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The country’s largest natural gas reserve at the Krishna-Godavari (KG) basin is losing steam. Natural gas production at the D6 block, controlled by Reliance Industries (RIL), has gone down to 24–25 million standard cubic metres a day (mscmd), down 60 per cent from its peak output. The fall happened as RIL shut six out of the 18 wells due to high water and sand ingress. The expected output from RIL and its partners — BP Plc and Niko Resources — was 80 mscmd of gas. The situation is going out of control, said an RIL executive, who did not want to be named. “At present, we are not thinking about raising output. We need to at least stabilise the production at 24 mscmd.” Another company official said that if the decline is not arrested, production will hit zero in a few years. On 9 October, oil secretary G C Chatur-vedi agreed with the analysts, who said that RIL and its partners may have to shut the underperforming D6 fields by 2015–16. A day before, Morgan Stanley analysts had said that the fields could be exhausted in five years. But low production is just one side of the coin, the other being pricing. RIL had asked the Centre to increase rates from $4.2 per million British thermal unit (mBtu) to import parity rates of around $14.2 per mBtu. Such a rate hike would add around $4.1 billion to RIL’s revenue, making the development of the KG basin more economically viable for it. Deven Choksey, CEO and managing director of KR Choksey Securities, says, “The basic fact in this issue is that production from KG D6 is becoming economically unviable at the government-approved price. RIL may not spend further to sort out the technical issues if the government doesn’t revise the gas price in line with the market price.” RIL says it is also waiting for many government approvals to sort out issues. “The work programme and budget for D1 and D3 discoveries are lying with the government for the last two years,” the RIL executive said. To cut the water and sand ingress, RIL needs to inject mono ethyl glycol (MEG) in the wells and install a booster compressor; it is also looking to convert the oil wells at its MA oilfield in KG-D6 into gas wells. “We need approvals from the government for all these jobs,” the official said. The government-led management committee has not yet approved the declaration of commerciality of the R-Series cluster comprising D29, D30 and D31 gas discoveries, citing technical reasons. Though the management committee had approved field development investments for D6 for three years in August, RIL is awaiting an official communication from them, said an official. In January, RIL told the petroleum ministry that the reserves in its main production gas fields in the KG-D6 basin were only 3.10 trillion cubic feet (tcf), about 70 per cent lower than the original estimates, which it blamed on “unforeseen geological surprises” in the field. But government is not buying RIL’s explanation for the fall in production, saying that the company is intentionally keeping the output level low. “We are not convinced (that the fall is due to geological complexity). The director general of hydrocarbons is not convinced. Therefore, the matter has been referred to arbitrators,” Union petrol and natural gas minister S. Jaipal Reddy said. The ministry has referred the issue to arbitrators. With the two sides sticking to their positions, the country’s largest natural resource pool looks set to languish indefinitely. (This story was published in Businessworld Issue Dated 22-10-2012)
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These are trying times for Hindalco Industries’ bauxite and thermal coal mining projects in Orissa and Madhya Pradesh. These projects have already been delayed by a couple of years; now, the worry appears to be how the delay will affect the upstream Aditya Alumina and Aluminium smelter and power plant project and the Utkal Alumina project with its integrated bauxite mines in Orissa, and the Mahan Aluminium smelter in Madhya Pradesh. Hindalco intends to commission these upstream projects in the next two years. But analysts said they were worried about how the delays, and the possibility of further delays, would affect the long-term profitability of the company, as the clearances for the mining and power projects, which have been caught up in the ongoing controversy, are yet to be announced. Hindalco officials say the issues will be sorted out soon. In fact, K.M. Birla, chairman of Hindalco’s parent firm Aditya Birla Group, said at the annual general meeting on 11 September: “The Mahan Aluminium project, Aditya Aluminium project and the Utkal Alumina refinery are all at an advanced stage of implementation. Post-stabilisation, these will be amongst the lowest-cost producers globally.”2012 was when the Utkal refinery was slated to be ready. Now, the datemay be 2014But sources close to the developments present a different picture altogether. “There were some environmental issues and local opposition in both states,” says one. “Coal mining for the Mahan project has been delayed because of the interference of the environmental ministry. In Orissa, the Birlas face challenges similar to the ones Vedanta Resources faced in bauxite mining.” This