Friday, November 21, 2014

$1B SBI Loan - Benefit of Doubt to Modiji

Lot of criticism has erupted as Adani Mining the Australian Subsidiary of Adani Enterprisesigned an MOU with SBI for a loan upto $1 Billion.  As I browsed through the morning papers this is the sense I could make out. Those of you not interested in technical fact based posts may avoid reading this one. :-)

First, let's collect some facts
1. Debt Position
As on Sep 30, 2014, the long term debt of the company : Rs 55,364.94 crore. 
The short term debt : Rs 17,267.43 crore. 
Hence, the total debt : Rs 72,632.37 crore.
The total debt of the company has shot up by Rs 7653.33 crore in a last six months.

2. Loan Repayment Ability
The total operating profit over the last four quarters : Rs 8999.92 crore. 
The interest paid on its debt in the last four quarters : 5,733.77 crore. 
This means an interest coverage ratio of around 1.57
However, the Interest Coverage is deteriorating over the last four qrtrs.  at 2.67 in march, at 1.58, in June 1.12 in Sep 2014.

Another unconfirmed figure that is doing the round in discussion is that the total asset value of adani enterprises is $72 B. (please note I could not confirm this figure - however this does not look like impossible).
So, the company does look like an over leveraged one even if on a solid asset base.
And at the same time the company does not like it is going down the drain. Banks offer loans to much worse balance sheets - not always because there are paybacks - but also because thats what they are supposed to do - take calculated risks.

3. Viability
Globally, coal prices have been on a downtrend in the last three years and are at the lowest levels since 2009. Prices of steam coal, a slightly lower grade that is used in power generation, have halved since 2011 to $62 per tonne now. The prices have fallen 30% and are expected to remain low for a few years according to many leading analysts.

In fact, Much bigger coal rivals, like BHP Billiton and Glencore, have also shelved coal developments in Queensland at a time when a third of Australia's coal output is making losses.
This does raise a question mark on viability of the project too.
A business standard article neatly sums up the risks in the project here.

How risky is it?
Depending on which side of the fence are you on, these figures may look as a risky bet to offer loan to - or it may appear to be an acceptable risk.

Now I am no financial wizard to opine authentically on the above numbers and yet to my sense - a company that is into projects like mining which are long term projects at least at this stage it does not look so dangerously risky. Specially because the company seems to be backed by the Govt. of the day.

What does SBI have to say on this?
Read this article - "SBI defends loan to Adani"
well as always - a misleading headline it is. There is no defence built by SBI chairperson Arundhati Bhattacharya, instead she explained the current position on the MOU. A better story to read is in The Economic Times - here 

Lets summarise the main points 
1. At present the bank has only entered into a memorandum of understanding (MoU) with the group. 

2. It will do "proper due diligence" before sanctioning the $1-billion (about Rs 6,000 crore) loan to Adani Mining  

3. If the board approves the loan, SBI's net exposure would be to the tune of $200 million, as there will be some repayments also from the company. 

 So, she makes it sound as if the Loan can still be cancelled. Technically true. But I guess its a forgone conclusion when announced in this manner. One can be easily forgiven to conclude that what SBI was doing by signing the MOU at the time when Adani was in Australia along with the PM, was that it was giving positive signals to authorities in Australia. It would be naive to believe that the PMO does not have a hand in it.

And yet there are three things to note
One, there is nothing wrong in a Bank signing an MOU subject to due diligence - even if just to help improve the client's chance to clinch a deal - if it believes that will reduce the risk in the project. In fact Banks are supposed to support ventures which in their view have fair degree of chance to succeed. (That they should do so for small entrepreneurs as well is another story - another post - another time)

Two, the Bank has let the deal be open to closer scrutiny by the media as well. So the Bank's intention should be viewed with less scepticism.

Third, the net exposure has to increase by much lesser (200 million) according to SBI chair person. If so, this may be a deft step in managing NPAs by getting the group to repay a large portion of earlier loan and starting a fresh credit line with fresh safeguards.

The Political Angle
So we inexplicably reach that aspect which is the biggest concern. The politics behind this loan. It is an open secret that Adani is a close connect of Modiji. Most ardent supporters of Modiji will also not disagree that, the media jamboree that Modiji has been able to generate and sustain has been possible because of the open flood of resource made available by the likes of Adani. So one may be easily forgiven to conclude that this is payback time.

Hence the cries of crony capitalism, back door kick backs etc. How do we make sense in this clutter? Most supporters like a asst. prof at the respected XLRI or a respected economist/author in Mumbai and many others have had less concrete things to say. Some glimpses
1. This is not yet sactioned loan. It is just an MOU.
weak retort this is. An intent to offer the loan is anyway good enough. Is SBI expected to decline now.

2. SBI has offered such loans earlier too and to  likes of Tatas, Birlas and Jindals
Again very Bhakt like response. Does the above truth make this loan fine. The intent of the current Government was to clean the UPA mess. If they hide behind the logic "they also did it" then where is the change. 
A mere point of distinction (equally bad an argument though) is that at least Tatas & Birlas weren't such all out supporters of UPA/Congress as Adani has been to Modiji.

3. the cries of crony capitalism rest on a form of guilt by association.
Correct, but then do you wish us to bring concrete evidence admissible in the court. Comeon - the UPA/Congress also has maintained all the time that they had no hand - did the bhakts listen then. The facts are too good to ignore. Adani's close links to Modiji, He present in australia along with the PM, deal inked in Australia, MOU signed in India. Come on too naive to accept that these are "mutually exclusive independent" events just to borrow a phrase from mathematical probability.

If at all Bhakts want these criticism to be wished away they should ask Modiji to clearly state that his Media circus is not funded by the likes of Adaniji. Till he does that, the Guilt by association, though not legally tenable, is very compelling otherwise.

4. The PM has a role in forwarding Indian Interest - even if it   benefits a few individuals and companies.
By far the strongest argument in favour of Modiji. 
Well historically, PMs and Presidents of countries have been instrumental in bringing about deals and projects which shall in the long run lead to development. One can argue whether this project is one such. But the fact is Energy security is a Big issue for our country. Our country is a net importer of Coal and is expected to remain so for years. So if such deals are happening - even with little help from the PM - its fine.

Having said that - there is one difference. The imagery is compelling. As I explained earlier, the guilt by association logic strongly suggests that the tax payers money has been put to risk for funding the media exercise to bolster Modiji's image.

Further, Earlier PMs and Presidents took a host of industrialists on board to benefit from such interactions and initiatives of the Govt. This one looks pretty biased.

5. The Govt. of Queensland also has promised financial support to the Project
True and thats more dangerous. First the Govt. of Queensland has committed an undisclosed amount. Going by the inclination for hyperbole now a days - the real figure could be the proverbial 20% (as it turns out in most cases attached to modiji :-) ) 
Further, what this means is that in case of default the recovery cases will have two parties the Queensland Govt. and the SBI. The case would most probably be tried in an Australian court. The chances of SBI recovering its loan are anybody's guess under the circumstances.

However, my criticism is also technical. The australian Govt. committing its bit certainly leads more credibility to the project.

On the other hand Congress and others opposed to Modiji call this the worst case of crony capitalism. BJP says they don't have a hand in this loan. 

Here is what I think - Modiji/BJP have been criticising crony capitalism for last decade but once in power they look simply a saffron copy of the earlier dispensation.
On the other hand - Congress who raises the bogey of crony capitalism now has probably been one of the worst offenders on the issue.

So where does this all leave the General Public - US.
Bhakts should continue to be dismayed as the drama unfolds and they realise that Modiji is just like many other politicians, although he is a more active and visible PM on the world scene.

In this case however we should give the benefit of doubt to Modiji. If as a country we installed him as a PM to change the way things are. His intentions will have to be trusted for some time. Yes, he seems to have been biased and yet every PM will require his trusted aides to bring about change.

There is a very thin line between quick and decisive decision making (what Modi stands for) and passing favours to close aides, friends and relatives (what long bureaucratic decision makings tends to avoid). Its a tight rope walk and the jury on Modiji is still out. This is just the start of the Firework. My suggestion is to hold the broadside till more details of the deal/loan/political connect emerges.