‘Possible Oil Spike may be the Only Danger to Economy’

HDFC Asset's Prashant Jain says there are reasons to be optimistic after the new round of reforms India's best known and welltracked  money managers, Prashant Jain, is bullish on the mid- to long-term prospects of equities market. "Policy framework in infrastructure and natural resources is improving. Lower interest rates and thinner deficits in the future should lead to faster economic growth," says Jain, the chief investment officer of India's largest fund house, HDFC Asset Management Company, with assets under management of . 97,773 crore. Spurt in oil prices coupled with an overtly populist budget and repeated scam allegations could hurt investor sentiment, he said in an interview with ET's Shailesh Menon. Edited Excerpts:  Is there a perceptible change in the way you see India after the policy announcements in September?  What we have seen so far is largely a correction of some of the earlier deficiencies. However, what is welcome is the change of direction and the communication of intent to take the economy forward. So, yes, there is optimism that things will move in the right direction, but a lot remains to be done.  Is the worst over for Indian economy?  There are reasons to be optimistic about the economy. The growth drivers of Indian economy are strong and sustainable and thus the economy grows even when the policy or external environment is challenging. If the good beginning is taken forward, then, in my opinion, the worst should be over for the economy. Consumer spending is showing a moderation, which is good in the current inflationary environment. Capital spending should revive, albeit with some lag. Interest rates should also be lower one year down the line. Economy should grow at a faster rate next year. A key risk is a spike in oil prices. Given the high fiscal/ current account deficits, the ability of the economy to withstand an oil spike is limited. On the other hand, a fall in oil prices should help in faster recovery.  Despite the government's road map for growth, Indian corporates are not very sure about making capital investments.  In my opinion, capital investments have slowed down due to a number of reasons: lack of a proper regulatory framework in key infrastructure areas, lack of co-ordination and prioritisation in the power sector, particularly between coal mining, distribution reforms and generation, inadequate experience or weak balance sheets of companies implementing large projects and high interest rates… These are not issues that can be solved overnight. However, the direction now appears to be right and given some of the recent changes and some key expected steps like the National Investment Board, coal pooling, etc. In my opinion, capital spending should revive in next 2-4 quarters.  What are your thoughts about the Reserve Bank of India's move to keep rates steady?  RBI has a good track record and an excellent reputation, so in my opinion we should accept its decision as the most appropriate one in the prevailing circumstances. At the same time, there are reasons to be optimistic about lower interest rates in a not too distant future.  There are worries that the next budget will have a lot of populist measures.  The fiscal room is very limited for populist policies. Besides, in my opinion, the revival of economic growth will be more effective than giving subsidies. However, the food bill could put some pressure on fiscal deficit. Hopefully, this should be counter-balanced by rationalisation of some social programmes and by fasttracking direct transfer of subsidies to cut leakages. The budget should focus on improving tax/ GDP ratio primarily by effective tax administration or removal of exemptions and also through some increase in tax rates wherever necessary. Elimination of diesel subsidies is also very important, even though it is not linked to the budget.  Has there been any impact of several scams on the overall investment climate?  These have clearly hurt investments. Having said this, in my opinion, every crisis is an opportunity for change and the current challenges will lead to a change for better – in future, this should lead to a more transparent and effective policy for use of natural resources. It must however also be kept in mind that the manifold appreciation in prices of several commodities over the last ten years has multiplied the numbers being discussed several-fold.  How have been the second quarter results? Is there a definite drop in demand?  Results have been marginally better than expected, barring a few instances when some companies have reported lower numbers. Select banks have reported higher-than-expected slippages and some engineering companies have reported disappointing results. Most of the slowdown, which we have been experienced so far, is in urban demand, rural demand is still holding up.  What's you medium-term outlook for markets?  Iam optimistic about equities markets over a mid- to long-term. This is so because, even though belatedly, the policy (and regulatory) framework in infrastructure and natural resources is improving. This along with lower interest rates and thinner deficits in the future should lead to faster growth. Valuations are below average and thus returns should be aided by an improvement in valuations apart from earnings growth.  Some money managers do not see value in paying 14-16 times price-to-earnings for a projected sub-10% growth in Sensex companies. Are you comfortable with current valuations?  In my opinion, a 10% earnings growth for next year is pessimistic. With lower interest rates and hopefully better economic growth next year, profits should grow faster. A 14-16 times price-toearnings for a similar growth in profits is not demanding, particularly if growth rate is sustainable for long periods.  What investment strategies are your adopting currently?  Our investment strategy has been consistent over time to focus on strong, well managed, growing and reasonably valued businesses. In my opinion, any economic recovery should be led by investments and not by consumption. Therefore, I expect businesses linked to investments to do better over time.