month, Vedanta finally shut its Lanjigarh refinery after failing to use bauxite from the Niyamgiri hills. Hindalco’s 1.5 million tonne Utkal Alumina refinery was slated for commissioning by December 2012, which may now be postponed to 2014. So far, Rs 4,500 crore has been spent on the Utkal project. Besides, Hindalco may have to buy bauxite from the open market, which may add to the costs. Analysts at ICICI Securities believe that even if the Mahan coal block — which is being developed in partnership with Essar Power — is made available, it will take around 15 months to ramp up production. “The coal project in Mahan has been delayed by almost a year,” says Ravindra Deshpande, analyst with Elara Capital. “The feeling is that coal will be available only from 2014, even if they start work now,” he adds. Environmental NGO Greenpeace, however, alleged that the Ministry of Environment and Forests had given its clearance to the block despite it being in a prime forest area. So, should Hindalco investors be worried? Arun Kejriwal, director at Kejriwal Research and Investment Services, says the delay will hit the projected revenue of the company adversely. “If the anticipated earnings per share is not realised, it will affect share price too,” he says. All this could compound Hindalco’s problems. The firm is investing Rs 10,500 crore in the Mahan smelter project. Of this, Rs 7,800 crore in debt has already been tied up, while the remaining amount is being funded through internal accruals. The longer the delay in rollout, the longer the payback period, and the higher the interest costs. Hindalco recently completed financial closure of its Rs 13,195-crore greenfield Aditya Aluminium smelter at Lapanga in Orissa, which is likely to be commissioned by the middle of 2013. The project has been funded through a debt-equity ratio of 75:25, with Rs 9,896 crore as debt. Though Hindalco’s fate may not be hanging in the balance because of these projects, the delays will definitely hurt.(This story was published in Businessworld Issue Dated 29-10-2012)
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The friction between Reliance Industries (RIL) and the government seems to be easing. The government-led management committee (MC) approved field development investments for RIL’s Krishna Godavari (KG) D6 block for three years, but with riders. The MC approved the pending budget for the past two financial years and gave consent to $1.06-billion expenditure for 2012-13. “Whatever the contractor needs technically and administratively to raise production, we will do. Approvals will be given subject to conditions,” petroleum minister S. Jaipal Reddy said.The grave power situation in the country and the recent collapse of the transmission grids may have prompted the government to soften its stand on KG-D6. The government needs fossil fuel from all sources to tackle the shortages. But allowing the RIL investment with riders indicates the government’s eagerness to avoid flak from watchdogs such as the CAG.But will RIL be able to ramp up its production to the expected levels? The company’s current gas production is 29 million standard cubic metres a day (mscmd) from its KG-D6 block. This is much lower than the target of 80 mscmd. Output from the fields is expected to fall drastically.On 6 May, Reddy informed Parliament that the gas output from KG-D6 is projected to decline to 20 mscmd by March 2015. RIL had estimated 10.3 trillion cubic feet (tcf) of recoverable reserves in the Dhirubhai-1 and 3 (D1 & D3) gas fields in KG-D6. But the revised estimate of recoverable reserves is 3.10 tcf.“At least for the next two years, the output will remain low. New investment is needed to sort out the geological issues for increasing production,” says an RIL executive. The company has spent about $10.5 billion in developing the fields. At present, RIL and BP are working on an integrated and capital-efficient plan for D6 block development, involving production from all the 18 gas discoveries in KG-D6. The R- Series and satellite fields are also covered. Officials estimate that the company could save up to $1 billion through the integrated block development plan. According to sources, the MC headed by director-general of hydrocarbons Rajiv Nayan Choubey allowed RIL and BP to develop three other gas fields in the same block, but said that the operator would be able to recover costs only after extensive appraisal of these discoveries to establish commercial viability. The MC has not yet approved the Declaration of Commerciality of the R-Series cluster comprising of D-29, D-30 and D-31 gas discoveries due to technical reasons, but it has expressed its willingness to give time to the company to solve the issues. Obviously, the MC doesn’t want to delay production from these discoveries. But RIL still needs approval from the ministry and the Cabinet Committee on Economic Affairs. The government’s move is need-based. But is Reliance, which is struggling to increase production, confident of overcoming the geological hurdles? If it fails to reach the targeted 80 mscmd, how will it recover its cost by selling the fuel? Multiple issues are staring the company in the face.(This story was published in Businessworld Issue Dated 20-08-2012)
