ICRAs expectations from the upcoming budget

In absence of more field developments, gas deficit scenario could further worsen putting several end users and lenders at risk.

June 26, 2014 9:35 IST | India Infoline News Service
Oil & Gas
Early decision on gas price revision is imperative as without which the upstream companies with gas discoveries in deepwater fields, may not be in a position to develop the fields as they are unviable at the current prices. In absence of more field developments, gas deficit scenario could further worsen putting several end users and lenders at risk. The upstream sector has also been affected by long approval process and unpredictable policies, which have stymied the pace of exploration and development, besides scaring away the investors. Early decision on Cost Recovery Model Vs Revenue Sharing Model and Uniform Licensing Policy would also be required to attract the risk capital in the sector. In the downstream oil sector, deregulation process initiated through monthly diesel price revision, should be carried to its logical conclusion so that diesel under recoveries are fully passed on. Moreover, price revision on LPG and SKO could also help in limiting the overall under recoveries.

As regards upstream companies, a predictable and equitable formula for under recovery sharing could enable them to generate enough cash required for their core operations, which are capital intensive besides being riskier. Timely payment of subsidy to the OMCs could help them improve the liquidity position, besides lowering the interest cost on short term loans, which are to their account. Instead of carrying forward certain subsidy to the next fiscal, adequate provisioning of fuel subsidy in the respective fiscal years would also help the cause of the industry besides sending the right signals to the financial investors. Other long pending demands of the industry include declared goods status on Natural Gas & ATF so that VAT burden is low & uniform across consumers, review of income tax holiday sunset clause for Greenfield refineries which expired by March12, clarity on Sec 80 IB deductions for both Oil and Gas instead of only for oil and CENVAT credit for the upstream companies on account of service tax paid on input services, which should merit attention of the Government.

In the fertiliser sector, urea price revision is long overdue as the farm gate price differential has widened between subsidised urea and decontrolled P&K fertilisers. The latter has adversely impacted the nutrient mix (NPK ratio) in the soils, as the farmers have been overusing the cheaper urea at the cost of dearer P&K fertilisers. Furthermore, it has led to high subsidy burden for the GoI with rising cost of production of domestic urea, which will be further exacerbated if gas price revision happens.

The domestic fertiliser industry has also been affected by significant delays in the payment of subsidy, especially in the second half of the fiscal year, which has impacted their liquidity position adversely besides impairing the profits due to higher interest costs on additional working capital borrowings. The GoI would also have to revisit the New Urea Investment Policy 2012, as the reported amendment on withdrawal of guaranteed buyback for domestic sales has resulted in significant uncertainty on returns for the project developers. This could lead to increasing dependence on Urea imports, which can hurt the fiscal position when international urea prices firm up from the recent lows. Moreover, existing pricing policy for debottlenecking projects for production volumes beyond the cut off quantity may have to be revisited, as the production has become unviable with sharp fall in international urea prices and rise in domestic gas/R-LNG prices.

Shipping & Ports
Private sector players operating in Major Ports under PPP regime, are functioning under multiple tariff regimes, of which the older set of players operating under 2005 tariff guidelines of TAMP have seen material fall in profits and return on the capital employed, on account of sharp tariff cut. Moreover, many of the tariff orders have been litigated upon resulting in a stalemate in the industry. In order to attract private capital, it is imperative to simplify the tariff regime and migrate the older set of players to the 2013 tariff regime, which offers some upside to the returns by giving partial freedom to fix tariff in line with the market conditions.

The Government is also expected to give a renewed thrust to the sector under Saga Mala programme, which could mean more projects being bid out under PPP and development of new ports. Coastal shipping and Inland water ways could also get more attention from the Government, as they are supposed to bring in efficiency in goods transportation, which could benefit players operating in this space. Dredging companies and other service providers such as tug boat operators could also benefit if the Port sector were to see pick up in awards. Government might also take a decision on the demand of the foreign shipping companies & port operators to relax the cabotage law, which gives the first right of refusal to domestic owners for coastal shipping.

K Ravichandran, Sr. VP, Co-head, corporate sector ratings, ICRA ltd

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