Fairval

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Archive for the ‘Energy’ Category

Are Ruias India’s most selfless & misunderstood entrepreneurs?

Posted by fairval on October 22, 2016

A seminal deal happened this week: one of the largest ever acquisitions of an Indian company, and as the full page ads mentioned – India’s largest ever FDI. The Ruias sold Essar Oil to a consortium led by Russian oil major Rosneft, at an enterprise value of USD 10.9B (there was separate money involved for associated group companies like Vadinar Port).

With this deal, the group expects debt burden to reduce by 50%. Overall debt at group level could be as high as USD20B. This suggests most of the sale value would go towards debt servicing.

The impact of the deal was instantly felt on the banking system. ICICI Bank, India’s largest private sector bank, which had a large exposure to the Essar group, jumped 7% on the day this deal was announced, and has risen since. At the time of writing, the stock is up 13% from the pre-deal close. In market cap terms, this is a USD 2.8B gain.

All this is good for the banking system, the rupee and the Indian economy. It becomes even better when you consider that the promoters Ruias have pretty much made no money whatsoever in setting up and running Essar Oil.

You read it right. For a company spanning around 2 decades, it appears the Ruias may have made zilch for all their family effort, plus the risk they had taken in terms of corporate, and maybe personal guarantees against bank loans.

Since we don’t have full information, this is what we are assuming – almost entire proceeds will go towards reducing debt. This means the only money Ruias may have made would be from dividend income, and salaries for family personnel.

On this count, the situation appears to be like this: in terms of data since FY02, Essar Oil hadn’t paid any dividend (as per equity database Ace Analyzer). The database does not show data before this. As per FY15 annual report, the only family member directly involved with Essar Oil was Prashant Ruia, who was chairman of the company. His remuneration for FY15 was Rs 43 lakh (Rs 4.3million). This is negligible for a company with a revenue of almost USD15B.

In other words, since the last 15 years or so, Ruias may have earned nothing directly out of Essar Oil. Assuming other than the principal amount of their investment in Essar Oil, they use the rest of the deal money to pay bankers, that’s 15 years of no return for an incredible effort of setting up India’s 2nd largest refinery, and one which pretty complex configuration. It wasn’t just a refinery; Essar Oil has 2500 retail outlets, India’s largest oil retail network in the private sector.

Contrast this with what the other big private sector player in India in oil refining – Mukesh Ambani – makes from his company Reliance Industries. Mr Ambani earned dividend of Rs 1400+ crore in FY16. In the last 5 years, he has earned dividend income of almost USD1B. He also draws a salary, which he has capped at Rs 15 crore per year for the last 8 years. This is besides his wealth from shares of RIL, which is about USD24B.

That is more like it. Unless you are making huge amounts of money, why would you create such a large business?

Unless some of the data above is wrong, this leads to a natural question – just why did the Ruais do it? Take such a huge financial risk, and then make no money.

Group chairman Shashi Ruia said in the press release “It is a historic day for Essar. The transaction demonstrates our unique ability to build world-class assets”. Note the stress on creating history, and doing something world class. Prashant Ruia’s quote also emphasized the group’s ability to create benchmarks. He said “The deals we have done have led to an FDI infusion of more than $30 billion into India”

I guess all this is not easy for a simple mind like mine to understand. Can the urge to create national or global benchmarks be so strong, that one can labour for decades for no financial reward? I don’t have it, many of us middle class Indians, who can’t look beyond their next salary cheque may not have it either.

And on top of it, the paradox is: we, who want to work for money, are poor or middle class; and those who are working for no visible money are not. Maybe this is one of those god’s mysterious ways of dispensing justice and allocating wealth.

In sum, I think it is time the media and analysts revised their opinion about Essar group, and recognize their selfless deeds for what they are worth.

 

PS: I guess this transaction and the 2 decade history of Essar Oil deserves a case study by Harvard Business School – what say?