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The third quarter of 2011-12 (FY12) was a shocking period for India's largest oil refiner, Reliance Industries (RIL). For the first time in its history, the gross refining margin (GRM) — the difference between value of petroleum products and cost of crude — of RIL fell below the Singapore complex refining margin. All efforts to protect the margins through hedging failed. The narrowing of the price difference between heavy and light crude hit its bottomline. In the fourth quarter (Q4), RIL did better, and managed a marginal recovery in GRMs, to $7.6 a barrel, compared to $6.8 a barrel in Q3. That's a premium of $0.40 a barrel over the Asian benchmark, the Singapore complex GRM, much better than the $1.1 a barrel discount in Q3 FY11. But even then, RIL managed an average GRM of just $8.60 in FY12, compared to $8.40 in FY11. But the business environment for refining companies continues to be tough the world over; blame weakness in demand and capacity additions globally. Even if some of Europe's mature refineries close, the spread between light and heavy crude remains under pressure. The increase in light crude supply from Libya and the North Sea, the reduction in Iranian exports thanks to sanctions on that country and the strength in fuel crack prices are driving the demand for heavy crude.Essar Oil, too, is struggling to protect its margins, which came down to $6.07 per barrel during Q3 of FY12 from $7.31 a barrel in the same period of FY11. Industry experts expect Essar's margin will also improve in the fourth quarter, but it won't be stellar (the fourth quarter financial results are due next month).Analysts predict that the complete recovery of GRMs would take six to nine months. But L.K. Gupta, managing director and chief executive officer of Essar Oil says a correction has already started. "This is an abnormal condition that will not last long," he adds.There are many reasons for a subdued second half of FY12 for refiners. The tsunami in Japan led to shutdown of its nuclear power plants, forcing the country to use fuel oil (the residue from petroleum distillation) for power production, creating unprecedented demand for fuel oil. But complex refineries like RIL produce less fuel oil, and more petrol and diesel. The price of heavy crude rose seemingly due to surge in the demand for fuel oil. Complex refiners like RIL and Essar Oil added auxiliary units to increase complexity for producing more high value petroleum products by refining cheaper heavy crudes like Arab Heavy and Mexican Maya, and reducing production of low-value, low-demand fuel oil for better yield.The increasing isolation of Iran on the global scene is also jacking up crude oil prices. FY12 began and ended with crude prices above $120 a barrel, but they were highly volatile in between. In October the price of Brent crude (light) went below $100. Average crude prices also increased by 31 per cent in the last financial year. Analysts at Macquarie Bank estimate that the festering tension in West Asia triggered by Iran's nuclear policy leads to a daily shortfall of 2.5 million barrels of crude.In Search Of Greater ComplexityThe complexity of RIL's two refineries at 11.3 in its first refinery and 14 in the new refinery — measured by the Nelson Index (the higher the number, the more complex the refinery) — in Jamnagar allows it to process heavy and sour crudes, which are cheaper compared to lighter crudes, and produce the same value products as from lighter crudes. Essar has almost doubled its complexity to 11.8 at its refinery in Vadinar in Gujarat. Now, the situation is not helpful for the complex refineries, says an analyst with a foreign bank. The issue wasn't that serious for public sector refiners. "Historically, the public sector refineries were less concerned about complexity and refining margins," says a senior executive with one of the PSU refineries. "But that is changing. Indian Oil Corporation's new refineries are coming up with higher complexities. Bharat Petroleum and Hindustan Petroleum are thinking of increasing the complexity of their existing units for processing heavier crude." The complexities of old PSU refineries are below 8.In the longer run, no refiner can survive without investing in complexity, says an official with RIL. "So everybody is running to add units for extracting maximum value products," he adds. IDFC analysts say that the configurations of refinery capacities being added globally means demand for heavy oil has grown disproportionately, reducing Arab heavy-light spreads and, therefore, impacting the premium players such as RIL and Essar, which enjoy premiums over Singapore complexity.break-page-breakRIL's GRM improved in the sequential quarters as petrol prices bounced back, while LPG and naphtha spreads improved. At the same time, however, IDFC analysts believe that while demand for diesel will remain strong across Asia, the rate of growth in demand will moderate in both India and China over the next 6-9 months as GDP growth rates moderate across the region.According to Goldman Sachs analysts, "While RIL's Q4 results were impacted by improving but still relatively low refining margins, we believe the cycle should improve in the second half of this calendar