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home Stories written for Outlook
April-July 2007 Gung-ho no more on Indian economy Making sense of Sensex at 15000 Good, bad & ugly side of world's knitwear-garments backyard--Tirupur Pune district: what it meant to be the automobile hub--Detroit--of India Unreal state of affairs in DLF real estate public issue |
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Gung-ho no more on Indian economy July 2007 The gung-ho feeling among bankers and stock market analysts
about the economy is greatly reduced although its not gone away completely. As
the analysts in Macquarie's research team stated in their report dated July 4:
"We think the India growth story is still very much intact. The only
headwinds we see are rising interest rates and the appreciating currency."
Says Abheek Barua, chief economist at HDFC Bank: "There is
some deflation in the euphoria about the economy but it is certainly not
significant. There is some deceleration in the economy that has started
happening but it is not sharp. People are looking at some pockets of risk which
are clearly identifiable. As a banker and an economist I keep talking to
companies and so on, I don't sense a feeling of gloom. There is a sense of
challenge looming in the form of appreciating rupee and so on but companies
seem willing to devise business strategies to take these on." The concerns aspect is also echoed by Madan Sabnavis, economist
at National Commodity and Derivatives Exchange: "The only worrisome
feature we have is the growth in credit. Because growth in credit is a kind of
proxy for what could be happening on the production front. After quite a number
of years we have actually seen a fall in the growth in credit, that is if you
look at the total outstanding bank credit as of March 30 this year (Rs
19,28,913 crore) to the outstanding credit figure currently (Rs 19,14,364
crore).The fact that bank credit growth went into negative territory is a
concern because it has been brought about by the series of increases we have
seen in the interest rates in the last 4-5 months. And I don't think the RBI is
going to lower the interest rates immediately." In a Citigroup Global Markets' July India Equity Strategy Note articulated "key reasons for earnings growth and upward revisions in India being less spectacular going forward are: (1) Limited levers for margin expansion as operating leverage runs out and inflation kicks in, (2) Moderating credit growth, as very rapid credit expansion of the past 3 years was one of the key drivers of a lot of demand surprise across sectors." Brokerage and research houses are saying that brakes are applying on the Indian economy's growth momentum.
Among the
sectors identified by equity analysts as experiencing slowdown in credit stand
out automobiles, pharmaceuticals, IT, textiles, metals and banks. Macquarie
Research points out about automobiles: "Margin
squeeze to continue as pricing pressure persists; harsh competitive landscape coupled
with rising raw material costs to lead to lower profitability. Interest rates
lead to volume decline." Macquarie expects metals to experience "some
volume growth, mixed metal prices and acquisitions." Adds HDFC Bank's Barua: "Some sectors like automobiles, two-wheelers, consumer durables, housing are leading the deceleration in the economy. These are the sectors that are dependent on leverage and which is based on personal loans and so on. These sectors have been affected, perhaps quite significantly." In the offer document for a recent public issue by ICICI Bank the state of retail loans brought out the picture quite vividly.
Citigroup's research analysis sums up what many marketmen will agree: "We expect top-line growth to remain in the double digits, due to rapid economic growth and niche export sectors. But, margin surprises are a big driver of earnings surprises and that is where we think the challenge will be for earnings revisions going forward. As operating leverage runs out and a few cost inflation items begin to make a dent (wage inflation, property rentals), the Indian market has a reduced ability to deliver positive surprises on margins. Of course there will be exceptions to that, as we still see margin improvement possibilities in Telecom, Media and Upstream Oil & Gas. But, it will be more an exception, rather than a broad trend for the market overall as in the last 2-3 years." --------------------------------------------------------------------------------------------------------------------------------------------- Making sensex of Sensex at 15000 July 2007 The first trading day of this month, July 2, saw the 30-stock
Bombay Stock Exchange's Sensex touch an all-time peak of 14745 crossing the
earlier peak of 14723 reached earlier this year on February 9. On July 6 the
Sensex crossed the psychological mark of 15000. The Sensex rise has primarily been driven by heavy trading in
top 5-7 weighted stocks like Reliance Industries, Bharti Airtel, ICICI Bank,
Infosys Technologies and ONGC that account for 60% of Sensex's ups and downs.
