Will PSUs play musical chairs with bad loans?

Sep 25, 2012

In this issue:
» Be cautious while investing in penny stocks
» No roaming charges 2013 onwards
» Could a cartel in oil be manipulating oil prices?
» QE3 is here and there's already buzz about QE4
» ...and more!

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In a bid to save its face amidst the political logjam, the UPA government announced a series of measures recently. One of the most significant ones being the massive financial bailout of power distribution companies. The size of the bailout is expected to be to the tune Rs 1.9 trillion.

As per plan, half of the outstanding debt burden will have to be taken over by state governments. The balance debt would be rescheduled by lenders, mostly public sector banks. The decision may come as a big relief to SEBs that have been virtually bankrupt. It may help revive investments in the sector which had been hindered on account of the humungous debt. While this may be a moment of renewed hope for the ailing power sector, there is need for some serious contemplation.

What reasons caused the SEBs to bleed so badly? The answer is petty politics taking over economics. How? Distributing free electricity, keeping power tariffs artificially low despite rising costs and the unwillingness to curb power thefts are the main reasons for the financial mess of SEBs. And let us remind you that state power utilities had been bailed out back in 2001 as well. How can a sector so fundamentally critical to the economy be so neglected and hounded by political compulsions?

Moreover, the problem with bailouts is that they don't really improve the economics of a business. They just tend to transfer the problems from one area of the economy to another. While the bailout may be a saviour for the power sector, it is going to be a curse for the banking sector. Owing to the economic slowdown, several banks have already seen their NPAs (non-performing assets) rise substantially. In June 2012 quarter, the banking sector has seen the quantum of restructured loans jump more than five-fold to over Rs 200 bn. Just imagine what the Rs 1.9 trillion power utilities bailout would do? The risk of default in the banking system would rise significantly.

We believe that doling out bailouts when things go awry is a not the way to go. We need reforms that would allow power tariffs to match with costs. At the same time, serious steps must be initiated to curb power thefts and slippages. Gujarat and Delhi have already shown the way. There is no reason why other states cannot follow. Political will is all that is really needed.

Do you think the government is right in announcing a massive bailout for power utilities? Do share your comments with us or post your views on our Facebook page / Google+ page

 Chart of the day
The investor sentiments have turned quite a bit following global stimulus measures and domestic reform announcements. So much so that the stock prices of about 100 penny stocks (market capitalisation less than Rs 3 bn) have shot up by anywhere between 30-90% in just 16 trading sessions. Today's chart of the days shows stocks that have registered the highest gains since the beginning of September. It must be noted that many such penny stocks are highly illiquid and tend to fall prey to manipulation by stock operators. Many also fare poorly on corporate governance. So, it is best to avoid buying into tips and rumours. A stock should be part of your investment portfolio only on the basis of solid business fundamentals, management integrity and sufficient margin of safety.

Data source: Economic Times
*Stock price change from 31 August to 24 September, 2012

Just a few days back we had written about how higher operating costs as well as higher spectrum costs could force telecom operators to raise tariffs. We are sure that the words went down hard for everyone as higher tariffs translate to larger mobile bills. Therefore it would come as a sweet surprise that the telecom minister has decided to ease the consumers' pain to some extent. He has stated that the consumers would not have to pay any roaming charges from next year. This means that from 2013 onwards, subscribers can use their mobile anywhere in the country without having to pay extra for the same.

But the end of roaming charges would hit the telecom industry in a big way. Currently companies earn 10-12% or around Rs 100 bn to Rs 135bn of revenues from roaming charges. Come 2013, this would vanish from their top lines. Therefore, naturally the operators and their representative associations have opposed this recommendation. They have stated that it is necessary to get the viewpoint of all stakeholders before arriving at the decision. Unfortunately for them, the telecom minister appeared to have made up his mind. From a subscriber's point of view, we hope he sticks to his decision. But from the sector's point of view, the woes are not likely to ease up any time soon.

Remember the recent LIBOR scandal? It was certainly a lack of sufficient oversight that enabled traders to manipulate the London interbank offered rate. However, is this case an isolated one? Certainly not! It is estimated that fewer than half of the benchmark interest rates surveyed in the US, Europe and Asia were based on actual transactions. In other words, the methods used to calculate rates were hardly transparent.

And this malaise is restricted to not just financial markets. It is present in commodities like crude oil also. In fact, so concerned was the group of G20 nations about wild swings in oil market that it had asked regulators to take a look at the role of price reporting agencies. But did anything come out of this scrutiny of the way oil is priced? Unfortunately not! On the contrary, these financial regulators had to backtrack on a few proposals for regulation of the physical oil market. This was due to the opposition from oil cartels like OPEC and some major oil companies. Thus, for the time being, no insight can be had in the manner in which oil is priced we believe. And we may continue to be at the mercy of oil cartels and oil producing companies.

Quantitative easing. Do not under estimate the power of these two words. Ever since QE1 was unleashed by the US Fed after collapse of Lehman Brothers, the far reaching effects of this cheap money have been doubted. However, the US central bank has been super optimistic about its power to set things right with consecutive rounds of money printing! Thus QE1, QE2 have come and gone without making any positive difference to the US or global economy. All that they did were to bring temporary buoyancy in global stock markets. On the flipside they also stifled the chances of hyper inflation. Under the recently unveiled QE3, the Fed will buy US$ 40 bn of mortgage-backed securities. Under the garb of generating employment and boosting the economy, this too will seal the chances of runaway inflation.

But this is not the end of the US Fed's histrionics! As per Morgan Stanley, leave aside economy, the QE3 is unlikely to even impact stock markets substantially. And hence there is a very strong chance that QE4 is just around the corner! No doubt, these numerous QEs are downright suicidal for the US economy. But what really concerns us is the impact that it will have on global financial markets and currency values. Buying some gold seems to be the only solution in such times.