year, driven by benefits from the closures in US and Europe, delays in new projects and recovering oil demand."RIL refining earnings before interest and tax (EBIT) were marginally higher due to improved GRM and lower segment depreciation, at Rs 1,700 crore, despite lower throughput due to a maintenance shutdown at its SEZ refinery. Macquarie Capital evaluates that the efficiency initiatives during planned shutdown will add $0.25 a barrel to GRM.RIL's improved margins were led by a strong revival in gasoline and naphtha cracks. They were up $4.2 and $6.6 a barrel, respectively. However, diesel cracks, which have a higher share in RIL's slate vis-a-vis Singapore GRMs, declined $1.5 a barrel on the back of weak industrial demand, write Edelweiss analysts in their report.Way ForwardRIL is taking a balanced refining outlook, with capacity additions in Asia being offset by shutdowns of high-cost refineries. The company has implemented several initiatives during the planned shutdowns taken last year (will improve GRMs by $0.25 a barrel), including debottlenecking of secondary units, increased ability to process more crudes, and some work on the Crude Distillation Unit (CDU) which will improve the yields of high-value products. GRMs were impacted by higher LNG cost as well. So RIL has decided to implement the petcoke gasification plant with a capex of $4 billion. RIL estimates this plant will add about $3 a barrel to its refining margin by replacing the high-cost LNG with synthetic gas produced from petcoke.Petcoke, which costs less, will produce syn-gas that would be used to meet refining energy needs, and lead to savings on high-cost imported LNG and higher-value fuels currently used. The off-gas cracker project is still in the planning stage, and would be taken up once work commences on petcoke gasification. The project is expected to be completed in the first quarter of FY15. Credit Suisse thinks that the gasifiers will produce the equivalent of 20 mmscmd of natural gas; a little under half of which may be used to substitute LNG currently used at the refineries. The rest is likely to be used as (part) feedstock for and to power the proposed off-gas cracker.Similarly, Essar Oil is setting up a coal-based power plant for feeding its Vadinar refinery. According to Gupta, the captive power capacitywill increase the GRM by $1, which means Rs 750 crore to the bottom line.Kotak Institutional Equities Research estimates that refining margins of FY13, FY14 and FY15 for RIL would be $8.4 a barrel, $8.7 and $8.9, respectively. The reasons are: limited supply additions globally, announced and expected shutdowns of refineries and incremental oil demand of 2 million barrels per day in two years.Citibank has marginally lowered their FY13 estimation on GRM of RIL to $7.8 compared to $8 earlier. "We expect Asian refining demand-supply balance to be relatively stable in 2012-13 following large refinery closures. New supply from India in 2012 (~300 kbpd) will keep the Asian market well supplied," analysts with Citi say in a report.According to Bank of America Merrill Lynch Global Research, the factors in favour of GRM are: a healthy rise in demand for global oil in Q2-Q4 2012; recently closed refining capacity in US and Europe, with more closures likely. Also, incrementally, over 2 mbpd of OECD refining capacity is under review, and this should support refining margins against upcoming new capacity.There's another hope. Light-heavy spreads that fell to an average $2.6 a barrel have started recovering. Light-heavy crude differential has weakened further during the quarter and is likely to remain subdued in the medium-term, predict Deutsche Bank analysts.However, UBS's outlook on RIL's GRM remains weak for the next two quarters. This is primarily on the back of: narrowing spreads between the Arab heavy and light; Brent prices likely to sustain amidst ongoing Iran issue; ongoing weak spreads for RIL's product slate — especially diesel; and regional forecast factoring complex refining margin to decline from $8.2 a barrel in 2011 to $6.5 in 2012 and $6.0 in 2013. "We have lowered RIL's GRMs marginally by 2-3 per cent to $8 per barrel and $7.75 per barrel for FY13-14E respectively," according to UBS.It's a tightrope walk for the refiners for the next six months at least.nevin(dot)john(at)abp(dot)in(This story was published in Businessworld Issue Dated 07-05-2012)
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Pranab Barua, Business Head - Apparel and Retail of Aditya Birla Retail (ABR), is in action. Like his predecessor Thomas Varghese, Barua is tightening the loose ends of retail business by downing shutters on 27 supermarket stores under the brand More in Mumbai. These stores had turned loss-making due to the high rentals and rising competition. Barua finds hyper markets to be the ideal retail model for Mumbai. "Except for the one profitable super market, which is at Kharghar in Navi Mumbai, we have closed down all the small retail shops in Mumbai. Similarly, we will look at the viability of supermarkets in high-rental places like Delhi," says Barua, who earlier was the managing director of Reckitt Benckiser India. Depending on the location and size of the catchments, the company will decide between supermarkets