India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
Capital Ideas
Capital Ideas. Continuing our regular meetings with policy makers in the capital of the
country, our second edition of Capital Ideas this financial year led us to meet with
movers and shakers in various fields of infrastructure: water, power, coal and oil. We
also met with two soft infrastructure creators: media and skills-development. We came
back with a positive stance on India’s current ’corrective phase‘ and skilling, while the
concerns on coal and power remain. Expect tariffs for water and power to rise.
Patrick Rousseau, CMD, Veolia India: Water distribution in India
India is increasingly beginning to realize that ’water is free but service needs to be priced‘. India
currently is in the process of developing transparent and fair rules and accountability provisions
that can facilitate private sector entry. Veolia has recently signed up a water supply agreement
with Nagpur Municipal Corporation where it will meter and bill its 2.7 mn people. Veolia believes
that Indian cities have enough water if the distribution is well-managed—expensive production
options like desalination are best avoided, except in certain areas.
Shoma Chaudhury, Editor, Tehelka: Corrective phase
India is passing through a corrective phase in its politics and governance: the excessive land-grab
attitude of business without consideration for the people or environment is manifesting itself in
the inevitable collision. The right lesson to draw from the current phase is not that there should be
flight of capital from India but that Indian business and politics need to take into account the
current and future generations along with them: the idea should be to create long-term
sustainable profits, rather than short-term gains.
Dilip Chenoy, MD and CEO, National Skills Development Corporation: Skilling India
Lack of skilled workers is creating bottlenecks in growth (while inflating costs) and is creating
capital-intensive projects. India needs to upgrade the skills of its workforce to make them
employable and more productive. The current issue in skill-development is the lack of scale of
current operators: NSDC is helping various ventures scale up by creating the right eco-system and
via funding as it goes about its task of creating 150 mn skilled employees over the next 10 years.
Tantra Narayan Thakur, MD, PTC India: Rising tariffs
Power tariff rise is going to be the new reality as state governments try to find a mechanism to fill
the annual losses of the SEBs and repay the bonds issued in 2002. Bihar and Punjab recently raised
tariffs by 19% and 9%, respectively and Delhi is expected to follow suit soon. The power purchase
agreements may need to be revised to take into account the new realities of coal prices, Chinese
currency appreciation and interest rates.
GC Chaturvedi, Secretary, Ministry of Oil: Updating the understanding
Recent government moves on oil pricing have led to an easing of pressure on the OMCs: a more
sustainable and rule-based method is under evaluation. On the Reliance gas block, he expressed
confidence that the stated reserves exist though technical issues on pumping them out need to be
solved. On ONGC, he expects the subsidy to go back the levels as earlier. On Iran, there is no clear
path on how to resolve the issue. He expects LPG subsidy-targeting to start soon.
Alok Perti, Special Secretary, Coal: Auctions and availability
Coal-block auctions should become a reality in the near future as guidelines get formalized in the
next 2-3 months. His bigger concern is on the availability of coal for the ambitious XIIth Plan
targets for power generation: there can be an annual gap of around 110 mn tons by end of the
next plan period, even after accounting for imported coal. Such a shortfall could inevitably lead to
deficit in power generation.
PATRICK ROUSSEAU, CMD, VEOLIA INDIA: WATER DISTRIBUTION IN INDIA
India is increasingly beginning to realize that ’water is free but service needs to be priced‘. India currently is
in the process of developing transparent and fair rules and accountability provisions that can facilitate
private sector entry. Veolia has recently signed up a water supply agreement with Nagpur Municipal
Corporation where it will meter and bill its 2.7 mn people. Veolia believes that Indian cities have enough
water if the distribution is well-managed—expensive production options like desalination are best avoided,
except in certain areas.
Understanding the company
Mr. Rousseau has been associated with Veolia for the last 35 years and since 1995 has been
heading operations in new geographies outside of France. He has been associated with
Veolia’s entry into South Africa, Morocco and countries in central Africa and eastern Europe.