Besides intensified short-terms speculators involvement in these its been the
high levels of FII inflows and domestic funds investments into
equities—particularly equity-based ULIP schemes of insurance companies. The FIIs, for instance, ploughed in Rs 7,481 crore worth of net
investments in equities this month as of July 11, and this does not include
their investments worth Rs 5,837 crore in DLF IPO. At the end of June their
total net investments stood in the current calendar year stood at Rs 18,931
crore, which means their net investment of Rs 7,481 crore in first 11 days of
July amounted to 40% of their entire net investment of Rs 18,931 crore in the
first six months of this year. So, what's going on? Says Mihir Vora, head-equities at HSBC:
"We are still expecting a 8-8.5% GDP growth overall which means a 15-20%
earnings is still expected growth wise. The only thing is we feel a lot of
money that is coming in Indian equities in the last few months is from very new
investors and some of it might also be hot money so to say. That makes us a
little concerned about the quality of money that has come in the last few
months, combined with the fact that you the current equity derivatives
outstanding positions are twice that of last year." Says Shubhada Rao, chief economist at Yes Bank: "We have
clearly seen evidence of the interest rate-sensitive sectors getting adversely
impacted. The growth impetus is still intact in sectors such as engineering but
there will be some redistribution and moderation of growth across sectors." As per a Enam Securities' 'India Strategy' report dated July 9
"deceleration of India Inc fundamentals at the margin due to higher costs
is offset by increasing volumes and superb long-term transformational
strategies." Infers Andrew Holland, MD of DSP Merrill Lynch: "Sensex
touching 15000 has a significance in the sense that it gives people confidence
that the Indian economy and companies are doing well. But all global indices
have been hitting new highs and India is not alone. But there is no
significance that 15000 is some kind of magic mark which would mean that Sensex
could go higher or lower." Points out HSBC's Vora: "You have seen a very good run up
in the earnings season. So the market has discounted a good amount of good
news. We are expecting decent numbers any case in the first quarter of fiscal
2008 also. But the point is a lot of it might already have been
discounted." Even so, says DSP ML's Holland: "The Indian economy
looks to continue to grow at 8-9% and the index by the end of this year will be
much higher than it is today but in the short term we might see some
pullbacks—globally and not just India." Global factors are playing on most people's minds. Says Vora:
"The underlying theme is that India has done well but its not been a star
performer in the last few months in the global scheme of things. We have just
participated in the global rally and if the global rally were to be impacted
then India will not be left alone." According to Holland "the markets worldwide are looking
tired. There has been a lot of M&A activity in US and Europe and without
those valuations would look stretched. We are still not at the end of US
sub-prime lending issues and that is some concern." Adds Yes Bank's Rao:
"Resurfacing of US prime mortgages risks and talks of Moodys and S&P
downgrading US housing sector (which pushed the US economy up in the last four
years) would mean reallocation of global liquidity. These are the caveats one
would have to continuously monitor." --------------------------------------------------------------------------------------------------------------------------------------------- Good, bad & ugly side of world's knitwear-garments backyard-Tirupur July 2007 It's probably the biggest unofficial SEZ (special economic zone)
in the country catering predominantly to American and European consumers. And
the saga is not a year or two old as the SEZ Act is, but is a quarter century
old. Tirupur, located at 11.05 degrees north and 77.2 degrees east on the map
of India near the city of Coimbatore in Tamil Nadu, has in the last five years
become the country's textile industry's hub. It's also referred to as the
hosiery capital of India. And the story it tells is interesting – and it most
similar interesting stories there is a bright side and a dark side. From rags to riches. There are around 6,000 textile-related
manufacturing units of all sizes in Tirupur today of which garment making units
are the highest in number at 2,500 units followed by 1,500 knitting units and
the balance 2,000 units is spread across dyeing and bleaching units, fabric
printing units, compacting and calendaring units, embroidery units and other
ancillary units. But a few decades ago Tirupur was almost a ghost town as far as
economics went. The town, in fact, did not exist until the textile units
started operating. And this was in the late 30s when a series of strikes in
knitting factories in late 1930s in the neighbouring towns of Salem and Madurai
resulted in shifting of textile units in Tirupur. But for next several years Tirupur's units served as a
sub-contracting zone for manufacturers in the rest of the country whose
production were chiefly meant for the export market, and in early 1960s the
number of units were only 230. As per Tirupur Exporters Association (TEA), a
private industry body comprising of almost only textile-related firms,
"Tirupur's direct exports started with Italy. Verona, a garment importer
from Italy came to Tirupur in 1978 through Mumbai exporters to buy white
T-shirts. He realised the potential and came to Tirupur the following year.