Posted in Energy, Trends, What was that Again? | Tagged: , , , , , , , , | Leave a Comment »

Telegraph’s article on Solar

Posted by fairval on April 11, 2014

Excellent article in Telegraph on Solar Power

Global solar dominance in sight as science trumps fossil fuels

Some points in that:

  • Roughly 29pc of electricity capacity added in America last year came from solar
  • New solar installations overtook wind turbines worldwide last year with an extra 36.5GW
  • Scientists can now capture 31.1pc of the sun’s energy with a 111-V Solar Cell, a world record but soon to be beaten again no doubt
  • There are already 19 regional markets around the world that have achieved “grid parity”, meaning that PV solar panels can match or undercut local electricity prices without subsidy: California, Chile, Australia, Turkey, Israel, Germany, Japan, Italy, Spain and Greece, for residential power, as well as Mexico and China for industrial power.
  • Sheikh Ahmed-Zaki Yamani, the veteran Saudi oil minister, saw the writing on the wall long ago. “Thirty years from now there will be a huge amount of oil – and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil,” 

 

Posted in Energy | Tagged: , | Leave a Comment »

How AAP has just screwed India’s power sector. One more nail in the India growth story

Posted by fairval on January 16, 2014

After Delhi, Haryana announced tariff cuts. Now I understand Maharashtra is set to announced 20% cut in tariff’s across the board. As this wave ripples across all states, the amount of cut can only increase.

This is set to screw India’s power sector, which has always been in doldrums. In the last 15 years or so, every few years there is hope of reform in the sector which may have lasting impact on sector health. But then comes an election, and everything goes back to the same old story.

The move started by AAP has the potential to totally screw the power sector. Let see some numbers first. The chart below has some  numbers from a report on discoms  by the Power Finance Corporation (PFC)

Image

In FY12, aggregate revenue of discoms was Rs 2.42 trillion (~$50bn). Aggregate losses, accumulating over time, were Rs 0.92 trillion ($19bn). Annual loss, in FY12, was ~Rs 180bn ($3.6bn).

Now imagine if, revenues were cut overnight by 15%.  At FY12 numbers, the annual loss will increase by Rs 363bn. In other words, the loss will become 3x of the prevailing FY12 number.

Now check another figure from the PFC report. It says: The aggregate networth of the discoms was NEGATIVE Rs 318bn (-$6.3bn) in FY12. The total equity invested in the sector was Rs 1.7 trillion ($34bn). So the aggregate losses, in the entire history of Indian discoms, is around Rs 2 trillion (~$40bn).

(several discoms have taken price hikes in FY13 and FY14. So some of the above numbers may have improved a bit).

The AAP led move will sharply increase the rate of loss accretion at discoms,taking it to maybe Rs 400bn to Rs 500 bn per year. . The aggregate networth of India’s banking system is a little over Rs 5 trillion (~$100bn). So SEB losses can shave off the networth of Indian banks by 10% in a single year.

If AAP had first figured out where the savings were, and then cut revenues, then it may have made sense. By doing the populist thing – fund revenue cut by subsidy – they have added one more nail in India’s dying (or already dead) growth story.

Posted in Energy, Social/Political issues | Tagged: , , , , , | 1 Comment »

The FM’s bullshit

Posted by fairval on March 2, 2011

Under recoverings in diesel and petrol

Yesterday the market seemed to have forgot its own concerns, but my guess is, reality will hit soon enough. The chart above shows one of the concern areas in the economy right now, which the FM has conveniently glossed over in the budget.

Diesel underrecovery hit Rs 10 in February, the highest in the last 2 years. So there is a large hidden inflation. The FM will not pass it on, so the subsidy burden will be much larger than what is being projected.

This is what an HDFC note says on the subject: Petroleum subsidies are actually budgeted at Rs 15000 crores lower than 2011‐12 which is really difficult to fathom given the enormous risks of supply disruption that the turmoil in the Middle East and North Africa have bred.