and hyper markets.ABR, a privately held company of Kumar Mangalam Birla, has 500 supermarkets and 12 hyper markets under More. Supermarkets were the one where the company had expanded rapidly in the first phase, and then closed many. During the time of Thomas Varghese, the company closed down more than 100 stores in two years and opened 50-60 at cost efficient locations.Unlike super markets, ABR started slowly in hypermarkets segment, but picked momentum in metros, posing threat to bigger players like Big Bazaar and Reliance Retail. But overall, Birla's food and grocery retail chain continues to make losses despite spending over Rs 600 crore on building the network across the country. ABR had reported a net loss of Rs 423 crore in the year ended March 2011 on net sales of Rs 1,637 crore. According to earlier estimates, the company will hit EBIDTA profitability by 2013 and PAT profitability by 2015, in 7-8 years of its operation.Barua is now focusing on controlling the costs to turn around the retail business. "We need to increase the throughput and margins to sustain the growth," he says. While controlling the costs by shutting down the loss-making shops in Mumbai, Barua aims to expand the business in low-capital cost cities with supermarkets. "In this financial year, we plan to open 70-80 supermarkets, in addition to adding 5-6 hypermarkets," he explains.In opening hyper markets, ABR faced delay because of the developer in most projects. With the financial downturn hit twice the market, most of the projects are completing at snail speed. In this environment of below 7 per cent GDP, the job of Barua is to change the retail business into cost efficient with the reduction or addition of stores, say analysts. According to a research report by The Boston Consulting Group (BCG), the organized retail in the country is growing at over 25 per cent and reaching a size of $44 billion by 2012. However, Indian players are still at nascent stage in forming a successful retail model, estimate analysts.While building retail business, the Aditya Birla group is seriously considering building its apparel portfolio under listed entity Aditya Birla Nuvo. For getting the operational synergies at the back end and plugging gaps in womenswear and kidswear, Nuvo decided to acquire a controlling stake in the rival Pantaloon retail chain, controlled by Big Bazar's Kishore Biyani. Unlike before, Birla is fast consolidating his consumer facing businesses at various levels. It's a tough task ahead.
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The war of words between Reliance Industries (RIL) and the government is escalating. The oil ministry, on 3 May, slapped a penalty of $1 billion for not meeting the natural gas production targets. Of the $5.76 billion that Reliance invested in developing the deep-sea KG-D6 fields, the ministry has disallowed $1 billion from the ultimate cost recovery (which is 2.5 times the total investment) till the company scales up production to the promised level.RIL has hit back, saying there was no provision in the production-sharing contract (PSC) to disallow any part of its investment. "The production fall and delay in drilling the promised number of wells are because of geological complexities," say RIL officials.A bit of history places the battle in context. On 23 November 2011, RIL issued an arbitration notice under the provisions of the PSC on "wrongful denial of cost recovery on the ground of lower production or underutilisation of facilities". However, no arbitrator was appointed. So RIL filed a petition in the Supreme Court on 18 April 2012 under Section 11 of the Arbitration Act, pleading for the appointment of an arbitrator (by the government).Under the PSC, RIL is entitled to deduct the cost incurred in developing the gas block from the revenue while calculating the share of profit to be paid to the government. The firm has already recovered $5.28 billion towards cost, but the government's argument is that the cost recovery that RIL is entitled to should be proportionate to the actual level of production.The current output of 34 million metric standard cubic metres per day (mmscmd) from KG-D6 basin is way below the target of 80 mmscmd for this time of the year. Output from the fields is expected to fall further. On 6 May, petroleum minister Jaipal Reddy told Parliament that the gas output is projected to decline to 20 mmscmd by March 2015; that's below the 34 mmscmd of gas that RIL will produce in 2012-13, and well below the peak of 60 mmscmd achieved in 2010.After RIL found huge gas reserves on the east coast in 2002, it changed the initial plan for producing 40 mmscmd of gas at a cost of $2.5 billion to 80 mmscmd at a capex of $5.2 billion. RIL's executive director P.M.S. Prasad told Businessworld that it added $3.6 billion in Phase II, taking its investments to $8.8 billion over 9-10 years, which was disputed by the DGH.This might put RIL on a weak wicket while going for arbitration. When RIL's high investment was questioned by the Comptroller and Auditor General of India, the pacifying factor was the promised output (80 mmscmd). Now with production below the initial target of 40 mmscmd, RIL's interest in doubling the target might invite criticism, say analysts. 