Author: Sonal Bhutra

Oil products demand: Is disruption on the horizon?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The recent launch of electric vehicles (EVs) at the Geneva Motor Show made the world realise that EVs are a reality and that excitement for this space is galore.

Lubricants or lubes are one of the most profitable areas in the oil and gas product slate. But will continuous thrust on EVs and city gas distribution, pose a threat for the demand for such products?

A recent Mckinsey report suggested that while volume growth for such products may flatten in the coming years, there is still some room for value expansion.

Growth will also be subject to certain risks and investors should pay heed to developments in areas of technology and science. They also expect road transport demand to decline in the next five years as the share of electric vehicles would increase and car-pooling will be the new cool.

Demand for sectors like marine, aviation and railway is less significant and this will continue to grow. Non-transport and industrial consumption should also keep growing steadily.

The report also suggested that while margins will rise significantly in small industrial sectors, such as fast moving consumer goods and chemicals, it will stagnate in sectors like transport equipment and metal works (these account for 30 percent of total global pool value)

Not only EV space, the continued focus on gas consumption as cleaner fuel is also expected to impact the growth in the lubricant space.

Gas consumption increased 8 percent year-on-year (YoY) in India for the month of January 2019. The oil products demand growth in India for the month of January 2019 came in at 6.4 percent, which is an improvement on a month-over-month (MoM0 basis but is still below the peak levels of 10 percent growth.

The gas demand in China is expected to increase, in fact, expected to more than double by 2035, largely driven by air- quality policies.

As per the World Health Organization (WHO), India is home to 14 of 20 most polluted cities globally. Transportation accounts for 11 percent of all carbon emissions in India and is among chief contributors to worsening air quality.

Additionally, the existing fleet of 90 lakh pre BSE I vehicles are major pollutants. In the near term, ride-sharing services and incremental acceptance of EV and gas-based fuels would in combination act as a practical solution towards change.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

To beat pollution, India to increase share of gas in energy mix

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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As India is battling some of the worst air pollution in the world, the government is keen to boost the use of natural gas to promote gas based economy.

The government has set a target to increase the share of natural gas in India’s primary energy mix to 15 percent in 2022 from around 6.5 percent in 2015 as the energy mix has gone up considerably in 2018.

For the month of October, the gas production numbers were stable. While gas production for October stood at 90 mmscmd (million standard cubic feet per day), implying 0.4 percent decline year over year (YoY), it increased by 0.8 percent month-over-month implying a multi-month high.

State-run ONGC’s production was at a record level of 68.1 mmscmd that implied a growth of 4.6 percent YoY, Oil India Limited produced 8 mmscmd and other private players produced 15 mmscmd.

The total gas consumption for October, 2018 stood at 170.4 mmscmd that implied a 2.3 mmscmd increase from Q2FY19 levels. On an average, power sector is the biggest consumer of natural gas in India, followed by fertilisers, city gas, refinery and other industrials. The share of liquefied natural gas (LNG) in total gas consumption mix has been around 47-48 percent on an average.

This year has seen a notable push on city gas distribution (CGD), with 86 areas being offered for bids in the 9th round. The 10th CGD round is offering 50 geographical areas (GAs), where the technical bids will open from February 7 to 9, 2019 and letter of intent is expected to be issued by end of February, 2019. This compares with a total of 101 GAs being offered in total so far.

The government is betting big on the natural gas sector and has announced investments to the tune of Rs 800 billion in the city gas space, which is aimed at achieving Prime Minister Narendra Modi’s target of achieving piped cooking gas connection in 10 million houses by 2020.

There has been a gradual change in the consumption pattern in last few months. City gas consumption saw a sharp increase in October that went up by 10.9 percent YoY and 2 percent QoQ.

Further, if natural gas is brought under Goods and Services Tax (GST), this would make the sector more attractive as companies will be able to get input tax credit and will gain with regard to pricing and margins.

This move could increase the competitiveness of natural gas against competitive fuels (LPF, fuel oils etc). CGD companies are currently subject to excise duty and VAT on natural gas, which is above 70 percent of their sales volume.

Excise duty, as well as VAT, will get subsumed under GST. This move could possibly increase CGD’s pricing power from 2-14 percent. While there has been a big push, infrastructure bottleneck is the key factor constraining natural gas volume growth in the sector.

Global brokerage house Jefferies said even if there is underlying demand for CNG, volume growth for natural gas segment could be capped by constraints on the infrastructure side. This needs to be addressed in order to make the sector more attractive for investment.