Verona was the man who brought European business to Tirupur" Another impetus was the agricultural dynamics. Says S.Sakthivel,
executive secretary, TEA: "Rainfall scarcity worsened and the Tirupur
region turned a draught area from 1980s onwards. The farmers, particularly the
Gounder community, who were into production of crops like cotton, groundnut and
cotton found themselves driven to work in the textile units and they were ready
to work from dawn to dusk." For company owners this provided an attractive
labour pool and culture to exploit. It is predominantly knitwear that Tirupur's textile industry
specialises while most textile industry clusters elsewhere in the country like
Ludhiana, Delhi, Bangalore etc specialise in woven textile production. Knit
wear textiles are fabrics that are flexible—they stretch and contract according
to the wearer's movement and dimensions—and are used as casual wear. Tirupur's
units, for instance, manufacture Polo's and sportswear for men, nightwear and
cycling shorts for women and for both categories plus for kids wear they churn
out T-shirts, vests, undergarments and ensembles. According to TEA's estimates, a handful of manufacturers exported garments worth Rs 15 crore in 1985 and the next five years was a windfall as exports grew 20 times to Rs 300 crore in 1990. At present, Tirupur's exports are rocking with TEA's estimate of Rs 11,000 crore for the last fiscal year of 2006-07. The growth rates in the last five years are more pronounced (see table: 'Tirupur's growth vis-a-vie All-India') which includes the fact that, from 2001-02 to 2005-06, while the country's total exports (all goods and services) grew by 118% from Rs 2,09,000 crore to Rs 4,56,000 crore and the country's ready-made garment exports increased by 60% from Rs 23,880 crore to Rs 38,190 crore, Tirupur's exports of ready-made garments registered the highest growth rate of 141% from Rs 3,530 crore to Rs 8,500 crore.
The dizzy increase in consumer demand for casual and comfort
wear from the affluent populations of US, European countries, Australia, Canada
and Japan among others. Lifestyle demands of the ultra-rich for high-end comfort
wears and of the semi-rich for 'use and throw' casual wear has contributed to
Tirupur's rise in the global marketplace for such products. Tirupur is also catering to similar extreme lifestyle changes in
the domestic market. Reminisces R. Gopalakrishnan, chairman of Tirupur-based
Royal Classic Mills, a major Tirupur player in exports and domestic market:
"In my school days during 1970s we would buy new cloth wear only on
festival occasions like Diwali, Pongal, Ramzan, Dussera and Christmas. Today, youngsters
will want to buy the latest style cloth wear whose advertisement they see on TV
the previous night." No wonder then Tirupur's sales in the domestic market
in 2006-07 is estimated to be Rs 3,000-4,000 crore by TEA which is about 20-30%
of all sales. The outstanding growth rates in Tirupur's textile industry have
appeared to have percolated to the people working in them – be they labourers,
supervisors, officers, machine operators, tailors, embroidery craftsmen and
others. The employment is not just 100% but there demand for manpower is more
than the supply. Says Tirupur-based advocate, C.P.Subramanian: "You scan
the papers here and you will notice all pages have advertisements of companies
seeking labourers, supervisors, officers, tailors, machine operators,
embroidery craftsmen and so on. Without any experience a person can go and earn
Rs 100 per day." And, says S.Sakthivel: "there are lots of rags to
riches stories here." What made it tick? Right circumstances involving risk-taking entrepreneurs,
hard working labour, zealous commitment to quality and international customers'
deadlines, lack of governmental interference at the state level and
governmental financial subsidies at the centre level, and a magnetic attraction
for all types of units connected to textile industry, are behind Tirupur's
success story. Says A.Sakthivel, chairman, Poppys Knit Wear, among the largest
exporter firm in Tirupur: "Those who are lazy can't survive here and
without quality in goods and delivery commitments nothing moves here." The drive for business growth is palpable in Tirupur.
S.S.Moorthi, senior tech advisor at Apex Cluster Development Services, a
consultancy firm, gives major reasons behind it: "Clustering concept is
seen extensively in Tirupur—about 8-9 enterprising individuals will get
together and form a small to medium unit. The risk-taking ability is seen
here—they don't mind investing in new technology machines and processes even it
if costs Rs 2-3 crore. In the earlier days of its industry, Tirupur's factory
owners could not speak fluently in any language other than Tamil but yet their
dedication in communicating prices and product information to international
customers was mind boggling—they would stay up all night to just make ISD trunk
calls to their European and American clients when it was daytime in those
countries." The friendliness of the industry attracted more entrepreneurs
from all over India. Electrical engineer from IIT-Delhi graduate, Sanjay Kumar
Gupta, was one such entrepreneur who set up his firm, Kishore Apparels, in
Tirupur in 1983. Says Gupta: "Ludhiana was also offering me the same thing
at that time but people were very transparent in Tirupur. We didn't feel
welcome in Ludhiana and Calcutta then and felt attuned to the work culture in
Tirupur. The co-operation of workers here is much higher than in Delhi,
Gurgaon, Calcutta. Here, the worker will work for money but will then go
hand-in-hand with the management. I can call him at 5 am in the morning to meet
a delivery deadline and he will come." The Tirupur companies claim to reward the workers handsomely.