India's iron ore production and exports have been on a decline since FY11 on account of bans/curbs, slower clearances and high export duties. Last year, a blanket ban on iron mining was imposed in Karnataka (Aug 2011). And now the state government of Goa has suspended mining. Goa and Karnataka accounted for 36% of India's iron ore production and 65% of India's exports prior to the ban. Most of India's iron ore production (around 25 to30%) is from public sector companies such as National Mineral Development Corporation (NMDC) and Steel Authority of India (SAIL). Balance is from the private sector including companies such as Tata Steel. And now the Indian government has banned steel companies from selling ore from mines which have been allocated for their exclusive use. The entire ore produced by iron and steel producers should be used for their own operations. They cannot sell it in domestic or overseas market. This decision would make it more difficult for Indian steel companies without captive mines to source iron ore for making steel.

In the meanwhile, the Indian equity markets traded in a volatile manner today. After opening trade on a firm note, the stocks fell for a while before bouncing back. At the time of writing, BSE Sensex was up by 62 points (0.3%). Sectoral indices mostly traded strong except metal, auto and energy stocks. Asian stock markets represented mixed performance.

 Today's investment mantra
"I have avoided technology sectors as an investor because in general I don't have a solid grasp of what differentiates many technology companies. I don't know how to spot durable competitive advantage in technology. To get rich, you find businesses with durable competitive advantage and you don't overpay for them. Technology is based on change; and change is really the enemy of the investor. Change is more rapid and unpredictable in technology relative to the broader economy. To me, all technology sectors look like 7-foot hurdles." - Warren Buffett

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    7 Responses to "Will PSUs play musical chairs with bad loans?"

    sharad sharda

    Sep 25, 2012

    The announcement made by the Govt. is not on sound economic footings. For the present position of SEBs, solely the Govt. whether it be Central Govt. or State Govt. is responsible for using these SEBs to carry out their political agenda. These SEBs were never allowed to function purely on commercial principles even after they were changed into corporations. Moreover, Govt. was never serious to check theft of electricity, which is also a major contributor to their bad position, in transmission as well as distribution of electricity. It is an example of a severe misuse as well as abuse of hard earned money of taxpayers and should immediately be checked. It is very difficult to understand why commercial banks are leaned so much to extend financial assistance to these SEBs when they are not running on sound commercial principles and suffering heavy losses, putting public money at stake. Can't it be stopped at all at least for future till the working principles of these SEBs are altered to run them purely on commercial lines?



    Sep 25, 2012

    I entirely agree with BRIJ.SEBs have in course become kinder garden of political nurture certainly not for the benefit of the country.What authority the Govt has to shatter the public money of PSU Banks.All SEBs and PSU Banks must be freed from clutches of to deter sytematic onslaught in the name of economic reform! Once in 2001 and in 2012 is it not a systematic cover up of loots of exchequer in disduise!


    Praveen VS

    Sep 25, 2012

    Why don't they collect the money from the defaulters? Why the hard earned money of common man collected as tax is wasted for protecting the interest of a few? To where we are heading? What is the benefit the common man getting?


    N Viswanatham

    Sep 25, 2012

    Giving "free power" for "political power" is a crime and an anti-national act. Free power results in reckless wastage of power as well as mindless exploitation of valuable ground water. The experience in A.P. has proved this amply. Only "free" remains but there is no "power" in "free power" in this State. The prophesy of Mr.Chandrababu Naidu that "you need to hang clothes on electric wires if free power is given" has come true. But, the politicians have not learnt their lessons. The solution is, give "subsidized" but "not free" power to farmers. All other users should be billed on cost plus basis. Transmission losses, theft and other problems in power sector shall be addressed effectively and appeasement of employees of SEBs shall be stopped forthwith. Let the SEBs be run on business lines and not be misused by politicians as step stones for "political power"


    Gopal Kalpathi

    Sep 25, 2012

    No wonder India is called a country of enigma. Ours is one-of-a-kind democracy. We are in a perpetual experimental mode. But let me tell you this the greatest thing about us is that we tend to thrive in chaos. Any semblance of order or discipline is anathema for us. Otherwise how can we explain the mess we are in? Ask any individual on the street , at least in the metros, he might agree with the reforms, but ask him/her to pay Rs. 15 per unit of power he will blow his fuse out.

    The second part of my comment is that this UPA government wasted precious 2 years in bringing these so-called reforms. The best time for any coalition to bring about change is immediately after coming to power, before the euphoria of the alleys' taste of power dies down. Trying to pacify the alleys and accommodating every whim and fancy has brought this fate to the ruling party.

    My third comment is that no matter what the economics dictate, politicians, as a class, are there to contradict it. If not, they will not be called politicians.

    Last, but not the least, "Power corrupts, absolute power corrupts absolutely- SEBs after all distributes POWER"



    Sep 25, 2012

    In the case of SEBs a Bailout may be a necessity. However it must be compulsorily linked to the Reforms... Technical & Others as in the State of Gujarat, if they have to pull these organisations from the mire that Politicians have pushed them into.In fact the bailout must come only after 75% of the most critical of these steps have been implemented by the SEBs.



    Sep 25, 2012

    Bailout is no solution. SEB are manned by govt officials who themselves are corrupt as no power theft can take place without the active involvement of officials. They enjoy free power in their homes and offices. Nothing can move in this country till such time corruption is controlled rather eliminated be it any sector. Each one of the govt employee wants the highest salary be it administration or defense.
    The time is not far off when we will ask whites to run our govt. as today we send our babushka to us and other countries to learn but they return back with sightseeing and fat cash in hand.

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