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Is real estate sector in India finally on a recovery path?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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After some quarters of lull, the real estate sector seems to be turning a new leaf, and is on a regulated recovery path. The second quarter sales were positive for the majority of the listed players and the commentary from the big realty players in terms of demand showed some respite.

Residential property demand in key cities have showed some signs of bottoming out and commercial property witnessed a steady demand. Also, inventory levels are at eight quarter low.

However, non-banking financial companies (NBFCs) liquidity crunch is plaguing the real estate sector. The NBFC market share in developer financing has increased from 24 percent at FY14 end to 53 percent as of March 2018.

Post-Real Estate Regulatory Authority (RERA), the ability of developers to extract equity from new sales have declined. With banks and housing finance companies (HFCs) not allowed to lend for land purchases, the new supply was largely funded via, a mix of NBFC loans, private equity etc.

Despite the unstable operating environment, funding reported a 14 percent compound annual growth rate (CAGR) (Banks + NBFCs) during FY14-18. Funding of banks to developers posted a 4.7 percent CAGR during the same period and NBFCs reported a 45.3 percent CAGR. But when it comes to raising funds through private equity deals and real estate investment trusts (REIT), less traction was witnessed currently.

The impact of funding crunch is expected to strengthen the positioning of big realty players as some mid-size players had defaulted on loans. As a matter of fact, market share for big realty players have increased to 75 percent against 30 percent with regard to new launches in the last few years. This may push for more consolidation in the real estate sector with big realty players having more avenue for funding their projects.

Discussions with various experts, companies and analysts by CNBC-TV18 suggested that NBFCs have taken a step back in loan disbursals and had impacted the cost of funding for the real estate sector, minus big players.

As organised players have relative liquid balance sheet and healthy sales momentum, they can hold their companies for long run. With over 89 percent of inventory under-construction, big realty players are less vulnerable to pricing pressures.

Discussions suggest that liquidity tightness for certain housing financing companies have led to instances of delay in disbursal of home loan installments. The global investment firm, CLSA, said for 85-90 percent of the market, availability of mortgages should not be a problem with banks and ‘AAA’ rated HFCs are well positioned to gain share.

Real estate data and analytics firm, PropEquity, said completed properties and under construction properties managed by big developers (as they are offering subvention schemes) are not facing financing issues, but the under construction segment managed by small developers will face serious funding issues as the inventory is not getting liquidated easily. Additionally, price cuts cannot be taken on new sales due to fear of cancellations.

While price cuts could be a measure, it’s still a measure of last resort as this increased the chances of investors cancelling the bookings and does not necessarily lead to a demand pick up and can lead to further price decline. Also, this can impact the cover available for financial institutions.

Interactions with real estate companies also suggested that this is an opportunity to buy stressed assets in the real estate and can lead to further business development. Also, experts expect consolidation over time for the sector after some near term challenges.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

IGL, Gujarat Gas shares gain as Jefferies starts coverage with buy rating

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Shares of gas distribution companies such as Indraprastha Gas (IGL), Gujarat Gas and Mahanagar Gas gained a lot of traction on Monday after global brokerage Jefferies initiated coverage on these stocks.

The brokerage has a ‘buy’ rating on Indraprastha Gas and Gujarat Gas, and an underperform rating for Mahanagar Gas .

Shares of Indraprastha Gas rose 1.2 percent to Rs 268.50, Gujarat Gas gained 2.4 percent to Rs 634.95 while Mahanagar Gas was down 2.1 percent to Rs 840 on the Bombay Stock Exchange.

Indraprastha Gas, according to the brokerage, has witnessed double volume growth over the last few years and Jefferies expects the trend to continue and expect Indraprastha Gas to clock volume growth at CAGR of 13.5 percent over FY18-23E. According to the brokerage, the company has also been able to maintain EBITDA margins, implying it has higher pricing power and that the company has been able to pass on any hike in input costs. Jefferies has a target price of Rs 340 for Indraprastha Gas.

For Gujarat Gas, Jefferies has set a price target of Rs 830, implying about 31 percent upside from the current levels. Industrial segment contributed 70 percent to the company’s total volumes, which is positive as it leads to lower infrastructure constraints, said the brokerage in a report.

With regards to Mahanagar Gas stock, the brokerage sees a 15 percent downside from current levels and has set a target price at Rs 730.
Jefferies expect volume growth to remain muted for next 6-7 percent. Further expansion in margins can be difficult unless there is a strong tailwind for the Company.

The gas stocks were also in focus ahead of the 10th round of city gas distribution bids starting next month.

An official statement said that 24 percent of India’s population and 18 percent of its area will be covered in this round.