He has been heading India since 2002.
Veolia has 4 main lines of businesses: (1) water (2) solid waste management (3) energy and
(4) public operators. In water, they look at public utilities in urban areas (and hence bottled
water or supplying rural irrigation water is not their area of activity). They also leave the
management of the water resource to the local (state) government. As public operators in
India, they will operate the Mumbai Metro Line I and II, where they will look after items like
train running and maintenance, ticketing, crowd control, etc. Their guiding philosophy is to
be an operator, not an investor.
Water business in India
The jurisdiction over water in India rests with the urban local bodies (ULBs), making water a
very local business as each authority has a different approach and framework of engaging
private players (for more on the business of water in India, refer our GameChanger report:
Water: A Deluge of Opportunity)
At a more macro level, India is still in the process of developing clearer rules where a fair and
clean request for proposal (RFP) can be developed and then the effective enforcement of
standards and regulations remains as an issue. The ideal situation would require creation of
these processes so that the utilities (whether public or private) can be held accountable.
India has ’plenty of water‘ but the issue is around distribution of water, the production of
water (which was seen as more glamorous) has attracted talent but distribution has lagged
behind. The pipes laid are non-standard and the lack of investments over time has meant
that the gap between the desired and actual distribution has widened significantly.
Veolia believes that there is a paying capacity for water in India and according to their
estimates the average burden that can be borne is in the range of `15 per cubic meter
(1,000 liters). This is enough to cover the operation and maintenance costs of the project
but not the capital cost. He believes that ’full-cost recovery‘ is also not the right approach in
India currently. This average tariff will possibly be realized by charging industry at `45-50 per
cubic meter and households at `5 per cubic meter.
Nagpur: Understanding water concession agreement
Veolia has, three weeks ago, signed a 25-year-long concession agreement with the Nagpur
Municipal Corporation (NMC) to manage the water utility. The utility, which serves 2.7 mn
people and expects a through-put of 500-600 mn liters a day (mld), will require an initial
investment of `3.5 bn and will possibly require further investments between `5 bn and `10
bn. Most of the investments will go in pipe and pipe-laying and in metering.
The project, a joint venture with a local company, Vishwa Raj, is approved under JNNURM
and hence funding for the initial investment is coming via central government (50%), state
government (20%) and private investments (30%).
The final cost to the customer will be `15 per cubic meter. This comprises a tariff of `7.9 per
cubic meter, administration cost of NMC and collection for loan repayments of NMC. The
city is currently 30-40% metered and Veolia expects to meter it 100%. It has been decided
that the poor areas of the city will also be metered but in those identified areas the pricing
will be fixed fees and ’non-volumetric‘. There is an escalation clause in the tariff and a fiveyear
re-basement mechanism.
Process of bidding
The bidding for the project was two-step: technical and price-based. The initial round saw
12-13 bidders which were narrowed down to three after the technical bids were evaluated.
The pricing bid was a quote as a discount to a tariff specified by NMC. While he did not
answer the question on how close the final bids were, he mentioned that the bidding was
ration from the perspective of Veolia and they do not see this project as
a ’flagship‘ or ’investment‘ project—this needed to make sense on a standalone basis. The
four-year process from conceptualization to award of tender is, in his opinion, par for the
course.
Other cities
Veolia is working on ’demo projects‘ in World Bank-financed projects in Karnataka in towns
like Hubli-Dharwad and Gulbarga. The objective is to demonstrate that it is possible to
deliver 24/7 water supply. The other cities which are in the process of awarding full city
contracts include Patna, Bhopal and Shimla, among others. He mentioned that desalination
is not a good option in India because of the high capex and opex: this should not be tried in
cities like Mumbai which have reasonable amount of water supply—getting the distribution
right is important
SHOMA CHAUDHURY, EDITOR, TEHELKA: CORRECTIVE PHASE
India is passing through a corrective phase in its politics and governance: the excessive land-grab attitude of
business without consideration for the people or environment is manifesting itself in the inevitable collision.