34 mmscmd is the current production at D6, way below thetarget of 80 mmscmd at this time of the year (BW Pic by Sanjay sakaria) At the same time, the government cannot ignore the risk factors involved in the exploration business. "Natural calamities can alter the geology of the entire reservoir. The contractor is taking a financial risk while going for such huge investments," says an RIL official.RIL chairman Mukesh Ambani, in a letter to shareholders that was published in the company's annual report, said that production from D6 was impacted due to "unforeseen reservoir complexities". RIL sources say the KG basin was a virgin area when production started in 2009. So the geological issues were unknown. "That is why we roped in British energy giant BP." BP paid $7.2 billion to acquire a 30 per cent stake in 21 of RIL's oil and gas fields.RIL said it has cut the estimates of its proven gas reserves by 0.43 trillion cubic ft at the beginning of FY2012. RIL's reduced estimates reflect the firm's reassessment of its portfolio and the relinquishment of five blocks during FY2012.The government has rubbished claims that RIL has not violated the PSC with regard to output; it has warned RIL of further action if it fails to submit detailed plans with timelines and steps being taken to remedy the default.Some of the language of the PSC seems ambivalent; Clause 151 says the contractor can recover costs out of a percentage of total value of petroleum produced and saved from the contract area in the year. Separately, Clause 15.11 says: "…Such provisional determination of cost petroleum shall be made every quarter on an accumulative basis. Within 60 days of the end of each year, a final calculation of the contractor's entitlement to cost petroleum, based on actual production quantities costs and prices for the entire year shall be undertaken and any necessary adjustments to the cost petroleum entitlement shall be agreed upon between the govern- ment and the contractor within 30 days and made within 30 days thereafter."Therein lies the core of the dispute: how clear the PSC is in regard to linking production targets to cost recovery. RIL wants to arbitrate the Minimum Work Programme stipulated in the PSC for four blocks relinquished by the firm. "The firm has been advised that the government cannot deny cost recovery for any element of contract costs on the ground that the levels of production mentioned in the develop- ment plan were not being achieved. The company is following the required procedure for progressing the arbitrations," RIL's annual report says. In a letter to Prasad, oil ministry joint secretary Giridhar Aramane stated: "In terms of the approved initial field development plan (IDP) as amended, you were required to drill, connect and put on stream 22 wells by 1 April 2011 with an envisaged production rate of 61.88 mmscmd and 31 wells by 1 April 2012, with an envisaged production rate of 80 mmscmd." But RIL has completed just 18 wells. Of which only 12 are in operation now, which the joint secretary cites as the reason for production fall.RIL shares fell to Rs 671 on 8 May, compared to its 52-week high of Rs 967.90. When elephants fight, the grass gets trampled.(With Anup Jayaram)(This story was published in Businessworld Issue Dated 21-05-2012)
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Last week, the central bank restricted the loan size of gold NBFCs to 60 per cent of the loan-to value (LTV) of gold jewellery. It also barred financiers from granting advances against bullion/primary gold and gold coins. It stipulated that NBFCs should maintain a minimum Tier-l capital of 12 per cent by 1 April 2014, while asking them to disclose the percentage of such loans to their total assets.According to George Alexander Muthoot, managing director of Muthoot Finance, the largest player, RBI took this step because during the past year and particularly over the past two quarters there was a dramatic rise in the number of new entrants in this field. Pledging gold against loans is common in the south, especially in Kerala. But over the past three-four years, this phenomenon has expanded across the length and breadth of the country. The opportunity for NBFCs came up with the capital depletion during the financial meltdown in 2008. Gold loan financiers borrowed at high rates from banks and raised capital from individuals issuing debentures, offering high interest, for lending against gold. They offered 66 to 100 per cent of the value of gold. The RBI move to cut the LTV to 60 per cent will kill the competition among NBFCs, says a senior analyst, who tracks the industry. Now, the customer just needs to focus on the interest rate as the loan amount for a particular asset will be the same for all players. "After the RBI notification for NBFCs, the LTV offered by banks is comparatively higher. As the 60 per cent LTV norm is meant to help NBFCs, banks will also stand to benefit if they maintain similar LTVs," says Thomas John Muthoot, chairman and managing director, Muthoot Fincorp.Now, gold financiers will have to find more customers to build volume in business. But that may not be easy since it is feared that customers will now go to the unregistered players or non-NBFCs in the segment, which are in thousands. "They