Posted in Energy, Indian Economy | Leave a Comment »

2009 – IPO Review

Posted by fairval on January 5, 2010

Fund raising from public markets in 2009

IPO-FPO trend data

Top IPOs/FPOs of 2009

Thats some data from Prima database. 2009 improved over 2008 in fund collections. 2010 should be a bumper year, with maybe 100% growth over 2009. Whats interesting is 4 of the top 5 issues in 2009 were from power generation companies.

Posted in Data, Energy, Markets | 1 Comment »

Mukesh creating another Reliance

Posted by fairval on August 13, 2009

Guess what, there is a new Reliance in town, its called Reliance Gas Transportation Infrastructure Limited. Once again, I am surprised how little media has written about this, considering the size and scale of RTGIL.
So what is RTGIL? It is what RNRL would want to be. RTGIL is a pipeline company owned by the big brother Mukesh. And that’s right. Not by RIL, but by Mukesh in his personal capacity. Interestingly, the company PPT on its FY09 results only mentions its pipeline (EWPL), and not its ownership.

This is how a CRISIL rating note describes RTGIL – Incorporated in 1999, RGTIL has built, and is operating the 1386-kilometre (km)-long cross-country EWPL transmission system that connects gas sources on the east coast with markets on the west coast. The pipeline extends from Kakinada to Bharuch, and has a capacity to transport up to 80 mmscmd of natural gas and is currently transporting around 35 mmscmd. The infrastructure required to transport 60 mmscmd of natural gas is complete and commercial operations have commenced from April 2009. Installation and construction of the remaining infrastructure is in progress. The total cost of the project is approximately Rs.185 billion. RGTIL is a wholly owned subsidiary of Reliance Utilities Ltd, a promoter group-owned company.

But what’s the big deal? A lot really, once you understand the size of RTGIL. As of now, this company seems to have invested close to Rs 18,500 crore (around $4bn), in one pipeline called East West Gas Pipeline (EWPL). In other words, this is as ambitous a project as say Reliance Petro. EWPL is roughly 1386km or so long, from Kakinada in AP to Bharuch in Gujarat. RTGIL proposed to lay a few more pipelines shortly, aggregative another 3000 or so km. So once that is done, what may be the size of RTGIL assets – maybe Rs 50,000 crore (around $10bn).

News report indicate RTGIL has some massive plans.

Says a recent news report –
The Mukesh Ambani-controlled Reliance Gas Transportation Infrastructure (RGTIL) has sought permission to lay a 1,100-km long pipeline from Kakinada in Andhra Pradesh to Howrah in West Bengal. However, an RIL official spokesperson declined to comment.
If these proposals are approved, Reliance will own one of the biggest networks of pipelines in the country.
Reliance’s move comes amidst complete lack of clarity in government circles over a concrete pipeline policy. With Reliance’s pipeline plans, there is a fear of duplication as GAIL has already been appointed the nodal agency to build the national gas grid. Even Anil Ambani firm Reliance Natural Resources has sought the ministry’s approval to lay a pipeline from Kakinada to Dadri in Uttar Pardesh.

Says another news report –
Presently GAIL is operating about 6170 km gas pipeline and authorization for laying additional pipeline of about 3400 km has already been issued. In addition Reliance Gas Transportation Infrastructure Limited (RGTIL) has plan of laying gas pipeline of 1386 km from Kakinada to Ahmedabad. RGTIL has also been given authorization for laying another four pipelines with total length of 2875 km.

Posted in Energy, Indian Economy | Leave a Comment »

RIL & the list of deafening silences

Posted by fairval on August 11, 2009

The oil and gas business of Reliance Industries gives an interesting example of why some skeletons don’t rattle, when it concerns RIL.