The right lesson to draw from the current phase is not that there should be flight of capital from India but
that Indian business and politics needs to take into account the current and future generations along with
them: the idea should be to create long-term sustainable profits, rather than short-term gains.
Batting for an equitable world
The journey of Tehelka is not a fight for an equal world (we are not communists or socialists)
but for a world of equal opportunities and justice. The discussion drew upon Ms.
Chaudhury’s on-the-ground experiences across a variety of locations like Singur, Nandigram,
Singrauli, among others. Her politics changed after her Singur visit: she thinks business
houses should recognize the need for doing business with consensus and taking the
considerations of the impacted people in mind.
She believes that the current phase of demonstrations and oppositions is a corrective phase
and the democracy of India ensures that we don’t veer off too much to an extreme: this is a
phase of taking corrective-action. The issues that are hampering growth are issues of justice
and she believes that efficiency cannot be the only marker for business: they need to take
into account longevity of the enterprise.
The recent worries espoused by the captains of industry that India is witnessing a flight of
capital, in her mind, is a wrong lesson learnt from the current state. She believes that India
needs to have confidence in its market and not be worried about business opportunities
running away—business cannot ignore India given its potential. India needs to get its
priorities right.
Maoism as a response to colonization?
The way businesses went about land-acquisition and mining recently, she believes, is a form
of colonization where the wealth of rural/hinterland India was funding the growth of urban
India. She believes that environmentalism that we are witnessing currently comes from the
micro issues of livelihoods and the future of upcoming generations (else why would a
Narmada Bachao Andolan continue for 22 years). The rampant trampling of rights (whether
it was via the SEZ policy or the mining policies) lead people into extremism.
She believes that the next leg of extremism will start to impact urban India. She exemplifies
the tin-roof housing provided to the workers at construction sites (where they are building
glitzy malls or expensive high-rises) which lack the basic facilities lead to frustration.
Apparently the reason such facilities are provided is to meet the specified norms of the labor
laws requirement and no more. Her contention is that such profiteering (by following the
letter of the law rather than the spirit) causes consternation.
However, the bigger issue is why should the democratically elected government vacate the
rights discourse and leave it to the left-wing extremists to take it on? Should the
government not think about the issues progressively?
Lessons being learnt—right takeaways important
The recent voting out of the governments in West Bengal and Tamil Nadu has had an
impact on the minds of the politicians and policy makers. Similarly, the fact that CEOs and
ministers are in jail the message is being sent loud and clear. She believes that right lessons
need to be learnt: business need not run away, they need to take the human element along
with them, politicians need a transparent rule making system (starting with political funding)
and media needs to start being less shrill and show-justice and lot more substance.
DILIP CHENOY, MD AND CEO, NATIONAL SKILLS DEVELOPMENT CORP.: SKILLING INDIA
Lack of skilled workers is creating bottlenecks in growth and project executions (while inflating costs) and is
creating capital intensive projects. India needs to upgrade the skills of its workforce to make them
employable and more productive. The current issue in skill development is the lack of scale of current
operators: NSDC is helping various ventures scale up by creating the right eco-system and via funding as it
goes about its task of creating 150 mn skilled employees over the next 10 years.
Skilled employees—one of the largest challenges before India Inc
People and their productivity have become the biggest issue for India Inc. With only 17% of
companies in the manufacturing sector sending their employees out for training (the lowest
in the BRIC nations) and only 2% of the shop floor workers having received any formal
training, productivity enhancement is a critical issue that India businesses must face.
Lack of skilled workers can create (1) bottlenecks in growth or project execution or (2)
dependency on capital-intensive projects. The low number of skilled workers has meant that
there has been a lot of horizontal movement (movement across various companies in an
industry) rather than vertical movement (growth of the employee) in the company, with a
resultant increase in wages/salaries but hardly any increase in productivity.