“The e-bidding process was initiated on November 8, 2018. Pre-bid conference is scheduled on December 6, 2018. Bids can be submitted by February 5, 2019. Technical bids would be opened during February 7 to February 9, 2019. The Letter of Intents are planned to be issued by end-February 2019,” the statement said.

The gas transportation regulator Petroleum and Natural Gas Regulatory Board (PNGRB) aims to award contracts for the new round by end of February 2019 and the government has also added 50 additional geographical areas for bidding as there is a clear policy push for gas based fuels.

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Iran out of Indian oil refiners’ playbook despite government optimism of US waiver

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Are fuel subsidies back? Why it doesn’t look good for HPCL, BPCL, IOC and their investors

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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On Thursday, the government stepped in to safeguard consumer interests against the rising fuel prices. The government cut excise duty on fuel by Rs 1.5 a litre, but also asked oil marketing companies (OMCs) such as HPCL, BPCL and IOCL to absorb retail fuel prices by Rs 1 a litre.

That might not be good news for the investors of these companies. The shares of BPCL, IOCL and HPCL have already fallen by 20-30 percent after the announcement.

Shock For Investors

OMCs were making a gross margin of Rs 2 a litre on petrol and Rs 2.5 a litre on diesel in the second quarter of FY19. Investors are in a soup because there is lack of earnings visibility for the marketing segment.

For HPCL and BPCL, the marketing segment contributed 54 percent and 46 percent, respectively, of their profit after tax in FY18. OMCs also earned around 20-55 percent of EBITDA from the marketing segment. On a consensus basis, it is expected that HPCL could be hit the most by this policy decision as it has more exposure to the marketing segment.

Analysts estimate that the Rs 1 a litre cut on fuel prices could possibly impact 29 percent of HPCL’s profits, 25 percent of BPCL’s profit and 18 percent of IOCL’s profit. Also, the ‘absorption’ could lower EBITDA of the OMCs by 24-28 percent in FY20.

Fuel Deregulation, RIP?

That is not all. There has been a string of downgrades and EPS estimates cut by the brokerages because there is a fear that the devil (subsidies) is back.

DB, for instance, has downgraded BPCL, HPCL and IOC to ‘hold ‘from ‘buy’ and cut OMC earnings estimates by 14-31 percent. Goldman Sachs has cut FY19-21 EPS estimates by 5-30 percent for the OMCs and downgraded HPCL/BPCL to ‘sell’ from ‘buy’. CLSA says the fear of fuel deregulation is back and so they have lowered FY19-20 EPS for IOC, BPCL and HPCL by 3-46 percent.

Not only the OMCs, upstream oil companies such ONGC, OIL and GAIL also took a sharp knock on their prices due to fear that they also might be asked to share subsidies. Since intervention is signaled, it will be difficult to keep these companies out of the concerns whirling round the sector.

Though the valuations are at historical low levels, buying interest in the oil and gas stocks will be minimal unless there is more clarity as if crude price rises further from here, there might be more intervention.

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Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Vinati Organics: Will additional capacities be a gamechanger?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Chemicals company Vinati Organics’ stock has seen gains of 20 percent this year and was locked in the upper circuit on August 6 and touched a 52 week high on August 7.

The company is the producer of ATBS (2-Acrylamido-2-Methylpropane Sulfonic Acid), IBB (Iso Butyl Benzene) and IB (Iso Butylene) products. While ATBS is largely used to manufacture dispersants in water chemicals, adhesives, textile companies, mining etc, IBB is used as a pharma intermediate for Ibuprofen which is used as a painkiller. IB has its applications in the fragrance industry and is used as a fuel additive. These three products contributed close to 80 percent of the company’s topline in FY18.

Also Read: Vinati Organics eyes 20-25% revenue growth; to fund capex via internal accruals

Apart from that, the company also has some production in terms of TBA (Tertiary Butyl Acrylamide), TOA (N-Tertiary Octyl Acrylamide) and TB amine, that are IB derivatives and contribute around 6-7 percent of the company’s topline.

The company reported a strong set of Q1FY19 earnings with revenue surging 25 percent, earnings before interest, taxes, depreciation and amortisation (EBITDA) grew by 41 percent and profit after tax (PAT) grew by around 24 percent.

This was largely led by the growth in ATBS segment which saw revenue growth of around 50 percent. This happened because the biggest competitor Lubrizol exited the ATBS market. It also took the company’s market share to 65 percent globally against 45 percent last quarter. The company is adding more capacity in this product and expects the performance in this segment to improve further.

