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Ritu Shrivastava April 09, 2014

Opportunities for Citibank in Public Sector. Ritu Shrivastava April 09, 2014. Global Markets. Information Classification: Internal. Project Overview. Opportunities for Citibank in PSUs in India Analyze the foreign exchange and commodity risk exposure of PSUs

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Ritu Shrivastava April 09, 2014

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  1. Opportunities for Citibank in Public Sector RituShrivastava April 09, 2014 Global Markets Information Classification:Internal

  2. Project Overview • Opportunities for Citibank in PSUs in India • Analyze the foreign exchange and commodity risk exposure of PSUs • Company- wise analysis to find specific opportunities • Product Idea linked to Employee Stock Ownership Plan(ESOP) • Understanding ESOP policies offered by Indian Companies • Product development on an idea based on Equity Linked Notes and ESOPs • Analyzer for FDI, ODI and ECB data • Developing a user interface for an easy access to FDI, ODI and ECB data 1 2 3

  3. 1. Opportunities for Citibank in Indian Public Sector Enterprises

  4. Companies analyzed • MAHARATNA • Bharat Heavy Electricals • Coal India Limited • GAIL (India) • Indian Oil Corporation • NTPC • Oil & Natural Gas Corporation • Steel Authority of India • NAVRATNA • Bharat Electronics • Bharat Petroleum Corporation • Hindustan Aeronautics • Hindustan Petroleum Corporation • Mahanagar Telephone Nigam • National AluminiumCompany • Neyveli Lignite Corporation • NMDC • Oil India Limited • Power Finance Corporation • Power Grid Corporation of India • RashtriyaIspatNigam Ltd • Rural Electrification Corporation • Shipping Corporation of India • MINI- RATNA - I • Airports Authority of India • Antrix Corporation Limited • BalmerLawrie & Co. Limited • Bharat Dynamics Limited • BEML Limited • Bharat Sanchar Nigam Limited • Bridge & Roof Company Limited • Central Warehousing Corporation • Central Coalfields Limited • Cochin Shipyard Limited • Chennai Petroleum Corporation Limited • Container Corporation of India Ltd • Dredging Corporation of India Ltd • Engineers India Limited • Ennore Port Limited • Garden Reach Shipbuilders & Engineers Limited • Goa Shipyard Limited • Hindustan Copper Limited • HLL life care Limited • Hindustan Newsprint Limited • Hindustan Paper Corporation Ltd • Housing & Urban Development Corporation Limited • India Tourism Development Corporation Limited • Indian Railway Catering & Tourism Corporation Limited • IRCON International Limited • KIOCL Limited

  5. Mazagaon Dock Limited • Mahanadi Coalfields Limited • Manganese Ore (India) Limited • Mangalore Refinery & Petrochemical Limited • Mishra Dhatu Nigam Limited • MMTC Limited • MSTC Limited • National Buildings Construction Corporation Limited • National Fertilizers Limited • National Seeds Corporation Limited • NHPC Limited • Northern Coalfields Limited • North Eastern Electric Power Corporation Limited • Numaligarh Refinery Limited • ONGC Videsh Limited • Pawan Hans Helicopters Limited • Projects & Development India Limited • Railtel Corporation of India Limited • RashtriyaChemicals & Fertilizers Limited • RITES Limited • SJVN Limited • Security Printing and Minting Corporation of India Limited • South Eastern Coalfields Limited • State Trading Corporation of India Limited • Telecommunications Consultants India Limited • THDC India Limited • Western Coalfields Limited • WAPCOS Limited • MINI- RATNA - II • Bharat Pumps & Compressors Limited • Broadcast Engineering Consultants (I) Limited • Central Mine Planning & Design Institute Limited • Ed.CIL (India) Limited • Engineering Projects (India) Limited • FCI Aravali Gypsum & Minerals India Limited • Ferro Scrap Nigam Limited • HMT (International) Limited • HSCC (India) Limited • India Trade Promotion Organization • Indian Medicines & Pharmaceuticals Corporation Limited • MECON Limited • Mineral Exploration Corporation Limited • National Film Development Corporation Limited • National Small Industries Corporation Limited • P E C Limited • Rajasthan Electronics & Instruments Limited

  6. Foreign Exchange and Commodity Exposure • Oil and Gas companies are clearly the outliers in forex and commodity space (Tranche I) • Many trading companies also have a significant forex exposure (Tranche II) • Large manufacturing companies have significant forex and commodity exposure Commodity Exposure('000 crore) Commodity Exposure('000 crore) Forex Exposure ('000 crore) Forex Exposure ('000 crore) TRANCHE-II TRANCHE-III Forex Exposure ('000 crore)

  7. Total Foreign Exposure of Public Sector Enterprises • Total foreign exposure of top public sector enterprises in India is Rs 7,69,146 crore • Oil and Gas Companies cover almost 84% of this, followed by trading and manufacturing companies with 8% and 7% coverage respectively

  8. Wallet Sizing for Citibank in Spot and Forward Market • If Citibank captures 20% share with 1 bp margin, expected revenue will be 2.56 Mio USD in the spot market • Assuming 10% of the forex position is hedged, expected revenue will be 0.25 Mio USD in forward market

