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‘Deferring gas price hike bigger negative than coal order’

While the Supreme Court’s verdict on coal block removes uncertainty, the negative aspect of the verdict is that coal block allocation will go back by 20 years , says Arvind Sanger of Geosphere Capital. In an interview with CNBC-TV18’s Shereen Bhan, he says that India is hurting from the data put out by the CAG which make no sense.

According to Sanger, India’s power sector continues to be plagued by immense uncertainties and that the power sector is grappling with issues of coal linkage and broke discoms. He feels that the government’s decision to defer gas price hike is a bigger negative than coal block de-allocation ruling.

Meanwhile, speaking about the government’s divestment plans, he says the SAIL is the worst PSU for the government to start its disinvestment drive and that the Finance Minister is ill-advised in picking SAIL to kick off its divestment plans.

Below is the verbatim transcript of Arvind Sanger’s interview with CNBC-TV18’s Shereen Bhan.

Q: Let me start by asking you about the coal verdict. In a sense the uncertainty is over because the court has said that what is illegal cannot continue to operate and they have given a six months window by when hopefully the government will get the auction process on the road, that is the uncertainty part when the government is going to rollout the auction, whether or not it will be able to meet that six months window. However how are foreign investors going to look at this verdict?

A: At the end of the day the positive is the uncertainty is out of the way but the negative is that you went back 20 years and you cancelled all awards for 20 plus years, plus you are talking about putting penalties on the coal produced. Part of the problem in India is not just that you had policy paralysis because the government was not making decisions, I think you have courts which are second guessing a lot of executive decisions and coming up with solutions which are from an investors standpoint and from a business standpoint negative. I guess this was known that it was coming, so in a sense its good to have it out of the way but the coal problem is not fixed.

Hopefully the government can get its act together and move this forward very quickly. It should focus on not being punitive because people who have built the power plants or the aluminium plants or whatever next to these coal mines are the ones that are going to be the logical winners and then you have this completely wild numbers that the CAG puts out which has no bearing and reality of what the loss to the exchequer is. So, hopefully some of this noise in the system in terms of the courts and the CAG is going to die down because when the coal auctions are held people who have plants right next to it will have the advantage to bid much lower than if it were a brand new coal block.

I am hoping that the political noise of assuming that every time somebody is doing something, where somebody has gotten paid off, there is a lot of that that happened but there was a lot genuine capex done by industry. So, the hope would be that we can move this forward quickly without second guessing continuously by other parties.

Q: But in this environment now and given the regulatory overhang and the regulatory uncertainty do you believe that investors are going to stay away from the infrastructure story, from the end user story which is the steel and cement and the power sector, which clearly are facing difficult times and now the added uncertainty?

A: Let’s separate the sectors. Cement is dependent on what happens with infrastructure demand and that whole story is not dependent on whether or not the coal blocks are allocated or not, but when you look at power and other infrastructure and power specially the uncertainties are still tremendous in terms of not just the coal part of it but also the state electricity boards that are broke and the fact that power plants are sitting idle, not because they don’t have coal, there are some lying idle because they don’t have coal, others are lying idle because their financial restructuring plan hasn’t worked so well. So the state electricity boards can’t afford to buy power.

So you have so many problems, the ‘Gordian knot’ if I may call it that, of the power sector is going to require, and frankly the last government tried a few things. It wasn’t like the last government was not trying, it created this new restructuring plan and the states didn’t all sign up as quickly as we would have hoped. I am hoping that we can move quickly on that because power is going to be a huge challenge for India in terms of its economic growth acting as a break if you don’t have enough power capacity coming on.

Q: Speaking of the power sector another decision that has been taken by the government today is to defer taking a decision on the gas price matter now to November 15. We have been talking about this on CNBC-TV18 whether the government actually has the political appetite to go through with this decision. It maintained that they would have met this September 30 deadline but finally it seems that they have developed cold feet. How much of a negative is this going to be?

A: That is a much bigger negative than the coal verdict. Coal verdict was expected and it is known. The fact that this government is unwilling to take decisions that might cause some populist anger with some people and not willing to make a decision on that is much more discouraging given the fact that this government has such a mandate. One of the first things that the Prime Minister said was about having to make some tough decisions but we haven’t seen any. Every time they are faced with this decision where they have to make a tough decision they keep kicking the can down the road. This reminds me of UPA all the way. We know there is a state election coming up but that is an excuse we heard for the last 3-4 years with the last government. So, are we staring off with the same approach of kicking the can down the road?

The other part of it is that from everything that I hear the decision that was going to come down is going to be worst than the somewhat finally courageous decision that last government did to provide some transparency  on the pricing.

If you are doing USD 6.50 nobody is coming to India. If you want to put up a sign shut for investment in hydrocarbons it is a great policy. If you want to put up a sign we would like to have investments in hydrocarbon it needs to be a completely different policy because at USD 6.50 the gas is going to stay beautifully underground and is not going to be helping the Indian consumers. So, the populist will be happy that  Reliance got “punished” but the country will be a big loser.

Q: Is the honeymoon period over with this government? Are investors now starting to lose patience because it is not reflecting in the stock market a movement that were seen yet?

A: Not yet, because there is still signs that at least some of the machinery of project approvals and environmental stuff is moving on but it is dangerously close to where we need to see some big decisions where the government does. Yes, it is creating some better approvals. Let’s talk about the positive, when I talk to businessmen one of the things that they all talk about is how the government is reaching out to them, the ministers and the bureaucrats, which never happened in the past and asking them how can we fix your problems.

So there is an effort to try to develop comprehensive policies and part of its explanation is it is taking time but they are hard at work, getting industry feedback to try to fix problems. So the reason the honeymoon period is still alive even despite this one or two decisions or non-decisions is because there is hope that there is some stuff coming out that is going to be comprehensive, that is going to show but if in the next two or three months we don’t see some action that is tangible and measurable and desirable, I will tell you one of the disaster this week. Very small, but didn’t get committed on; the government announced in its Budget it’s disinvestment targets. Guess what, I don’t know who advised the Finance Minister but the lead off with Steel Authority of India Limited (SAIL) . If you had to pick an absolutely disastrous, terribly run PSU you couldn’t have done a better job of picking that. Why would you lead off your disinvestment with the one that is destined to fail, which they have now said we are not going to do it because the stock has dropped too much. In a bull market there are so many options that they could have chosen.

Q: What about  ONGC now because ONGC and  Coal India were the next big ones that they were looking at. ONGC you still don’t have clarity on gas, you won’t have it till November, Coal India given all the uncertainty around the sector, what happens now to the disinvestment target that the government papered?

A: You have other options, you have some of the stocks of  Axis Bank and others owned by SUUTI that will be easy to do. You have things like  Hindustan Zinc and Balco which we have a willing buyer and all the things have been cleared up.

So, there are options out there. You can’t keep doing the same things that the last government did which is put PSUs in front of investors and ask them to sign up without any clarity on how they are going to earn returns on their investment. I am not sure that there is an organised thought process here which seems to be discernible to us investors.   

Q: You are not sounding bullish on India at all?

A: I have been getting a little more cautious in the last couple of weeks because the global macro environment is looking a little less favourable. So, when India is this vast outlier versus the rest of the world and it is not doing enough to justify that outlier status, if the rest of the world was doing fine and things were hunky dory and everything else in India can – but if there is any risk off trade that happens India has a little more risk than others unless it starts to show a reason why it should continue to deserve that outlier status. So, I have gotten a little more cautious.

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