IN THIS EDITION

 
     
 

 

 
     
 

 

 
     
 

 
 

On expected lines, the Monetary Policy Committee (MPC), in its first policy statement for 2018-19, has left the repo rate unchanged at 6% and retained its neutral stance, despite revising downwards the inflation trajectory for H12019. In ICRA’s view, there is a low likelihood of a change in the repo rate, until there is greater clarity on the impact of minimum support prices (MSPs) of various crops, monsoons and fiscal risks on the inflation trajectory; accordingly, we expect an extended pause for the policy rate. Also, in the absence of a broad-based pick-up in investment activity, ICRA’s forecast for GDP growth is at 7.1%, mildly lower that the MPC’s forecast of 7.4% for the year.

We also take a look at the potentially adverse impact the Bharatmala network could have on the existing road projects set up under the BOT route as a result of a potential fall in toll collections due to the diversion of traffic on new roads. This could disrupt the financial viability of some of the projects and their debt-servicing ability. ICRA estimates that 25 NH-Toll projects involving Rs. 19,435-crore of debt may be at risk as a result of the new economic corridors under Bharatmala Pariyojana. We estimate that the traffic diversion risk for about 72% of the projects is low, nearly 16% of the projects would have a moderate risk and the remaining 12% are likely to have a high risk of diversion in traffic with the availability of an alternate route. Also, in our opinion, the existing ways to compensate BOT operators seem inadequate.

Insight also discusses the revised energy norms under the New Urea Policy-2015 (NUP-2015), which are effective from April 1, 2018. It will help the Government of India reduce the urea subsidy outgo and promote higher energy efficiency for the urea plants. The urea manufacturers who use gas as the primary feedstock will be able to recover a part of their capex through energy savings earned, as typically these companies have long pay-back periods of 7-10 years. However, a lower subsidy will negatively affect their profitability. We also discuss why their return metrics too are expected to remain subdued.

Finally, Insight examines the recent draft policy on the generation of e-way bills by the Central Board of Excise & Customs (CBEC), whereby certain amendments have been proposed to the previous draft. The amendments proposed, in ICRA’s opinion, will largely address concerns of small businesses, e-commerce logistics companies, courier/express cargo companies and less-than-truck-load (LTL) operators.

The issue concludes with the regular features: monthly rating updates, upcoming ICRA events, and news features related to the company.

I hope you will find this newsletter useful and informative.

Best Regards

Anjan Ghosh
Chief Rating Officer, ICRA Ltd

 
 
 
 
     
  MPC signals extended pause for repo rate  
 

As expected, the Monetary Policy Committee (MPC) left the repo rate unchanged at 6.0% in the First Bi-Monthly Policy Statement for 2018-19. It retained the neutral stance of the Monetary Policy and reiterated the commitment towards achieving the medium-term inflation target of 4%.

Following the decline in the CPI inflation from 5.1% in January 2018 to 4.4% in February 2018, the MPC has revised the inflation trajectory, to 4.7-5.1% in H1 FY2019 (from the earlier projection of 5.1-5.6%), and 4.4% in H2 FY2019 (from the earlier projection of 4.5-4.6%). However, it added a word of caution that volatility in crude oil prices, pass-through of higher input costs to final prices and the improvement in aggregate demand could pose some upside risks. Other sources of uncertainty, regarding the inflation trajectory, include the final contours of the revised formula for minimum support prices (MSPs) announced in the Union Budget for FY2019, the monsoon dynamics, the staggered impact of the HRA revisions by the state governments and fiscal slippage at the central or state government level.

The MPC expects the GDP growth to improve substantially from 6.6% in FY2018 to 7.4% in FY2019, benefitting from factors such as an emerging revival in investment activity and an expected push from improving global demand to exports. The committee highlighted that a recovery in growth and closing of the output gap is under way, as reflected in higher credit offtake and fundraising from the primary capital market, which is likely to support investment growth. However, the MPC reiterated that the deterioration in public finances might crowd out private financing and investment. Moreover, it flagged the risk that rising trade protectionism and financial market volatility could disrupt the global economic recovery. In ICRA’s view, a broad-based pick-up in investment activity may not emerge in the next two quarters. Accordingly, ICRA expects a GDP growth of 7.1% in FY2019, mildly lower than the MPC’s forecast.

The MPC highlighted the importance of ensuring that domestic macroeconomic fundamentals are strengthened in an unsettling global context, which, in conjunction with the lowering of the CPI inflation projections for FY2019, suggests an extended pause for the policy rate. In ICRA’s view, there is a low likelihood of a change in the repo rate or stance of the Monetary Policy until there is greater clarity on the impact of the MSPs, the monsoons and the fiscal risks on the inflation trajectory, which is unlikely to emerge in the next few months.

 
     
  25 NH-Toll road projects worth Rs. 19,435 crore of debt at risk due to Bharatmala Pariyojana  
 

The Bharatmala network is a step in the right direction, designed on the concept of the shortest possible route connecting the origin and destination. However, this is likely to negatively impact the existing network as it will directly compete with some of the existing BOT (Toll) road projects. As the new Bharatmala Pariyojana proposes 44 economic corridors (EC) on the existing road network, the ensuing traffic diversion will impact toll collection and thereby debt-servicing ability of some of the BOT (Toll) and OMT projects. It is estimated that 25 NH-Toll projects involving Rs. 19,435 crore of debt would be at risk as a result of the new economic corridors under Bharatmala Pariyojana.