Ministries
The ex-ONGC chairman Mr Subir Raha wrote perhaps the most hard hitting, and well informed piece on the RIL-RNRL-MOP fued. It appeared in The Economic Times on 7th Aug 09, and anyone following this controversy should read it.
An interesting phrase Mr Raha used is ‘deafening silence’. Some excerpts –

There is deafening silence from one set of the interested parties: the power minister, his ministry and his company, NTPC. GoI-MoP is apparently committed to the three-monkey approach to life and times, and possible loss of 12 mmscmd gas @ $2.34 does not matter; after all, the regulator accepts cost of fuel as a `pass-through` item! Therefore, GoI-MoP is apparently conceding a walk-over to GoI-MoP&NG.

Another source of deafening silence is the ministry of finance. Petroleum minister is struggling to erase the figure of $2.34 everywhere, with the declared intention to maximise GoI revenue; GoI-MoF is quietly watching the game.

Analysts
I wonder why analysts haven’t asked some rather obvious questions. Let me give some examples. Found this in an analyst report –
On the deep-water exploration front, the company’s success rate is above 70%, which is substantially higher than the global average of 16%’.

My question is – 70% success rate: Is this merely luck? Certainly cant be skill, since RIL cant claim to be better than global oil giants in E&P.

Next, check this (from a Morgan report) –
RIL’s 80 mmscmd of gas implies an annual US$8 billion saving for the country, or replacement of close to 26mn tons of crude oil; that is as much as ONGC produces domestically’.
(wonder why is Morgan bothered here about ‘savings for the country’. This is typical RIL marketing speak)

My question – Is it really possible for a company to create an output of the size of ONGC in less than ten years?
My hunch is this – RIL’s 70% success rate can only imply, that there is a lot of oil and gas going around. This begets another question — Then why did ONGC not find it? Is there an oil import lobby at work? Ministers cant possibly take a kickback from a PSU, it is easier to take a kickback from the private sector, whether RIL or OPEC or an international oil supplier.

Political Parties
Am really surprised why is the opposition, particularly the left, so silent? After all, $4.2 per mbtu, RIL gains and public has to pay more for either fertilizer or power. I should imagine left should ask – why not gas at $1.5 per mbtu? If it is a national property, and RIL merely a contractor, then greater public good must be served.

RIL itself
And finally, the mother of all silences – RIL itself. RIL always tom toms its achievements, but is relatively silent on the E&P business. For ex, on the oil refining business, it keeps saying how its capital cost is the lowest in the world, how its GRMs are the highest in the world.
How come it is making no such statement here. Like has it said – cost of production of gas is lowest in the world? Or capex per mmscd of gas is the least in the world?

Posted in Energy, Stock Ideas | 1 Comment »

Oil data

Posted by fairval on June 28, 2008

Dont know what all these rigs are doing? Production isnt particularly going up.

Posted in Energy | Leave a Comment »

PSU Oil shone last week

Posted by fairval on November 17, 2007

The day we wrote that PSU oil stocks like BPCL and HPCL looked good, two weeks ago, a large foreign brokerage came out with its report on oil. This is what it said —

Nothing has changed — R&M has had a rough time with no respite from oil prices as was hoped for at various points of time. On the policy front, we have no visibility.Recent suggestions of a possible price hike will be mostly piecemeal and hence insufficient.So while stocks may have looked tempting from a value perspective (e.g., replacement costs), we reiterate our Sell (3M) ratings on BPCL, HPCL, IOC with revised target prices of Rs303, Rs184,and Rs494 espectively.

Now lets see what are the prices of these stocks as of last Friday’s closing (Nov 16).

BPCL was Rs 342 on the day of the report. It is now Rs 435, up 27%, and 43% more than their target of Rs 303.
HPCL was Rs 239 on the day of the report. It closed at Rs 316 last Friday, up 32% in 2 weeks, also 71% over their target of Rs 184.
IOC’s price on the report day was Rs 495. IOC closed at Rs 615, up 24% in 2 weeks, and up a similar number from the target.

Two weeks may not mean much, but we will revisit this in the next few months. Lets see how this goes.