On the IBB segment where the company enjoys 70 percent market share, the shutting down of the BASF facilities (biggest IBB client) in the US  has led to higher Ibuprofen prices but has lowered the offtake for Vinati. The company expects lower offtake from IBB in Q2 and Q3 of FY19 due to shut down of these capacities.

On the IB segment, the company enjoys 80 percent market share and sell entire products in the Indian markets.

Vinati is also coming up with additional capacities for PAP (Para Amino Phenol) a key intermediate for paracetamol, where they have planned to invest Rs 600 crore in Maharashtra with a capacity of 30,000 tonne per annum (TPA).

The company has initiated a pilot project for this product by investing around Rs 20 crore, and management told CNBC TV-18 that they are facing some teething issues and plan to sort the same out.

Vinati is also coming up with a facility for Butylated Phenols (39,000 TPA) which is used to make plastics explosives such as picric acid, and drugs such as aspirin. The company expects this product to add close to Rs 200 crore to topline by FY20. It is going to fund all these expansions through internal accruals and will not take any additional debt.

The management maintains its guidance of 20-25 percent revenue growth in FY19 and 30-35 percent growth in profits. Also, the current promoter shareholding stands at 74 percent and management would not mind taking it further to 75 percent.

The overall capacity of the company currently is 64,000 TPA (ATBS+IBB+IB+TBA) and in the ATBS segment Vinati is working at full capacity.

In terms of valuation, it is trading at 28.6X FY20 EPS (earnings per share) and 15X EV/EBITDA. It is not very cheap but strong earnings and positive management guidance keeps the investor interest active in the company because the ROE (return on equity) of the company has been around 19.5-20 percent levels.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Arysta Lifesciences deal: What the deal means for UPL

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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UPL on Friday announced the acquisition of Arysta Lifesciences, global crop protection solutions provider and its subsidiaries. The deal worth $ 4.2 billion, will make the company the 5^th largest agro-chemical player in the world.

WATCH: Arysta’s business is completely complementary to ours, says UPL Group CEO Jai Shroff

The transaction is backed by $1.2 billion investment from TPG and Abu Dhabi Investment Authority for a combined 22 percent stake in UPL Corporation, while the company will be taking loan for the remaining $ 3 billion.

Debt remains to be one of the major reasons behind the fall in stock price. The price declined more than 12 percent in the last month. Now with the deal, the leverage of the company will increase to 3.5 times by the end of FY19.

UPL, on Monday, was however trading higher by 14.10 percent at Rs 627.10, gaining by Rs 77.50. The agro-chemical company’s stock ranged between a high of Rs 631.35 and a low of Rs 561.10.

Maintaining a positive stance, the management said that it expected synergies of $100-$120 million in first year and $200 million thereon. The incremental interest cost is expected to be around $120 million and EBITDA will be boosted by $425 million.

Here’s where the companies stand in terms of numbers:

 What the deal means?

The diversified portfolio, access to more geographies and the cost synergies will be beneficial for UPL, but the additional debt on the books will continue to have an impact on the stock performance. In the long run, the deal may help in earnings per share(EPS) growth.

Brokerages have cut their price earnings multiple for financial year 2020, thereby leading to a reduction in the target price. However, they say in the long run, the acquisition is positive for the company.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Sebi Watchlist: Will 2017’s star performer BEPL retain its spot this year?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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In order to curb extreme volatility in the markets and curtail market risk for gullible investors, Securities & Exchange Board of India along with the stock exchanges decided to implement Additional Surveillance Measures in early June. The measures involve putting stocks that display big high-low variation in trading, high client concentration, multiple price-band hits, high closing price to closing price variation and extraordinarily high PE ratios in a curtailed trading mechanism that will allow trades only with 100% margin and with a 5% price-band.

Some misinformation about the mechanism has caused unwarranted concern and consternation among prospective investors and existing shareholders of companies that find themselves on the list. While the regulators have clearly indicated that being on the ASM list “does not indicate an adverse action against company”, fears abound.

To better inform investors about the fundamentals of several companies on the list, CNBC-TV18 has launched the SEBI WATCHLIST, which will seek to better inform investors about the strengths and weaknesses of the businesses in order to enable them to take more informed decisions, and segregate the bad apples from the good.

BEPL was a star in 2017 as the stock price zoomed close to 7.5 times. However, the rise didn’t last this year as the stock witnessed a fall of 22% so far.

One of the reasons for the sharp correction in the stock could be adverse currency movement as majority of the raw materials are imported by the company.