Out of the 44 economic corridors, about 21 would partially or fully affect the existing alignments while the remaining 23 corridors involving upgradation of the existing alignment, will not result in any deviation. Among the 21 corridors that affect the existing network, eight have a totally different route (shortest route between origin and destination) as against the existing route while the remaining 13 show some deviations from the existing alignment. Overall, there are 24 BOT (Toll) and 1 OMT road projects which might see traffic affected due to the proposed ECs. The traffic diversion risk for about 72% of the projects is low, while 16% of the projects face a moderate risk and the remaining 12% of the projects have a high risk of leakage in traffic with the availability of an alternate route.”

We need to look at possible remedial measures available with protection through the concession agreement.

As the stretches under the ECs of Bharatmala Pariyojana are either longer by more than 20% or traverse a completely new route, they, therefore, do not fit into the description of the additional tollways as defined in the concession agreement. Article 30 of the concession agreement extends protection to the BOT toll road projects by restricting construction of additional toll ways, however, this clause is not applicable if the length of such additional toll road exceeds the length of the existing route comprising the project highway by 20%. Therefore, traffic loss/diversion arising out of these would not get compensated under the concession agreement. In extreme cases, the concessionaire may choose to opt for a termination of the concession agreement by invoking the Authority Event of Default clauses. Since it cannot be termed as the Authority Event of Default, in most cases this may end up in a dispute with the Authority, or the Authority in turn invoking the Concessionaire Event of Default (which is the case with most of the terminated projects till now). The termination payment in case of the Concessionaire Event of the Default is equivalent to 90% of the debt due (here, debt due is calculated as if the capital cost was restricted to total project cost as per NHAI). In around 40% of the total BOT projects, the debt sanctioned is higher than the total project cost as per the NHAI, resulting in a shortfall in termination payments when compared to the actual debt due.

To arrive at the debt at risk, the debt outstanding for each of these SPVs, the repayment tenure, concession end date, the credit profile of the SPV and its sponsor credit risk profile are taken into consideration. The total debt at risk for the 25 affected projects is Rs. 19,435 crore. Out of this, about Rs. 9,416 crore of debt is considered to be low risk. Projects with debt at a moderate risk have an aggregate debt of Rs. 3,483 crore while the aggregate debt under high risk is at about Rs. 6,536 crore, which accounts for ~34% of the total debt at risk.

 
     
  Revised energy norms to marginally impact urea producers’ bottomline, as government saves on subsidy  
 

In a recent decision, The Cabinet Committee on Economic Affairs (CCEA) has approved the revised energy norms under the New Urea Policy-2015 (NUP-2015), made applicable from April 1, 2018 for 11 urea units and approved the continuation of existing energy norms for the remaining 14 natural gas-based urea units, which could not meet the revised criteria. These 14 units are likely to face nominal penalties. Besides, the CCEA has also given the go-ahead for the continuation of existing norms for naphtha-based urea units for another two years i.e. FY2019 and FY2020 or till the time pipeline connectivity is achieved, whichever is earlier.

The question then is about the necessity of the revised energy norms.

The Government wants to reduce the urea subsidy outgo and promote higher energy efficiency for the urea plants. The new energy norms, applicable till March 31, 2025, will enable urea plants to recover a part of their capex through energy savings earned, as typically these companies have a long pay-back period of 7-10 years. For the Government, in the case of 11 units at present, the savings in subsidy is expected to be nearly ~Rs. 268 crore per annum, and once the remaining 14 units migrate to the revised norms, the total subsidy saving is likely to be ~Rs. 1,500-1,700 crore per annum, based on the prevailing pooled gas prices. However, the new norms mean lower subsidy for the urea units which is likely to negatively affect their profitability.

As for the naptha-based urea producers, the continuation of energy norms is a key relief as it will ensure their economic viability. However, the delay in pipeline connectivity will continue to affect the profitability of these entities, making them vulnerable to the volatility in prices of naphtha and R-LNG as the energy charges are reckoned on the basis of the lower of the above two fuel prices.

For the urea plants where energy-saving projects are under implementation, the existing energy norms will enable them to produce urea economically over the next two years and also ensure continuity of urea production while keeping import dependence under control.

Irrespective of the policy impact, the key return metrics of the urea players are expected to remain subdued due to lack of timely revision in fixed costs. A part of the retention pricing policy, the regular tightening of energy norms, delays in payment of subsidy, high interest costs which are not reimbursed as part of subsidy scheme, and lack of material increase in farm gate price of urea are concerns which need urgent policy measures as the industry is regulated.

 
     
  Recent amendments in e-Way Bill to clear snags for courier, e-commerce logistics companies  
 

The Central Board of Excise and Customs (CBEC) recently released a revised draft policy on the generation of e-way bills on March 07, 2018. Certain amendments have been made to the bills and some conditions were relaxed, which would significantly address concerns of e-commerce logistics companies, courier/express cargo companies and less-than-truck load (LTL) operators.

The modified e-way bill will benefit small businesses that operate intra-state and transporters who follow a hub-and-spoke-model for operations, such as the less-than-truckload (LTL) operators. This is because as per the revised norms, generation of e-way bills will not be required for each consignment in case of intra-state movement of goods via e-commerce or courier companies where the value of each consignment is less than Rs. 50,000 but the aggregate value is greater than Rs. 50,000. The revised policy has also extended the relaxation on the requirement of updating vehicle details for intra-state movement to 50 Km from 10 Km.

It may be recalled that the road transport industry had raised several concerns about the earlier draft e-way bill policy, especially regarding generation of e-way bills for change of conveyance and the requirements of generating e-way bills with value of each consignment at less than Rs. 50,000 but the aggregate value being more than Rs. 50,000. This was expected to put significant compliance burden on the road transport sector, especially courier, e-commerce logistics and LTL operators. The Government has now addressed some of these concerns in the revised draft policy for e-way bills.

 
     
 
           
 
   
m Rating Updates for the month of March 2018
   
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