IDFC, PFC biggest gainers of lower gas prices: UBS

As domestic natural gas prices fall by a whopping 9 percent to USD 4.56 per unit from April 1 reflecting the softening in international prices, power and fertilizer sectors with exposure to gas based power projects are set to gain from the bonanza.

Vishal Goyal, Executive Director, Leading Banks & Fin Research, UBS told CNBC-TV18 why IDFC and Power Finance Corporation (PFC) are going to be biggest beneficiaries of the government's decision. Below is the transcript of Vishal Goyal’s interview with Anuj Singhal and Ekta Batra on CNBC-TV18. Anuj: I was just reading your report and you were saying that IDFC and Power Finance Corporation (PFC) would be the biggest beneficiaries, if you could explain that point? A: We all know all these gas based power projects which were lying idle for the want of gas. Now if government is providing gas, all these projects will start throwing cash flows back. IDFC, PFC have exposure to gas based power projects, they have clearly provided even in their disclosures. So, overall what it addresses is that the amount of capacity which is lying idle and these are the two financials who has got the maximum exposure on a relative basis to gas based projects. So, they should benefit because either these loans are restructured already or on the verge of kind of NPL.

Ekta: When you talk about IDFC can you just explain to us how much of their exposure is towards gas based power projects at this point in time and what has the management said qualitatively as per your interactions with them or maybe through the Q3 conference calls or the past conference calls that have taken place? A: We unfortunately can’t discuss much of individual stocks in detail. We can discuss the topic in the sense for example even IDFC disclosures are available in public so we can discuss that separately but we stick generally to topic or the sector. Ekta: Explain to us how this would impact PSU banks in general, how much of PSU banks have exposure to gas based power projects according to you out of their entire power portfolio or infrastructure portfolio and how much do you think they will possibly benefit? A: On a very broad count what we have analysed is around 60 basis points of overall lending in the banking system is to gas based power projects. Now we have seen private banks generally have not lent so much to gas based projects so PSU banks even if you do extrapolation maybe they have 1 percentage of their total exposure to gas based projects; that is the amount they have. Now, of this 1 percent I would expect roughly 75 percent would be like kind of restructured and 25 percent of that would be NPL already because you have seen a couple of projects being declared as NPL by the PSU banks. However, the one thing which I would rather look at in this gas pooling is not just the price pooling for the gas but again the intention of the government to fix a stressed issue or a stressed sector.

Ekta: Based on that theme do you think gross NPLs are going to improve in FY16 as compared to FY15 or the government’s efforts will start showing on balance sheets maybe FY17? A: I think in FY16 what we are estimating is that NPL formation goes down. So, for example, if few banks are adding NPAs at around 4 percent and 5 percent, that number should go towards more like 3-4 percent. However, I don’t think absolute gross NPA will decline in FY16. Anuj: Do you get a sense that maybe right now could be good time accumulate PSU banks for those who would have missed out in the earlier rally? A: My view has been don’t buy PSU banks for your trading portfolio, buy it for a 12-18 month time horizon and what you will see is you will see the turn in asset quality definitely re-rating the stock plus also we are seeing the state-own enterprises (SOE) reforms which have been again reiterating is hiring CEOs from private sector, building a bankruptcy law plus constituting a bank board bureau. So, all these are long-term reforms which would re-rate PSU banks but it will take time. So, the investors will have to be patient with PSU banks if they invest. Ekta: What would you be recommending to your clients at current levels then? A: Our most preferred names are State Bank of India (SBI), HDFC Bank, Bank of Baroda, Axis Bank and LIC Housing Finance. Disclosures: We don’t own any stocks which we have coverage on right now.