The company manufactures acrylonitrile butadiene styrene (ABS) resins which is an oligopolistic market with high customisation. The component is used as a raw material in parts of automobiles, home appliances, telecom and luggage. The major raw materials used to produce ABS resin are butadine, styrene and acrylonitrile. While butadine is available domestically, styrene and acrylonitrile are largely imported.

The company has been on capacity expansion spree and increased capacity in FY17 to 80,000 tonnes per annum from 51,000 tonnes per annum. Additionally, it is adding more capacity, planning to take it to 1,37,000 TPA by the end of calendar year 2018. The move is likely to make it largest domestic ABS player.

Though the revenue growth was quite flattish till 2017, it showed massive improvement in 2018 due to additional capacity kicking in.

Margins have been volatile because majority of the inputs are imported and adverse currency movement lead to the instability.

The only listed peer of the company is INEOS Styrosolution owned by MNC INEOS Styrolution Apac Pte. Ltd. which is largely trading at similar valuations on FY18 earnings.

The table summarises the comparison between the two on various financial parameters:

While the ABS market has limited number of players, there are certain risks associated with this business, one of which is adverse currency movements.

Also, the company informed the exchanges that its Satnoor plant that produces HRG (used as a raw material to produce ABS) has been shut due to fire breakout . Any delay in re-opening of the Satnoor plant will lead to higher costs as HRG has to be imported and HRG imports are costlier by Rs70-80 per kg.

As of now, uncertainty prevails on whether the investors would take interest in the stock as they did in 2017.

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Sebi Watchlist: What next for Apex Frozen Foods, once a darling of investors?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

In order to curb extreme volatility in the markets and curtail market risk for gullible investors, Securities & Exchange Board of India along with the stock exchanges decided to implement Additional Surveillance Measures in early June. The measures involve putting stocks that display big high-low variation in trading, high client concentration, multiple price-band hits, high closing price to closing price variation and extraordinarily high PE ratios in a curtailed trading mechanism that will allow trades only with 100% margin and with a 5% price-band.

Some misinformation about the mechanism has caused unwarranted concern and consternation among prospective investors and existing shareholders of companies that find themselves on the list. While the regulators have clearly indicated that being on the ASM list “does not indicate an adverse action against company”, fears abound.

To better inform investors about the fundamentals of several companies on the list, CNBC-TV18 has launched the SEBI WATCHLIST, which will seek to better inform investors about the strengths and weaknesses of the businesses in order to enable them to take more informed decisions, and segregate the bad apples from the good.

The calendar year 2017 was a stellar one for shrimp exporters as underlying demand in the US grew by 10 percent year-on-year (y-o-y).

India improved its market share in the US shrimp imports to 32 percent. It was 25 percent in 2016. However, later demand tapered due to a prolonged winter in the US, which started pressurising realisations amid strong supply.

Listed on September 4, 2017, Apex Frozen Foods, an integrated producer and exporter of aquaculture products, was a darling of investors last year. The stock surged as much as three times in the calendar year 2017, but could not sustain those levels in 2018.

The stock has seen sharp correction of 46 percent this year and around 19 percent this month itself. The tremendous price gain in 2017 could be the reason for stock’s inclusion in the Sebi’s ASM list.

The company garners 100% revenues from exports. Around 76% of revenues are from the US, followed by 17.6% from UK and remaining from the EU market.

While the company is currently functioning at optimum utilisation of around 93%, it is also on a capacity expansion spree and it expects to add 20,000 million tonnes per year (mtpa) of capacity in the shrimp processing plant by the end of second quarter of FY19.

The company has also leased capacity of 6,000 mtpa to cater to additional demand. The cold storage facility of Apex is also nearing completion.

In the hatchery segment, the company commissioned a new facility in FY18, and that took the combined breeding capacity to 1 billion SPF (specific pathogen feeds) seeds. Additionally, it plans to commission one more hatchery in FY19, enhancing the capacity to 1.4 billion SPF seeds.

Shrimp prices firmed up in first half FY18, but started slipping in fourth quarter of FY18. However, a depreciating rupee aided overall realisations.

But risk remains as there could be fresh import restrictions by the US amidst all the talks related to trade wars.

The US had already increased anti-dumping duty on shrimp imports from 0.84% to 2.34% in March 2018. Also, if we take a look at the EBITDA margins, they have been very volatile in last few years.

And this industry as a whole is vulnerable to external disease outbreak like the white spot disease that impacted the international competitors Vietnam and Thailand.

While management in its concall has guided for 20-25% volume growth both in FY19 and FY20, question remains whether second half of 2018 will turn out to be better than first half in terms of stock performance.

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

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Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow