Author: Sonal Bhutra

After a poor show this year, is Mahanagar Gas on a recovery path?

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

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Natural gas distribution company Mahanagar Gas has been a poor performer in the city gas distribution(CGD) space, losing 24 percent this year.

Why The Fall?

Investors have been concerned about the company’s inability to pass on the increase in input costs. Depreciating rupee led to higher cost of imports and higher feedstock prices, impacting the margins. Adding to the cost woes was the recent applicability of additional Gujarat VAT.

The major concerns for the company have been in relation to margins as they have been largely volatile in the last eight years, ranging from 23 to 38 percent.

Triggers For Reversal

The company usually revises prices twice a year, i.e. in April and October. However, breaking the practice, the company, this year, increased the price in June as well to pass on the impact of increasing costs. This came as the second price raise within two months after the regular price hike in April.

The move is expected to improve the margins starting from the first quarter of the current financial year in both, the industrial and commercial segment.

Petroleum and Natural Gas Regulatory Board has offered 86 areas in round 9 of city gas distribution bids and the company’s wins in these bids will definitely help it expand its reach.

There have been talks of bringing natural gas under GST. If implemented, this could definitely be positive for MGL as it will lead to increase in pricing power by 2% to 14% and stable gross margins.

The management of the firm told CNBC-TV18 that the move would enable them to take input tax credit of various costs roughly amounting to Rs 25 crore.

Brokerage View

UBS has a ‘Sell’ rating on the stock.

CLSA has a bullish stance as it expects margins to rise from current levels, especially after the price increase in June.

HDFC securities upgraded the stock from ‘Neutral’ to ‘Buy’ after Q4 earnings.

Motilal Oswal also has a ‘Buy’ on the stock but expects EBITDA to remain under pressure.

MGL is one of the cheapest stock in the city gas distribution space. The stock is trading at 15.5 times its forward earnings, 25% discount to IGL and 35% discount to Gujarat Gas. Analysts say that this valuation gap could reduce going forth due to the recent increase in price.

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Will valuations leave a stain on Bombay Dyeing’s stellar run?

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

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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

After losing 20% this year, can Bharat Petroleum shares see a rebound?

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

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Despite reporting stellar fourth quarter earnings, shares in Bharat Petroleum Corporation Ltd (BPCL) have lost nearly 20 percent of its value this year as worries around rising crude oil prices continued to weigh on the minds of investors.

The recent spike in crude prices has stoked fears that the central government will force oil marketing companies (OMCs) to bear the subsidy burden.

Oil subsidy has long been a matter of concern for the OMCs. On the one hand, the OMCs have to bear a part of the under recovery and on the other, there is a time lag of six to eight months before they receive the compensation from the government. This results in liquidity crunch for the OMCs, leading to additional borrowing and interest burden.

Similarly, profits of the the upstream oil companies are affected since they share the under-recovery burden in the form of a ‘discount’ on crude oil prices.

Another major worry for BPCL investors is the company’s slower-than-expected rise in refining margins at its Kochi facility, suggesting that the expansion is yet to commence.

While OMCs usually benefit from an increase in petrol or diesel prices, the government is unlikely to offer any steep hike in retail prices because the 2019 general elections is fast approaching.

So the question remains: Can BPCL rebound from its current levels?

There are certain triggers that suggest so, one being government’s clarification that the daily fuel pricing mechanism will continue and the same will not be regulated. Another factor being that the OMCs will not be asked to share the subsidy burden.

Moreover, analysts expect refining margins at the Kochi facility to add around $2 per barrel to the current gross refining margins.

Brokerages, however, are not on the same page when it comes to BPCL. Investment bank CLSA recently increased the target price, but still maintains a ‘sell’ rating as they see a macro risk in election year.

Financial services company Jefferies also maintains underperform rating and has cut its  take-profit order (TP) from 425 to 360.

Morgan Stanley, on the other hand, is sanguine about the company and maintains overweight as they expect robust fuel marketing margins and steady earnings. Edelweiss also remains constructive on the stock as they expect new Kochi capacity to fetch premium GRMs.

While macro risks largely remain same for all the OMCs, there is valuation comfort in BPCL and it trades comparatively cheaper to its peers.

For other Hunting for Value stories, click here.

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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

Here is how new accounting standard will affect real estate companies

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

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Being a chartered accountant, I know that accounting standards is one of the first and most important subject that is taught in the field. They basically are a guide to true and fair presentation of financial statements. Over the years, accounting standards have undergone a lot of changes. When I studied, we were taught Accounting Standards (AS) which have now changed to IND-AS (Indian Accounting standards).

While the whole subject was pretty exciting, I was intrigued by a particular standard and that was AS-7 “Construction Contracts”. I was specifically amused by this one because companies could not account for revenues in spite of receiving the money or completing the project unless certain conditions laid down by this standard were not met. You see, its accrual world.

And then I started tracking the real estate sector and realised why this sector is analysed in a manner different than the others and how we do not look only at the P&L in case of real estate developers to analyse the performance.

This particular sector has already seen numerous accounting changes in other areas (accounting for JVs, SPVs, effective control, etc.) in FY16-17 and looks like there is room for more.

Under International Financial Reporting Standards(IFRS), revenue from contracts with customers (IFRS 15) is applicable for accounting periods beginning on or after January 1, 2018. In India, the equivalent standard to IFRS 15 is IND-AS 115. The Ministry of Corporate Affairs (MCA), on 28 March 2018, notified Ind AS 115, revenue from contracts with customers. The new standard is effective for accounting periods beginning on or after 1 April 2018.

