divestment plan

As the financial year enters the last quarter, the Indian government is struggling with its fiscal deficit. By the end of November, this had reached 94% of the FY14 target with a third of the year left. One disappointment has been asset sales. The divestment of shares in state-owned companies, from which the government had budgeted to raise . 40,000 crore, has only yielded a paltry . 1,400 crore so far in the year.
That’s not surprising considering the significant and consistent erosion in the value of the Maharatnas, Navratnas and Mini-Ratnas, designated as such because they are supposed to be the best public sector undertakings (PSUs). The Navratna title was originally conferred on nine companies that were seen as capable of becoming global leaders and were given more financial freedom than their peers to achieve this stature. The other two titles were created as more companies were identified and slotted into the categories depending on their size.
An ET Intelligence Group analysis shows that the market capitalisation of the Maharatnas – a grouping of the seven biggest government companies, all of which are listed – dropped 17% in the last one year, when the BSE Sensex gained more than 4%. The listed Navratnas, 12 in number, lost 14.5% in value while the worth of 14 listed Mini-Ratna companies plunged 56%. Over a three-year period, the underperformance is even more stark. The Maharatnas dropped 25% in the three-year period, the Navratnas were 30% cheaper and the Mini-Ratnas lost 68%, while the BSE Sensex was up more than 13%.
All the seven Maharatnas — Bharat Heavy Electricals, Steel Authority of India, Oil and Natural Gas Corp, Indian Oil Corp, GAIL, NTPC and Coal India —have lost market capitalisation in the last 12 months. GAIL lost the least (6.4%) and IndianOil the most (33.2%), which is why the petroleum ministry recently opposed plans to sell shares in the company. 
All the listed Navratnas lost value, with Power Grid Corp losing the least (less than 1%) and Mahanagar Telephone Nigam dropping the most (38.6%). Among the Mini-Ratnas, Dredging Corporation and Container Corporation of India were the only two generating positive returns for investors, each gaining more than 18% in the last one year, while ITDC and MMTC lost more than 90% of their value.
This degree of value erosion and the underperformance relative to the rest of the market are why the government has been hesitant about pursuing its divestment programme. Apart from the proposal to divest a 10% stake in IndianOil being deferred again last week, the listing of Navratna Rashtriya Ispat Nigam has been put off indefinitely.
Some of the reasons for the poor performance are business related.
“Most public sector companies operate in the domestic arena and are not export-oriented,” said Dipen Shah, head of research, private client group, Kotak Securities.
“With the domestic economy not doing well, the performance of these companies has suffered. There are various issues -- for example, oil companies are hit by subsidies, power companies by lack of fuel supply and engineering companies by projects getting delayed.”
The problem with the companies is also systemic in nature.
“The underperformance has always been a reflection that ownership and management need to be divergent,” said Gaurav Parikh, managing director of JSA Advisors, a Mumbai-based boutique investment advisory. “As long as it’s government-owned and managed, there will be corporate governance issues and government interference in the operations and toplevel appointments and paralysis in decision making,”
The government is now planning to set up an equity-traded fund (ETF) for state-owned companies to raise . 3,000 crore. This will hold shares of 11 PSUs with ONGC carrying the highest weightage. The acceptance of such a product and its success will depend on the performance outlook of each company, which doesn’t look too bright right now. “In my opinion, the underperformance will continue for the next year or two as India grapples with macroeconomic issues of high inflation, rupee depreciation and low GDP growth rate,” said JSA Advisor’s Parikh.
Shah of Kotak Securities sees most of these companies doing better once incremental reforms take place and procedural bottlenecks are removed. “PSUs definitely remain good longterm bets, but in the short-to-medium term, there is a lot of uncertainty over their performance,” he said. “Even within PSUs, those with a stronger balance sheet or high cash balance are more preferred over the rest.”