  9. Company wise Analysis Companies • Oil and Gas Companies • Trading Companies • Manufacturing Companies

  10. Exposure analysis of Oil and Gas Companies • IOCL is the market leader in oil and marketing space with 36% of total forex and 40% of the total crude oil exposure of oil companies • #2 HPCL 18.49%, #3 BPCL 15.61%, #4 MRPL 13.74%, #5 ONGC 7%

  11. The Value Chain • In the value chain maximum risk is carried by downstream sector (refining and marketing) Upstream Companies Downstream Companies • ONGC (OVL) • Oil India Limited • HPCL (HMEL) • BPCL (NRL) • IOCL (CPCL) • GAIL • MRPL

  12. Case Study: Bharat Petroleum Corporation Limited(BPCL) Mr. Chandra Dev Singh, Head of Derivatives- Risk Management, BPCL (International Trade) • Imported: 75%, • Indigenous: 25% • Oil Supplying Countries • Middle East • Nigeria • Malaysia • Price: Linked to Argas and Platts benchmarks • Refineries • Mumbai Refinery • Kochi Refinery • Numaligarh Refinery • Bina Refinery

  13. Risk Management Policy Objective: Maximizing Gross Refinery Margin Maximize { Steps Followed Gross Refinery Margin(GRM) calculation on the basis of forward price curves and expected demand/supply of products and raw materials Threshold for GRM Hedgingis decided by the board in the beginning of the year. Usually this is equal to the fixed cost incurred to run the refineries. Refinery Hedging during the year is done by floating a tender to consortium of banks depending on the market view and the decided threshold Freight and Individual Product Hedging is also done depending on the transportation cost and export requirements respectively

  14. Threshold Trigger • For the current year BPCL has a threshold of 22% of their GRM • BPCL has not hedged anything in last 2 months as oil prices have remained range bound • Most of the Middle East Suppliers have their supply price floored at $100 USD/barrel. Unless this floor is hit, they believe there will be no expected turbulence in the oil market C

  15. Refinery Hedging Instrument- Crack Spreads • Crack Spread = Refined Product Price – Crude Oil Price • Refiners are LONG crack spreads and to hedge they SHORT crack spreads Common Crack Spreads • Gasoline Crack • Kerosene Crack • Naptha Crack • High Sulphur Fuel Oil (HSFO) Crack Type of Crack Spreads • 1:1 Crack Spread • 3:2:1 Crack Spread • 5:3:2 Crack Spread Naphtha: 15% (Sell 150 bbls) Kerosene: 15% ( Sell 150 bbls) Crude 100% Buy 1000 bbls Gasoil: 50% (Sell 500 bbls) HSFO 20% (Sell 200 bbls) Banks with aggressive crack spread quotes • Goldman Sachs • Morgan Stanley • Barclays • JP Morgan • Deutsche Bank

  16. Potential Opportunity- Rapidly increasing refining capacity from 215 to 302 MMT by 2017 IOCL BPCL HPCL NRL

  17. Excess capacity points to weaker Refinery Margin Consideration Refinery Hedging • Refining capacity addition will exceed the incremental demand over 2014-2017, pointing towards weaker refinery margins RBI Regulation PSU companies active in Refining Hedging • BPCL • IOCL • HMEL • Permits hedging of risks to existing refineries like margins, inventory, product sales and freight for oil refining and marketing companies

  18. Changing Landscape of Commodities Market is an opportunity for Citibank “Barclays has reduced its presence in commodities, while other banks including CréditAgricole and UBS have virtually closed their commodities businesses.” - Financial Times, Dec 2013 “ Deutsche Bank slashes commodity trading operations” – Financial Times, Dec 2013 “JPMorgan has put up for sale its physical commodities business” - Reuters, May 14 “Morgan Stanley agreed to sell its physical oil business to OAO Rosneft (ROSN) as the investment bank backs away from owning some physical commodities businesses.” - Bloomberg, Dec 13 • “Citibank increasing its gas and power business • in Europe as competitors such as Bank of • America Merrill Lynch and Barclays are • pulling back” • – Reuters, May 2014

  19. Revenue Estimation from Crack Spread Hedging • With comparatively lesser competition in commodities than in forex, expected annual revenue for Citibank can be around 0.39 Mio USD (optimistic estimations)

  20. Freight Hedging Consideration Indian Scenario • Indian OMCs enter into shipping contracts for hiring carriers from different shipping companies to bring oil • The various modes of sea borne transportation used by Indian OMCs are • Voyage Charter: Employment of a vessel for a specific and certain voyage • Time Charter: Employment of a vessel for a specific period • Contract of Affreightment(COA):Extended form of voyage charter where certain number of voyages are covered under one contract at pre specified rate. • Shipping expense is the second most important expense after crude oil purchase for oil refining companies • Freight cost of operating a vessel greatly fluctuates with the cost of shipping fuel, also known as bunker fuel. Pricing Factors • Bunker Fuel Price • Distance between load port and discharge port • Size of the cargo - Very Large Crude Carriers (VLCC) (260 TMT), Suex Max (130 MT) and Afra Max (80 TMT). • Capability of load port of handing vessels • Availability of vessels *Source: Ministry of Petroleum, Report on LONG TERM PURCHASE POLICY AND STRATEGIC STORAGE OF CRUDE OIL