Some of the examples that Mr. Chenoy laid out for the lack of skilled workers include the
(1) involvement of Chinese labors in Delhi airport, (2) lack of availability of glass fitting
technician holding up the completion of the CII building by 3 months, (3) local workers in
Mumbai not willing to work beyond four floors in height and hence, projects needing to
wait for outside labor to take up such jobs.
A study by NASSCOM estimated that the IT industry spends around US$3 bn annually on the
training of its employees. While the model of large IT companies have been to create corecompetencies
of training in-house (refer the case study of Infosys in the GameChanger
report, ’The Great Unskilled – Can we fix it?’), many other firms (he cited Genpact, for
example) have outsourced their training needs to other companies (in this case, NIIT).
How to go about it?
The current issue with the training set-ups in the country is that many of them are operating
at a woefully small scale. The current set up of institutes catering to 2,000 to 3,000 students
leads to a cost of `15,000 a student: if the model is scaled up, the cost can come down to
`6,000. He believes that, while there are challenges in finding trained faculty, it is not a
challenge that can be overcome—for example, post the retirement age of 58, many can
become trainers till say, about the age of 65.
For the organizations setting up the training management institutes, they require 70% of
their students to be placed so that the institute becomes sustainable. A multi-sectoral
venture would work better than a single-skill based institute. Unlike in the filed of education,
there is no restriction either on profit making or dividend distribution in vocational training.
In light of all this, the business plans that NSDC is funding show an IRR of between 21%
and 55%.
Genesis of NSDC
A couple of things led to the start of NSDC (1) Dr. CK Prahalad, as an advisor to the PM,
mooted the idea of a helping hand of entrepreneurs in the skill development space such that
robust business models emerge in the sector, and (2) state governments began requiring its
vendors to offer them services rather than products—for example, under JNNURM the state
governments and ULBs wanted busses as a service rather than as equipments. Since the
vendors were signing service level agreements (SLAs) specifying that the busses will be up
and running 98% of the time, they needed trained drivers and mechanics. Such requirement
from the industry created a significant push to creating trained personnel.
Some of the various other industries where he sees such a transition are healthcare (for
example, hospitals want to pay per X-ray image for example, rather than for an X-ray
machine), telecom (where a full service is required for the towers) and facility managements
(where guards are doubling up as plumbers, etc.).
Creating the eco-system
NSDC is taking the lead in creating the sector skill councils so that individual industries can
set up their own standards of how they want the students to be trained. 37 such councils
are in various stages of being formed with the lead being taken by IT, health, media and
energy sectors, among others. A product that the NSDC has helped develop is a loan
product for the students where NSDC gives a 10% first loss default guarantee. They are also
getting Indian skilled technicians to participate in the World Skills Olympics.
MR. TANTRA NARAYAN THAKUR, MD, PTC INDIA: RISING TARIFFS
Power tariff rise is going to be the new reality as state governments try to find a mechanism to fill the annual
losses of the SEBs and repay the bonds issued in 2002. Bihar and Punjab recently raised tariffs by 19% and 9%,
respectively and Delhi is expected to follow suit soon. The power purchase agreements may need to be
revised to take into account the new realities of coal prices, Chinese currency appreciation and interest rates.
Get ready for tariffs rising
The current consternation in the investing community about the health of the state
electricity boards (SEBs) is surprising given that the situation, according to him, has not been
dramatically different over the last 16 years since he has been associated with the power
sector. Drawing upon the FY2009 figures of `300 bn of SEB losses, he expects that, on the
higher side, the current SEB losses would not be more than `600 bn annually. Given that
India produces around 800 bn units of power, an increase of less than `0.8 per unit will can
help wipe out the deficit.
The current average rates of tariff in India are between `3 and `4 per unit and hence a `0.8
per unit increase is an increase of around 20-27%. This increase can of course, not happen
overnight but recent examples give comfort that increases are possible. Bihar recently raised
power prices by 19%, Punjab by 9%, and in Delhi the Chief Minister has recently mentioned
that the city needs to gear up for higher prices of power. He believes that there is paying
capacity for power if the right quality of power (stability, timing, etc.) is provided.
The `300 bn 10-year tax-free bonds issued by the SEBs in 2002 (on the basis of a tripartite
agreement between the states, centre and RBI) will come due now. It is this cash outflow
that the state governments will need to make that will force them into taking some strong
decisions on the pricing of power. Possibly, the regulators will be allowed to suo-motto
increase tariffs, even if no recommendation is presented to them.
Re-open the PPAs?
The power purchase agreements that were signed over the last 5-6 years, there have been
significant changes in the basic economic variables on the basis of which the agreements
were signed: (1) the price of coal, which had historically risen by 2-3% per annum shot up
suddenly rendering meaningless the 4.5% per annum price rise cap that was built into the
agreements, (2) the value of rupee has depreciated against the Chinese currency, thereby
increasing the prices of equipment and (3) the interest rates have changed dramatically.
Agreements, amounting to 40,000 MW of power, are being re-thought.
However, reopening the PPAs is not easy, especially in light of the current situation where it
is difficult to take any action which seems to benefit a private company.
Status updates
The coal shortage is well-known and in engaging the attention of the relevant people. In the
case of hydro power projects, other than a few cases of concern in damming the Ganga or
Bhagirathi, most of the others are on track. The SEBs have always paid (there may
sometimes be delays, but then the penal interest has also been paid) and hence, there is
limited need to worry on account of SEB dues.
On the Karcham Wangtoo project, there is an active process of resolving the technical issue
that has cropped up between the operator and PTC: at what price should the power be sold.
The pricing was to be decided by CERC or by applying CERC norms on CEA certified costs.
Both CERC and CEA have refrained from giving a tariff or approving the costs. The costs are
now being vetted by IIT, Rourkee, which has expertise in this matter.
MR. GC CHATURVEDI, SECRETARY, MINISTRY OF OIL: UPDATING THE UNDERSTANDINGRecent government moves on oil pricing have led to an easing of pressure on the oil marketing companies: a
more sustainable and rule-based method is under evaluation. On the Reliance gas block, he expressed
confidence that the stated reserves exist though technical issues on pumping them out needs to be solved.
On ONGC, he expects the subsidy to go back the levels as earlier. On Iran, there is no clear path on how to
resolve the issue. He expects LPG subsidy-targeting to start soon.
Under-recovering the under-recoveries
The recent government decisions have led to the falling of under-recoveries by `490 bn:
`280 bn via duty cuts and `210 bn by passing it on to the customers. What the decision has
not been able to achieve is making good the under-recovery for the first few months of the
year and solving what would happen if the prices remain high for the year (beyond the
Indian crude basket price of US$90 or US$95 per barrel).
Various methods of apportioning the under-recoveries are under consideration of the
Ministry of Finance. One which is considered possible is that the under-recoveries will be
borne one-third each by the Ministry of Finance, Ministry of Oil and Petroleum and the last
one-third will be passed on to the consumers.
On Reliance
On the issue of Reliance’s gas production, he was of the opinion that the reserves seem to
be there (despite the current write-downs by Niko): he says that if BP has done a due
diligence and the seismographic reports both suggest that the reserves are intact. What
needs to be done of course is to resolve the technical issue of how to get the reserves out.
The involvement of BP should help bring in the expertise. He says that the deal approval is in
process: it must be noted that this deal is different from Cairn-Vedanta since there is no
change in operator here.
On ONGC
ONGC’s share of the under-recovery at 38% in Q4FY2011 was a fait accompli based on
how the subsidies were divided among the other companies. The tiered formula which has
appeared in the press is not being considered. It is for the government of disinvestment to
decide when they want to do the follow-on public offering.
On gas
The price of APM gas will remain fixed till March 2014 as was decided by the GoM, post
which it can change. He believes that there is significant demand for gas and now since
supply is an issue, a re-consideration for LNG may set in. If that were to happen (that seems
not to be the case now as PLNG is still not able to convince NTPC to offtake gas from the
Kochi terminal), the infrastructure around LNG (finalizing contracts, setting up a terminal
and laying pipelines) can be done in 3-4 years. He believes the setting up of pipelines for the
gas should be done post there being some clarity on where the gas will come from.