Oilmin seeks share in RIL gas levy Won’t Approve KG Field Fin Accounts Till Co Pays Cut In Marketing Margin

New Delhi: The government appears to be further tightening the screws on Reliance Industries (RIL). In a latest salvo, the oil ministry's technical arm for exploration — Directorate General of Hydrocarbons (DGH) — has refused to approve the financial accounts of the company's showcase Andhra offshore field without a cut from the marketing margin it charges from customers on sale of gas. 

    Government documents on the issue of approving the 2010-11 accounts for the KG-D6 block show the ministry's resolve to get a share of the 13 cents RIL charges customers on each unit of gas it sells from the field. RIL levies this amount in addition to the $4.2 per unit price set by the government, and does not share it with the exchequer. 
    The company's argument is that marketing margin is needed to cover the risks and costs associated with marketing of gas from the field. It also argues that it is a matter between the buyer and seller that did not brook intervention by the ministry or the gas market regulator. But unless the DGH approves the accounts, RIL will not be able to recover its investments and operating costs for the year under review. 
    The ministry wants the government's share of revenue from the field's gas sales to be calculated after adding the marketing margin to the base price, or $4.34 per unit instead of $4.2. The accounts show RIL mopping up over $88 million (around 472.6 crore) as marketing margin in 2010-11, when the field's gas output 
stagnated at less than half the target of 60 mcmd (million cubic metres per day). 
    This is the second time the ministry has taken a stern stand against the firm. It recently threatened to hold approvals for future investments in the field unless RIL allowed federal auditor to conduct a second round of audit of the KG-D6 accounts. 
    The marketing margin became a bone of contention ever since the fertilizer ministry and Fertiliser Association of India lodged their protests with the oil ministry last year. During deliberations on the issue, both the ministry and DGH took the view that since the government identified the customers and allotted the quantity of KG-D6 gas to be sold to each consumer, there was no marketing risk involved. It also said that RIL would have to share with the exchequer any additional charge it levies from customers. 
    RIL had argued back saying state-run gas utilities such as GAIL too charge marketing margin of up to 18 cents per unit of sale but do not share it with the government. 
PUMPING FOR EXTRA FEES 

• Oil ministry determined to get a share of 13 cents RIL charges on each unit of gas sold from KG-D6 block 

• The amount is levied by RIL in addition to the $4.2 per unit price set by govt, and not shared with the exchequer 

• Co argues that additional amount is required to cover risks and pay for marketing of gas from the field 

• RIL had raked in over $88m (around Rs 472.6cr) as marketing margin in 2010-11 UNDER SCANNER RIL to face second CAG audit OilMin Assures Auditor Will Scrutinize A/cs, Not Performance 
New Delhi: Decks have been cleared for the federal auditor's scrutiny of accounts for the Andhra offshore gas field being operated by Reliance Industries Ltd. Officials from the Comptroller and Auditor General are expected to meet Reliance executives on October 31 to discuss modalities of starting the audit of the KGD6 field's books for the 2009-2011 financial years. 
    The meeting has been called after the oil ministry agreed that the federal auditor would examine the accounts to verify whether Reliance's investments in the field and operational expenses were in line with the terms of its contract with the state. 
    The contract allows Reliance to recover its investments and running costs before sharing revenue with the government. 
    Any excess claim, thus, has a bearing on the government's take from the field. 
    Reliance had agreed to a CAG scrutiny in 2009 but has been opposing a second round because of the audit format. It argued that the contract allowed only scrutiny of the field's accounts and not performance. 
    It raised points of law to say the federal auditor did not have the powers to examine the accounts of a private company or evaluate the efficacy of technology or processes deployed in the field. 
    But the company also said it would have no objection to an audit of the field's accounts by a "duly appointed representative of the government", including CAG. 
    The adverse report of CAG's first round of audit and the recent drop in the field's output revived doubts over Reliance's investment plans for the field and put the ministry under pressure to order another round of audit. No wonder the ministry has put on hold approvals for future investments in the field to pressure Reliance. 
    The CAG report had said the government extended favours to private oil companies, including Reliance, and pointed out violations of terms of contracts. The report also pointed out "sweetheart deals" in the procurement process for the KG-D6 field but ruled out gold-plating of investments by Reliance. The field's output has fallen to 26 mcmd (million cubic metres per day), or less than half the target for which the government had approved investments. The reduced output has left the government grappling with clamour for fuel from starving power, fertilizer and other plants. 
    The ministry had in 2009 ordered the special CAG audit of contracts the government had signed with private oil firms, including Reliance, for operating fields after allegations of gold-plating by Reliance. On its part, Reliance has been pushing for quick approvals for fresh investments to develop other gas finds in the area, saying these were needed to shore up output from the KG-D6 block and stop the producing fields from dying. 
    But the ministry has been dragging its feet to make Reliance submit to a CAG audit of the field's performance in view of the fall in output.