  21. Country-wise Crude Oil Import by Indian Companies Time between loading at major Importing countries to unloading at Indian Refinery Norway Azerbaijan Iraq Iran Kuwait Algeria Egypt Saudi Arabia Mexico UAE Sudan Yemen Nigeria Venezuela Brunei Colombia Cameroon Malaysia Congo Eq. Guinea Ecuador Brazil Angola Australia 6-7 Days 10-14 Days Up to 30 days

  22. Crude Oil Transportation- Scenario in India *Source: Ministry of Petroleum- Crude Oil Import Data 2012-13 and 2011-12

  23. Declining oil production from domestic suppliers will put significant pressure on imports “Supply of crude oil from domestic sources has been on a decline owing to the reduction in ONGC’s production volume. BPCL’s dependence on imports for meeting the crude oil requirements of its refineries therefore has been increasing” - Annual Report 2012-13, BPCL Citibank in Freight Business “Citi Energy Risk’s Freight House of the YearAward – 2010” Opportunities • Indian Scenario • RBI Circular allowing Freight Hedging: “Oil refining and marketing companies, which have substantial overheads on account of freight component, are permitted to hedge the freight risk in international exchanges/OTC markets on the basis of the underlying exposures.” • BPCL undertook hedging of freight cost of the tankers in 2012-13 taken on spot charter and COA. • The freight cost for the year 2012-13 for BPCL amounted to INR 3824 crore

  24. Freight Hedging Solutions Freight Forward Agreement A financial forward contract that allows ship owners, charterers and speculators to hedge against the volatility of freight rates Example Seller: Citi Bank Route: TD3 Period: Q4 14 Quantity: 20kt (knot, 1 nautical mile= 1.852 km) Contract Price: XX Contract Regulation: ISDA

  25. Revenue Estimation for Citibank through Freight Hedging • Citibank did a trade with State Trading Corporation of India Ltd. on freight hedging for wheat import in 2008.

  26. Inventory Hedging Consideration Indian Scenario • Inventories of LPG, Kerosene, Diesel, Jet Fuel, Petrol and Fuel Oil have to be maintained at numerous locations like Ports, Refineries, Pipeline installations, marketing depots, Airports etc. to ensure uninterrupted availability of products • OMCs carries inventories in the range of 10 MMT of crude oil/feedstock and products which are valued at Rs.25000 crores • Inventory Value= MIN (Acquisition Cost, Net releasable value) • Though not representative of operational efficiency, such fluctuations in oil prices can have a major impact on the inventory value, which in turn can have a disproportionate affect on the profitability. • According to the RBI circular, hedging of inventory up to 50 per cent of the volumes in the quarter preceding the previous quarter is allowed. • Currently only IOCL does hedging for inventory management

  27. Structured Solutions: Gas Companies (GAIL) Gas Users and Requirements • Power Sector • - Fixed INR or Fixed USD prices • Floating prices with pre-defined worst-case • Fertilizers • Fixed INR prices • Petro Chemical/ Refineries • - Floating USD prices linked to Brent instead of Henry Hub)

  28. Structured Solutions

  29. Problems with pitching Repo Financing Solutions to PSUs • Major bottlenecks- • Easy access to buyer’s credit from RBI and other banks • Not really concerned about their balance sheet management • Too exotic for PSUs to adopt • A lot of other banks are already pitching ideas on repo financing to them but it is too exotic for their board to approve

  30. Foreign Exchange Exposure • Operating Expenditure Linked Exposure • Buyer’s Credit • Working Capital • Packing Credit • Post- Shipment Credit • Capital Expenditure Linked Exposure • FCCBs • ECBs • Bonds

  31. Case Study: Hindustan Petroleum Corporation Limited(HPCL) Mr. AnupamPathak- Manager, Risk Treasury- HPCL Buyer’s Credit 1 • Suppliers from Middle East offer a credit window of 30days and do not really mind extending it to 60days • OMCs have a usual operational cycle also of 30 days (6-7 days transportation, 10-15 days processing and 6-7 days of marketing) hence there is no mismatch if payment collection in smooth • Delayed in under-recovery payments lead to a lot of liquidity crunch in the past, at a point of time they were carrying 100% buyers’s credit on their books but now the situation has improved significantly • RBI has opened Revolving Credit Lines for IOCL, BPCL and HPCL where they can borrow an repay directly through RBI. As a result, they have not availed any buyer’s credit since Sep 2013. Packing Credit and Post Shipment Credit 2 • As these companies have limited export exposure they generally do no avail any packing and post shipment credit. Nothing has been availed in last 2-3 years

  32. External Commercial Borrowing 3 • A target for borrowing cost is set by FRMC (Financial Risk Management Cell) in the beginning of the year • Dynamically hedge their position throughout the year to maintain the FRMC target

  33. Recommendations

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  47. Appendix

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