As of now, real estate companies report accounts based on percentage of completion method. So as the projects approach particular levels of completion, revenue is recognised accordingly (usually 25% is the initial threshold).

Now, the companies will have to report accounts based on completion method. The accounting standard says, “Revenue should be recognised when (or as) an entity transfers control of goods and services to a customer at the amount to which the entity expects to be entitled.”

That basically means, revenue should be recognised once the real estate company performs all its obligations i.e. completes the project and delivers it to the buyer.

There is a five step model as stated in the standard:

• Identify the contract with the customer
• Identify the performance obligations in the contract
• Determine the transaction price
• Allocate the transaction price to the performance obligations
• Recognize revenue when (or as) the entity satisfies its performance obligations

Brigade enterprises told CNBC-TV18 that receipt of occupancy certificate is not a pre-condition for completion of project as per the accounting standard.

What could be the possible impact on financials of real estate developers?

Financial statements will be impacted in a lot of ways, starting with their balance sheets as delay in revenue recognition will lead to bloated customer advances. P&L will be hit as developers will need to write back profits booked for on-going projects which are not 100% complete as per the standard.

In some years, we will see huge profits and in some, huge losses. This will impact the taxation payments also for these developers.

But will it impact how analysts rate the real estate companies?

Mostly no, while revenues is an important factor, performance of a real estate company is largely judged by the cash flows, collections and the construction cycle reported by the companies. Most of the listed companies have improved the disclosure standards by publishing quarterly cash flows, collections, construction spends, land/capex and approval costs.

CLSA says, adoption of the method could potentially increase the time lag between project launch/sale and revenue recognition to 4-6 years vs the current 1-3 years. Companies with higher mix of lease income will not get impacted and completed project inventory will see the least impact.

While ICICI Securities says they do not see any major impact in the net asset value calculations as these are cash flow driven depending on the collections and construction cycle of a project.

Prestige Estates in an interview to CNBC-TV18 had said that a lot of representations are made to the government authorities to let the current regime be as is, but clarity is still awaited on the same.

Till the clarity is received, real estate developers will present accounts under this standard, the impact of which will be seen starting from Q1FY19 earnings.

On a lighter note, with so many changes or modifications to the accounting standards, an accountant is bound to suffer from something an ordinary person doesn’t, i.e., depreciation.

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

As elections approach, oil marketing companies face the heat

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

Listen to the Article (6 Minutes)

Consumers were alarmed last week as petrol and diesel prices soared to record highs. Oil marketing Companies (OMCs) such as HPCL, BPCL and IOCL have steadily increased the price of auto fuels after the Gujarat elections, boosting their marketing margins to historic highs. They earned margins of Rs 3.2 a litre on petrol and Rs 3.4 a litre on diesel in the fourth quarter ended March compared with an average of Rs 2-2.5 a litre in FY17.

While rising crude oil prices – at $72 a barrel, they have climbed to four-year highs – are already queering the pitch for OMCs, new reports suggested that the government might ask these companies to absorb the increase in petrol and diesel prices by Rs 1 a litre (oil minister Dharmesh Pradhan clarified later that no such direction has been given).

Oil’s Not Well

But the news reports trickled in right after the finance secretary told CNBC-TV18 that the government is not looking at cutting excise duties on fuel.

Given that this happens to be an election year, the government’s intent was par for the course. As the government does not want to tinker with its fiscal deficit targets, OMCs might have to bear the brunt.

The share prices of these companies took a sharp knock. HPCL, BPCL, IOCL all declined by about 6-7% each on Wednesday.

But what if oil companies have to actually absorb a spike in fuel prices? Would it then be prudent to invest in these stocks around elections?

Several brokerages have taken note of the possible move. According to CLSA, the oil subsidy bill for 2018-19 is inadequate. It said this clearly raises fears of companies being forced to bear the subsidy burden.

In a note on April 2, analysts from Jefferies said unmet under-recoveries will be a reality in FY19E. In their view, as profit before tax (and before subsidies) for OMCs has exceeded that of upstream companies since 2015-16, the unmet under-recoveries might be shared equally between them.

Assuming under-recoveries will be divvied up equally between upstream and downstream companies, the brokerage said for every Rs 10,000 crore of unmet under-recovery, the consolidated earnings per share, or EPS, will be squeezed.

Jefferies estimated that every Rs 0.10 a litre change impacts HPCL’s standalone EPS that is at Rs 31.7 by 3.7%. For BPCL and IOC, the impact is 2.9% and 2% respectively for the same change.

Antique, for its part, estimated a higher impact on profits. In its report, the brokerage said for every $1 a barrel increase in crude oil prices, retail selling price of crude and oil should be revised by Rs 0.5 a litre. It quantified the amount of profits that could get impacted if OMCs are asked to absorb the Rs 1 price uptick.

However, they say that they expected the normalisation of marketing margins on auto fuels and this would bring the margins to the historical levels of Rs 2-2.5 per litre.

Motilal says that OMCs were already making marketing margins higher than the historical levels and this move would normalise the margins to previous levels. The analysts do not expect it to impact the companies so much (based on their estimates). Additionally, they said that spiking of crude prices will cool down in coming days as it is only because of temporary geopolitical tensions.

Sonal Bhutra is a research analyst with CNBC-TV18 who tracks sectors as diverse as oil  and real estate

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