New Projects to Fire Up Mangalore Refinery’s Growth in Next Fiscal

Securing steady supply of power will help MRPL to shrug off a two-year lean patch

Mangalore Refinery & Petrochemicals (MRPL) is looking for a turnaround in the next fiscal year after a tough two-year period, with its top executives pinning their hopes on likely commissioning of some long-delayed projects to drive growth. This could also help the company’s badly-bruised stock price.
MRPL completed its third phase of refinery expansion two years ago, only to realise that a captive power plant needed to run the additional units was not ready. The new units were built to improve the company’s flexibility in processing heavier, but cheaper, crude oil that will help it improve profitability. The refinery units are awaiting the availability of uninterrupted steam and power supplies for carrying out their pre-commissioning and commissioning activities, the company said in its latest annual report released in August.
Things have gradually progressed since then. “The main reason for the delay (in commissioning the new units) was the captive power plant being built by BHEL, which is partially functional now but will take some more time to become fully operational,” said VG Joshi, director of refineries.
Getting a steady supply of power will allow MRPL to go ahead with commissioning its fluidized catalytic cracking unit, delayed coker unit and sulphur recovery unit, which will help it process high TAN and heavy crude, increase distillate yield by upgrading lowvalue naphtha and black oils, produce value-added products like propylene and upgrade its diesel output to Euro III/IV grades.
In will likely bring huge benefits for the company. “The commissioning of these units by January 2014 will add $3 a barrel to our gross refining margins,” said managing director PP Upadhya.
Besides, it will also allow commissioning of its 440,000-tonne-a-year polypropylene unit. “Once these units are up and running smoothly, we will be able to commission the polypropylene unit by around July 2014,” Joshi said. According to him, by March 2014, the units will achieve a 60% utilisation level, which will be scaled up to 100% over two-three months after that. The company also recently commissioned a single-point mooring facility, which will enable it to import crude oil in very large tankers from far off places like West Africa and Latin America.
On an expanded capacity of 15 million tonnes a year, these additional benefits could translate into significant gains on its balance sheet. A $3-a-barrel gain in refining margin would mean an incremental operating profit of . 2,000-2,300 crore on an annualised basis. The delays in project commissioning and ongoing capital expenditure had resulted in the company’s debt-equity ratio shooting up from 0.2 at the end of fiscal 2011 to 1.7 as of September 2013. Its interest burden jumped from 5% of operating profit in fiscal 2011 to 71% in fiscal 2013. Commissioning of these long-delayed projects will help ease the situation.
The stock closed trading Thursday at . 41.25 on the BSE, compared with its 52-week high of . 69.50. 

Weak Rupee Negates the Gains of a Soft Crude Oil Price Regime

As the year draws to a close, global crude oil prices appear to have remained rangebound through the year at close to the $105 per barrel-mark. There are several factors curtailing further growth in oil prices, but India has steadily witnessed a rise in under-recoveries as the rupee weakened. The quarter to December is likely to end with higher under-recoveries or sales of products at below cost by state-owned oil companies compared with the earlier three quarters of 2013.
Through 2013, crude oil prices climbed to $113 in the first quarter and then fell to $99 levels in the second quarter, while the last two quarters saw the prices move between $103 and $107 per barrel.
Rising production in the US, growing spare production capacity at OPEC and an expected slowdown in consumption on weak economic growth have all depressed oil prices. However, supply-side problems and unplanned production outages have helped oil prices stay high. Even the recent nuclear deal between Iran and six western countries did little to ease crude oil prices. Nevertheless, the impact on the Indian companies has been negative, as the under-recovery on selling fuels below cost has continued to soar.
For the October-December 2013 quarter, the domestic industry is estimated to lose at the rate of . 440 crore daily or approximately . 40,000 crore, which in the first three quarters averaged below . 32,400 crore.
The main reason for this rise in underrecovery is a sliding rupee, which averaged close to 54.8 against the dollar at the start of the year, but dropped to 62.5 in December, marking a 14% drop in value. The outlook on crude oil production is favourable in the near term as the shale revolution continues to grow in the US and countries such as Iran and Iraq are able to ramp up output. However, that doesn’t necessarily translate into a drop in oil prices ahead, particularly since a large number of old wells as well as the new deep water exploration efforts call for high prices to remain commercially viable.
The world economy is expected to grow at 3.5% in 2014 compared to just 2.9% in 2013. This has already started pushing up oil demand.
Paris-based International Energy Agency upped its estimate for global oil demand for 2013 by 130,000 barrels per day (bpd) in the last month of the year on stronger than expected demand from industrialized nations. It also noted a fourth consecutive monthly drop in OPEC production to 29.73 million barrels per day (mbpd) for November, although the group agreed in December to leave its production target unchanged at 30 mpbd.
For India, this global stability means little as the baby steps the government is taking to curtail fuel subsidies are proving futile due to a weakening rupee. The fair weather window in the global oil markets is likely to remain open in the next few years, with low oil price volatility. By 2020, India is set to become the single largest growth driver for global oil demand, when it surely won’t be able to carry on with under-recoveries like now.

Accountants’ Battle Flares Up with Cos Act

Chartered & cost accountants lobbying to sway decision-making with Act’s provisions seemingly limiting scope for the latter

The rivalry between the two accountancy streams — cost and chartered — has escalated into a battle over what one group perceives as the machinations of the other to cut it down to size. At the heart of the dispute is the new Companies Act, the provisions of which have curtailed the scope of the cost auditors. 

Ranged on opposite sides of the dispute are two groups that share an acronym and a profession – the Institute of Chartered Accountants of India and the Institute of Cost Accountants of India.
Both are currently engaged in hectic lobbying to sway decision making, according to officials in the ministry of corporate affairs (MCA) and other stakeholders.
Suresh Chandra Mohanty, president of the cost accountants’ institute, told corporate affairs minister Sachin Pilot in a November 22 letter that the elected members of the institute may resign en masse if the ministry did nothing to protect its interests. EThas a copy of this letter.
Cost accountants say they feel betrayed by the latest turn of events. An expert panel set up by the ministry in 2008 to review the cost audit mechanism had made certain recommendations about widening the scope of such checks. To start with, only 44 specific industries and businesses — in which administered prices, subsidies, regulation and strategic public interest are involved — had been covered by cost accountants. The field was enlarged through various notifications in 2011 and 2012 as per the suggestions of the expert committee.
However, draft rules issued by the ministry in November under the newCompanies Act roll back these changes. Mohanty described the draft rules as “de-facto withdrawal of recognition” in a November 23 press release.
By definition, this branch of accounting analyses costs such as raw material, wages and marketing that a company incurs and establishes a link with the profit margin it earns. In the process, companies get better clarity on costs, making them easier to control. Cost accountants say the audit process helps authorities build authentic cost data on industries, which could be used in instances such as controlling drug prices, setting tariffs, plugging tax leakage or sniffing out fraud. Chartered accountants look at the company’s books and validate balance sheet.
Cost accountants feel that their utility won’t be realised fully if more than 96% of the corporate sector is kept out of their purview as proposed in the latest draft rules. They believe cost audits play a critical role in ensuring good fiscal behaviour. Chartered accountants, on the other hand, say cost audits are intrusive and blur the lines of accountability — to the extent that two sets of auditors look at the same data — besides making it difficult for companies to do business.
While both look at the same data, their approach is different. Statutory auditors need to give their opinion on whether the balance sheet gives a “true and fair view” of the financials, since the accounts are based on a number of assumptions. The work of cost accountants is more focused as they certify the actual cost of production of a product or service based on actual payments made.
Chartered accountants say they also uphold responsible business conduct and good governance.
“The purpose of company law is not to micro-manage business aspects. In an era where competitiveness is essential, no business appreciates intrusion, burdens or regulations which add to complexity of business without true value addition,” said a member of the chartered accountants’ institute.
Industry is mostly in favour of the new draft rules as it feels these are less onerous.
Applying the cost audit mechanism to products and services through a statutory diktat would be in direct conflict with recent growth-oriented economic policies, said Sidharth Birla, president-elect, Federation of Indian Chambers of Commerce and Industry (Ficci).
Such rules may be regarded with suspicion by the overseas investors that India has been trying to woo, he said. Added a Mumbai-based industrialist with interests in fast-moving consumer goods, “What have such regulations achieved other than to provide income to one profession?” Chartered accountants say Pakistan is the only other country that has mandated the maintenance of cost records and cost audits for business entities.
Cost accountants say the animosity of chartered accounts is of long standing.
“Way back in 1959, when the Institute of Cost and Works Accountants of India was enacted under a statute of parliament, the (Institute of Chartered Accountants) in its representation had stated that no such profession existed in India or anywhere else in the world,” said a past president of the cost accountants’ institute.
It “had then said that cost accounting was only a specialised branch of accountancy,” this person said, quoting the protest made at the time, “By a mere enactment, a profession which does not actually exist cannot be brought into existence.”
Cost records provide information that’s useful for running businesses efficiently, said PR Ramesh, chairman, Deloitte India. However, extending such audits widely may be counterproductive.
“While it is desirable that all entities maintain cost records, it would be appropriate if legislation mandated such maintenance only for businesses which operate in critical sectors or which are in receipt of subsidies from the state,” he said. “In a free-market economy, businesses should be free to determine what systems and processes they need, considering the benefits they perceive are derived from maintenance of such systems and processes.”
Cost accountants say they didn’t get a chance to represent their case when the draft rules were being drawn up.
Rakesh Singh, central council member of the institute and its president until July, told ET that no formal invite was received from the corporate affairs ministry to join the rules committee.
Singh said he wrote to the ministry in May when he came to know about what he described as misconceptions being spread about the cost audit mechanism. The institute then submitted its suggestions formally to the ministry.
“Both communications appear to have been ignored when preparing the draft rules,” Singh said. “The MCA has a specialised department on cost, but I doubt if their views were also considered at the time of finalising the draft rules.”
The committee that drew up the draft rules was made of representatives from the corporate affairs ministry, industry, the professional institutes, besides domain experts in law and capital markets, said additional secretary Mohan Joseph. 

Issues with Govt Still Weigh on RIL

Index heavyweight Reliance Industries continues to underperform the broader benchmark index Nifty 50 even in FY14, continuing its subdued trend over the past four fiscals. Although brokerage houses have started revising their views in the past four months, the stock remains range-bound due to a few concerns. Investors will do well to wait and watch.
Despite a significant weightage on benchmark indices such as Nifty 50 and the BSE Sensex, Reliance Industries has gained just 1% during the past three months, against the 11.5% gain in the Nifty and 10.4% in the BSE Sensex. A Bank of America Merrill Lynch report said that RIL stock price has underperformed the BSE 30 by 98% since April 2009 due to its weak EPS growth (CAGR of 4% for FY08-13) and de-rating of its E&P. Even after its continued underperformance, analysts in brokerages have been bullish, of late.
According to data compiled from Bloomberg, just 50% of 56 brokerage analysts tracking the company had a ‘Buy’ recommendation at the start of September 2013. This has gone up to over 62% now. However, the improvement in ‘Buy’ recommendations has not been supported by any improvement in the target price. The average one-year forward target price was . 975 – or 14.3% above the then prevailing price – at the start of September, which stands at . 985 – or 13.2% above its closing price on Thursday. In other words, analysts are being bullish without really raising the target price.
This could be interpreted as an improvement in terms of visibility over future earnings, but earnings growth itself will be high. RIL has embarked upon an expansion programme and expects doubling of natural gas prices starting April 2014 and its forays in retail and telecom are close to reaching critical mass.
A Morgan Stanley report said that RIL is set to double its profits over F13-17e driven by higher gas prices and volumes and downstream expansion, with one of the most aggressive price target of . 1,156, or 33% above the current level. These bullish recommendations apart, investors are not biting owing to anumber of concerns. Concerns on implementation of the gas price increase and RIL’s dispute with the government on ‘cost recovery’, besides a weak outlook in refining margins over the next couple of years are reasons to worry. The BoAML report said that RIL’s FY15-16e GRM could be significantly lower than assumed and its gas price may not be hiked in April 2014. In that case, RIL’s FY14-16e EPS CAGR may be much lower – at 2-12% – as compared to our base case of 17%, it warns. Retail investors would be better off waiting for more clarity on these issues . 

Cost Auditors Hit Out at New Draft Rules That Curb their Scope

ICAI says new rules will hurt company stakeholders and also jeopardise the prospects of many auditors

The latest draft rules issued by the ministry of corporate affairs related to the cost records and audit mechanism could substantially curb the scope of the cost audit profession and have outraged its practitioners, who say their implementation will hurt company shareholders.
The Institute of Cost Accountants of India, set up under an act of Parliament, has expressed deep concern and vowed to “leave no stone unturned” in seeking to make sure the draft isn’t implemented. ET had first reported on August 12 that the government was considering a reduction in the scope of cost audits due to industry pressure.
The draft rules curtail cost audits in three ways. First, the number of industries covered is reduced. “At present a company engaged in production, processing, manufacturing, or mining activities is required to maintain cost records,” said Suresh Chandra Mohanty, president, ICAI. “Moreover, all listed companies are required to maintain cost records. Cost audit is applicable to a company for which cost audit is ordered by the central government,” he said.
“The draft rules require only those companies that are operating in strategic sectors or in industries that are regulated by a sectoral regulator, or a ministry or department of central government or in some specified industries such as manufacturing of components and equipment being used by railways, minerals and ores. It also covers health care services and education services,” Mohanty said.
Secondly, the turnover and net worth threshold have been increased substantially. “The threshold has been increased from net worth of . 5 crore to . 500 crore and the threshold of turnover from the specified product is fixed at . 100 crore,” Mohanty said. Third, apart from the companies required to undergo cost audit, all others have been exempted from maintaining even cost accounting records. “Nearly 90% of the economic activity will be out of the purview of cost records and cost audit,” said Dhananjay Joshi, a leading cost accountant and past president of ICAI.
ICAI listed its opposition to the draft rules in a press release. “It is well established that managers act opportunistically and they take short-term view and benefit themselves even when the going is bad. In absence of reliable cost accounting information, independent directors will not be able to assess whether the company is achieving optimal productivity of resources,” ICAI said. “The reversal will hurt shareholders and other stakeholders.”
“It is noteworthy that when the MCA itself had appointed an expert group in 2008 and implemented its recommendations in 2011 and possibly the first audit report is filed only for the year 2012-2013 for most of the companies, MCA has taken a total Uturn,” said Joshi. 
The implementation of the draft rules could jeopardise the prospects of many who left other jobs to pursue cost accounting. Also, “the profession will not be able to attract talent and it will become weak. This will hurt all the stakeholders,” ICAI said, while terming the development as “de-facto withdrawal of recognition.”
“Cost audit is not only the audit of cost accounts, but it also reveals the utilisation of the scarce resources in the country. At a time when our economy requires efficient and costeffective resources utilisation, the new rules will defeat this purpose,” said Nachiket Vechalekar, associate dean, Indian Institute of Cost and Management Studies & Research.
The corporate affairs ministry said any changes will be based on feedback received. “The draft rules are in the public domain for comments and suggestions of stakeholders. As in case of other rules, a final call will be taken only in the light of the feedback received. In the circumstances any further comments on the issues are premature,” said Naved Masood, secretary. The ministry has asked stakeholders to send comments on the draft rules by December 6. 

GUJARAT GAS: Sept Show won’t be Sustainable

Gujarat Gas reported a 19.7% jump in profit to . 119 crore for the quarter to September. This is by far the highest quarterly profit posted by the private sector natural gas distribution company. But analysts say the company will not be able to sustain the high profit in the quarter to December. They have given a “Hold” call on the stock. Gujarat Gas, however, still holds the potential to generate value for investors. The company is focusing on improving margins and expects volumes to rise in the coming months. One of the main reasons behind the high profit growth at Gujarat Gas was its all-time high gross margins at . 9.4 per standard cubic metre. The resultant operating profit margin increased to 23.7% from 19% in the year-ago quarter. This was a result of one-time favourable developments. “We decide on pricing based on our projection of natural gas costs and volumes,” Sugata Sircar, managing director at Gujarat Gas, told ET. “During the September quarter, the availability of local gas was higher than expected, reducing the use of imported LNG to 48% against 50% in the nine months to September.” As a result, the cost of raw material for the company turned out to be lower than anticipated, which boosted its margins. The company has also managed its other operating costs well. The company’s performance over the past few quarters has underlined its focus on maintaining and improving profit margins by aggressive price hikes. The company last raised the price inOctober anticipating higher LNG prices during the winter season. Gujarat Gas also maintains that its stagnating volumes should not be seen as a long-term handicap. “Every quarter, we are signing new volumes with industrial clients while CNG and PNG customers are increasing. However, volumes would drop if clients switching over to grid power were higher,” said Sircar. The September quarter saw the situation changing as the company posted a marginal increase in natural gas volumes. An improvement in the industrial scenario and beginning of the new investment cycle should firmly reverse the declining trend in volumes. “We have bottomed out in volume terms,” Sircar said. Gujarat Gas will have a cash balance of nearly . 600 crore even after paying . 9 a share interim dividend announced by it. Considering it will generate . 350-400 crore of cash annually with capex requirements just one-third of that, its cash pile will continue to bulge. At 11 times its earnings for trailing 12 months, the company’s stock appears attractively valued for long-term investors.