On other issues
On Iran, he was not sure how or when the issue will get solved but MRPL which has the
largest exposure is also considering if it can get substitutes, say from Venezuela, which has a
similar type of crude. On smart card for direct transfer of subsidies, he expects an easier roll
out for LPG as the database exists with the three oil marketing companies. They are in the
process of putting the data of the various OMCs on one platform and de-duping. However,
how the cap of subsidy will be implemented is another matter altogether
MR. ALOK PERTI, SPECIAL SECRETARY, COAL: AUCTIONS AND AVAILABILITY
Coal-block auctions should become a reality in the near future as guidelines get formalized in the next 2-3
months. His bigger concern is on the availability of coal for the ambitious XIIth Plan targets for power
generation: there can be an annual gap of around 110 mn tons by end of the next plan period, even after
accounting for imported coal. Such a shortfall could inevitably lead to deficit in power generation.
Auctioning the coal blocks
The process of auctioning of coal blocks is on track. After the amendment to the statute last
year, the work on framing the guidelines is on and should complete in the next 2-3 months,
post which the auctioning process can begin. In tracing the history of auctioning, Mr. Perti
traced back to the year 1993 when coal fields were allotted to captive users (for example,
steel plant operators) as not getting coal was hampering their production. In 2003, the
process was changed to bring in the concept of allotment letters, which while initially did
not pick up, saw a rush of applications as the power sector demand shot up and a selection
committee was formed to judge the priority and preparedness of the mine allocation
recipient. As the value of coal shot up, the concept of auctioning is now being brought in.
Coal availability
According to the XIIth Plan, the target is to create new power generation capacity of
100,000 MW, of which 70,000 MW is expected to be coal-based. The ~60% achievement
of the XIth Plan target raises concerns on whether this ambitious target will be met—the
Xith Plan coal-based capacity addition is expected to be less than 40,000 MW. The hope for
the XIIth Plan rests on a significantly larger expectation from the private sector. However,
whether public or private sector is expected to deliver, the issues holding up capacity
expansion are similar, whether it is environmental clearances or coal linkages.
Given an average consumption of 4.5 mn tons of coal of producing 1,000 MW (1 GW) of
power, producing 70,000 MW would require 315 mn tons of coal (70 GW * 4.5 mn tons).
Assuming that 12,000 MW of this capacity will be set up by port based plants, this still
requires 58,000 MW to be set up inland and hence, requires 261 mn tons of inland coal.
The imported coal-based capacity that is coming up in coastal areas suffers from the low
berthing and vacating capacity at the ports.
Deep diving into the inland coal-based production, he is not very hopeful of a more an 5%
per annum rise in coal production in India, which compares with the 4.5% per annum
growth as witnessed in the XIth Plan period. Given the current production of around 550
mn tons, even assuming a 5% per annum growth rate, the production at the end of fifth
year will be around 700 mn tons, implying an incremental capacity creation of around 150
mn tons, Given the requirement of 261 mn tons, this will leave a significant shortfall.
He believes that there is significant optimism attached in expecting a 5% growth. The
current additional capacity that Coal India expects to create over the XIIth Plan period is 110
mn tons (which appears conservative). However, growth has to come from Coal India as
there is limited scope for volume growth from Singreni. The growth of Coal India also needs
to come in from capacity expansions of current facilities only: even in the ’go areas‘ (as
opposed to the ’no-go areas‘) if new work were to be started, the first set of production will
accrue only in the XIIth Plan period.
MMDR Act
He decided to refrain from answering specific questions or conjecturing on what the
outcome of the Group of Ministers meeting would be as the said meeting was going on
even as we were meeting with Mr. Perti. Since then there have been media reports and
comments from our respective analysts in the coal and metals space on this issue.
No comments:
Post a Comment