Posted in Energy, Stock Ideas | Leave a Comment »

PSU oil companies look cheap

Posted by fairval on November 6, 2007

Valuation anamolies have widened in the oil sector. While private sector stocks are gripped by irrational exuberance, the PSU stocks have the reverse ailment

The commodity story refuses to die away. It is now the turn of oil, which is nearing an unprecedented $100 per barrel mark. With oil at that level, oil stocks globally are also at valuations which would have been unthinkable a even a few months ago.

While much of the oil sector in India is hobbled by government controls, private sector stocks are participating in the global oil price boom. However, investor frenzy over private sector oil stocks seems to be creating rather massive pricing anamolies in stock prices. So much so that if you were a value investor with a long term outlook, PSU oil stocks would perhaps be representing a good percentage of your portfolio.

It would perhaps sound quite ridiculous to talk about PSU oil stocks these days. They have underperformed massively in this entire bull run since 2003. They have perhaps underperformed the last three bull runs as well. So why talk about them now?
The reason is that PSU oil stocks – BPCL, HPCL and IOC – are undervalued at this time, alteast in comparative terms, perhaps in absolute terms as well.

Check the valuations of Reliance Petroleum (RPL) and Cairn India (CIL). RPL is currently quoting at a market cap of around $31bn. CIL is quoting at an market cap of $10bn.

RPL is setting up a refinery with a capacity of around 29 mn tons per annum (mpta). The project is not yet ready. At a project update of 16 October, 70% of work was done. The company appears to be planning to start commercial production from Dec’08. This means it is currently quoting at a valuation of a little over $1bn per mtpa.
Now let’s do a back of the envelope calculation to see how much should the refinery business of BPCL and HPCL be valued at. BPCL has refining capacity of 20 mpta, and HPCL has a capacity of 16mpta. Reliance’s refineries tend to be far more profitable compared to PSU refineries. But even if we take a per mtpa valuation at a third of RPL, BPCL’s refining business could be worth $7bn, and HPCL’s refineries could be worth $5bn.

BPCL has further value from ventures and stakes outside the parent company. It owns a 3mtpa refining capacity through Numaligarh refinery. It is also building a 6 mpta refinery, which is about 30% complete. These two could perhaps be another $1.5bn, looking at above numbers. BPCL also has a 12.5% stake in Petronet LNG and a 22.5% stake in Indraprastha Gas, which amount to over $300mn at current prices. It has stakes in some other city gas projects as well.

The non-marketing business of BPCL can thus be valued at around $10bn. HPCL’s non-marketing business could be valued at $5-6bn. This is 3 times current market capitalization of these companies.

The marketing business, where PSUs have no pricing control, is destroying a lot of value for these companies. General government interference could also be a reason for low valuations.

Now imagine if value unlocking through M&A was possible. If for example, BPCL and HPCL were allowed to sell the marketing business even at a token Rs 1, these stocks could triple. Value capture could also happen if BPCL and HPCL were allowed to be acquired. An acquirer would most likely be willing to pay a price far higher than current market price, keeping in mind the underlying value. These could be numerous private sector companies wanting to acquire these PSUs – from Reliance to the likes of LN Mittal, Essar, or even Vedanta Group, which has good experience with turning around PSUs.

Of course, a lot of this is wishful thinking since government is unlikely to let go of oil companies easily. But with a long term horizon, who knows? A long term investor may also better be vary of Cairn Energy, which is quoting at a market cap of $10bn. Its parent Cairn Energy Plc holds 69.5% stake in CIL. This means imputed value of the stake is $6.95bn. Cairn Energy Plc is listed in London, and its current market cap is only $3.1bn, or less than half of value of its stake in the Indian entity. The UK markets don’t seem to share the same enthusiasm about Cairn as the Indian investors. While rising oil price could one reason why Cairn’s price may have gone up, the other pure oil producer, ONGC has not seen its price go up in similar ratio.

Posted in Corporate Finance, Energy, Stock Ideas | Leave a Comment »