will continue offering loans up to 100 per cent of the value of the gold and that will pose a challenge to the business of the major players," say industry sources. RBI's thinking is correct. The risk factor for NBFCs has come down following this move, considering the fluctuation in gold prices. But the stock market did not buy this view. The share price of Muthoot Finance and Manappuram Finance, the largest and the second largest players, fell 11.35 per cent and 6.1 per cent, respectively, on 22 March, a day after the RBI announcement. The three major gold financing companies, including third largest Muthoot Fincorp, welcomed the RBI move, saying it will strengthen the industry. At the same time, they admitted that their margins would be squeezed.There are about 20 active NBFCs in the gold loan business; gold loans make up over 50 per cent of their financial assets. They need to maintain a minimum Tier l capital of 12 per cent by 1 April 2014. As some of them have extensively leveraged the balance sheet for expanding their business, they need to cut down branches and shrink the business to become profitable and repay the loans.(This story was published in Businessworld Issue Dated 09-04-2012)
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Reliance Industries (RIL) and the central government are having a tug-of-war and every move is tightening the rope. On the one hand, RIL wants to deploy global oil giant BP's expert team at the Krishna-Godavari (KG) basin to revive gas production, which fell to an all-time low of 39.80 million standard cubic metres per day (mmscmd) on 15 December due to technical snags. On the other hand, the government is planning to bill the developer (RIL) for fall in production as India aims to increase the usage of natural gas with prices of crude oil spiralling.But the government — largely the petroleum ministry and the Directorate General of Hydrocarbons (DGH) — has not approved BP's plans of becoming a partner in the production sharing contract (PSC) of 20 blocks operated by RIL. Although BP has completed payment of $7.2 billion and formed an expert team to tackle the reservoir issues, it has been waiting for almost 10 months for approval."Every two months DGH or the oil ministry comes up with questions on the deal. First, they wanted audited numbers of BP and that was given. Next, they found the land line and fax numbers of BP are missing. After that they suggested that the government should be included as partner along with RIL, BP and Niko Resources," says an executive close to the development.Last month, RIL chairman Mukesh Ambani criticised the government for its slow functioning. Attending the India Economic Summit in Mumbai, he suggested that both central and state governments should move fast.Soon after, RIL sent an arbitration notice to the oil ministry over the government's move to disallow some of the expenditure the company has incurred in the KG-D6 gas fields as punishment for falling output.The government's move is based on the advice of the solicitor general of India. In the arbitration notice, RIL stated that the move to limit the amount of expenditure the company can recoup from its flagging KG-D6 fields is illegal and outside the PSC. According to reports DGH later recommended that the oil ministry disallow partial cost recovery of RIL in this financial year and the next. That's a whopping $1.2 billion.As there is a contrary view that RIL intentionally keeps production low in order to fetch a higher price when gas prices are revised in 2014, the government is cautious in its move. According to the 2006 field development plan, where capital expenditure in D1 and D3 fields was hiked to $8.8 billion from $2.47 billion, RIL was meant to produce 61.88 mmscmd of gas from 22 wells by April this year and 80 mmscmd from 31 wells by 2012. But RIL has drilled just 18 wells for production, but shut down four due to technical problems.RIL's view is that drilling new wells will only add cost at $8-10 million per well. "We are looking for optimal utilisation of resource based on the joint study of BP and RIL," says an executive.(This story was published in Businessworld Issue Dated 26-12-2011)
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Having posted dismal results — a 89 per cent fall in profits — in the second quarter, India's largest steel producer is gearing up for harsher times to come. The quarter ending December (Q3) is expected to be ‘difficult', said Tata Steel Europe's (TSE) CEO Karl-Ulrich Kohler last week after the Q2 results were out.While waning demand for steel and rising costs of raw materials (coking coal and iron ore) have hit Tata Steel hard, the depreciating rupee also ate into its profits. Steel sales in Europe have thinned down since June on fears that Greece and other euro-zone countries may default on debt. TSE, which produces about two-thirds of Tata Steel's total steel and buys all the required raw material from outside, faced a 40 per cent increase in coal prices and 30 per cent rise in iron ore. The 14 per cent surge in the price of hot-rolled coil steel was not enough to power the bottom line.According to Niraj Shah, analyst, Fortune Equity Brokers India, the European uncertainty is likely to continue and this may force the company to shutter or suspend more units there. "Indian operations may be the saving grace, but even here, the shine is off as consumption growth has almost stagnated," says Shah.The rupee depreciation has also lowered the earnings of Indian commodity players. It has affected Tata Steel's exposure to foreign-currency convertible bonds by Rs 150 crore, says group chief financial officer Koushik Chatterjee. The rupee depreciated 8.7 per cent in the three months ended September, the biggest quarterly drop since 1992.Since the Tatas acquired Tata Steel Europe (then Corus) in 2007, the steelmaker has been haunted by the costs of iron ore and coking coal. So the then managing director (now the vice-chairman) B. Muthuraman set a target for sourcing half of the raw materials from captive mines. But the acquisition or development of mines has been delayed because of the financial crises. Now, the company is developing some of its mines in Mozambique, Canada, South Africa and Cote d'Ivoire and looking to acquire mines. Analysts estimate that the European entity could save up to 60 per cent of input costs, translating into a cost reduction of $120 a tonne of steel, if it could achieve full self-sufficiency in raw materials. "Since the company is looking for only 50 per cent raw material security, the overall input cost reduction will be 30 per cent, or $60 a tonne of steel," says an analyst.Tata Steel managing director H.M. Nerurkar expects that raw material prices to come down. The spot indication in the past two to three weeks is that they are coming down, he says. On the Indian steel market, Nerurkar says, "Both prices and demand will be steady."The slowdown in steel prices has softened the raw material spot prices, too. That is a helping hand for Tata Steel. However, it is time for the company to tighten the belt.(This story was published in Businessworld Issue Dated 28-11-2011)
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July shouldn't be a flash in the pan — that is what India's cement companies are praying for after witnessing a spurt in sales last month. The first three months of this fiscal (April-June 2011) were not encouraging — at less than 5 per cent, the industry posted the lowest growth in over a decade. The pressure is mainly on three fronts: increasing input costs, slackening demand and surplus capacity.In July, Swiss major Holcim outperformed the industry in sales volume. ACC and Ambuja Cements, controlled by Holcim, saw 28 per cent and 14 per cent growth, respectively, compared to the same period last year. Aditya Birla Group-controlled UltraTech's sales volume went up 7.4 per cent, while JP Associates' rose 19 per cent.Analysts say heavy monsoons last year slowed down demand, but the conditions were better this July. And companies are hoping for more. "The government has not released any major orders. Real estate and retail business, which essentially boosts the cement demand, is not seeing any recovery," says a Mumbai-based analyst.After announcing the June-quarter results, ACC and Ambuja blamed higher prices of raw materials such as coal, diesel, freight, flyash, gypsum and power for the drop in profitability. UltraTech said the quarter was affected by the 30 per cent increase in domestic coal prices in March 2011. Moreover, prices of imported coal, too, rose by 30 per cent, resulting in a substantial escalation in costs.Coal accounts for nearly one-third of a cement maker's costs. ACC's dependence on import and auction is 40-45 per cent, while Ambuja's is 55 per cent. With 65 per cent, UltraTech's exposure to coal import and auction is the highest. In terms of power supply, too, the cement companies (which depend on power supplied from the central grid) are facing increased input costs. Many are now setting up captive power plants to address this issue. Another increased expense has been for transportation because of non-availability of wagons and vessels.Ambuja Cements managing director Onne van der Weijde recently said the company would continue to take measures to improve productivity and operational efficiency to partly mitigate the pressures. The same holds true for other cement companies as well.According to Motilal Oswal Securities, capacity utilisation declined to about 74 per cent in the June-quarter compared to 80 per cent in the quarter ended March. The infrastructure companies expect the government to award more projects after the extended monsoon across the country. However, the realisation on sales, say analysts, will be delayed by about six months even if the projects are awarded now.Some blame the companies' capacity additions for the dire situation. Macquarie Equities Research sees at least a two-year wait for a bull cycle in cement to return to India, the world's second largest cement producer after China. UltraTech executives admit that the surplus scenario is likely to continue over the next 2-3 years, which will result in the selling prices remaining under pressure.Moreover, if the global economic slowdown impacts India, it will worsen the bad phase that the cement sector is going through. Companies are keeping their fingers crossed.(This story was published in Businessworld Issue Dated 22-08-2011)
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