Says Royal Classic's Gopalakrishnan: "There is this woman who started as a
helper 10 years ago and was earning Rs 2,800 per month. Over the years she was
promoted and today she is a HR head earning Rs 60,000 per month." Gopalakrishnan points to what he believes to be a significant
factor behind Tirupur's growth: "Before the economy was opened up in 1991
we were not able to import machines due to import duties as high as 150% and so
we were not able to match European/American standards." The duty crashed
to 5% and Tirupur exporters started importing the best machines from all parts
of the world. Says Gopalakrishnan: "At that time the suppliers to the
European and American market were from Turkey, Greece and Italy and we
basically bought high-tech machines from the same manufacturers that they were
buying from, which then gave us the edge in bagging more export orders." There is a fervent approach among Tirupur companies to use
latest technology in all their processes. One new imitative has been that of
TEA's MoU with Microsoft India to set up e-readiness centers that will soon
offer e-readiness programmes and enhance solution delivery capability of
software and hardware suppliers for Tirupur's exporters. Says Anil Varghese,
group head, SME cluster development, Microsoft Corporation (India): "Most
Tirupur companies specialise in sub-contracting and our IT-intervention led
project will help them manage their sub-vendors better. What I have seen is
that whenever we have come up with an idea that is to their benefit they bring
it to fruitation faster." Out of five clusters—Pune, Ahmedabad, Agra,
Ludhiana and Tirupur—chosen by Microsoft only the Tirupur project has gone live
and is already a year old. TEA claims its other initiatives too have provided a boost. For
instance, it set up an inland container depot, through a joint venture called
TEA Lemuir Container Terminals, about 10 kms from Tirupur. TEA claims this
depot "arranges for loading and unloading of export and import cargo in
Tirupur itself. Exporters in Tirupur are now completing the customs formalities
in Tirupur itself and sending the goods in containers directly for shipment
through all southern ports and through Mumbai." Last but not the least, Gopalakrishnan points out that the
central government's textile-promotion subsidies helped the Tirupur industry.
These included a 5% interest subsidy from mid-2000 onwards. Says
Gopalakrishnan: "If the rate of interest charged by a bank was 9% for a
term loan then 5% was being reimbursed by the central government." Another
important benefit was the 10% capital subsidy under the Technology Upgradation
Fund of the central government fund that Tirupur's exporters took full
advantage of. Tirupur's dark underbelly. Till the central government issued a
notification two years ago banning child labour, many of Tirupur exporters were
notorious for using them. An NGO, Save Water Forum, headed by environmentalist
P.K.Sundaran has time and again asserted that the high concentration of huge
textiles units in a small geographical area has led to an extreme pressure on
natural resources. Tirupur's Municipality's area is 27.4 square kms with a
Census 2001 population figure of 3.5 lakh of which about 60,000 are
slum-dwellers. This is over and above the 6,000 textile-related units running
non-stop 24 hours a day and 365 days a year. Continuously running open sewage gutters line the commercial
areas of Tirupur and the air smells of chemical emanating from the textile
manufacturing units. Says Mansoor Ali, a owner of a medium-size footwear shop
at the heavy traffic density Kumaran Road in Tirupur: "My business is
booming over last few years but my two children—one six years old and one just
six months old—have developed respiratory trouble and the doctor tells me to
take them out of Tirupur." In July 2005, the Madras High Court came down heavily on
Tirupur's dyeing and bleaching units for discharging high amounts of toxic
effluents into Noyyal River than runs through Tirupur and ends in the bigger
Cauvery River. It ordered the closure of around 600 units who had not complied
with its earlier order of mandatory installation of reverse osmosis (RO) plants
for the treatment of toxic effluents. It's only after this high court order
that around 500 of the erring dyeing units spend around Rs 40 crore to install
the RO plants. Before all this happened, estimates were that 80 million litres
of highly saline and heavy metal-laden effluents were going into the river,
ponds, drains and cesspools. Advocate Subramanian also refers to a 2002 public interest
litigation against illegal drawing of groundwater from the villages surrounding
Tirupur by the textile units and lorrying them to the factories for use in the
manufacturing or dyeing process. Estimates suggest that at that time at least
700 textile units were bringing over 60-70 million litres of water in more than
7,000 tankers every day from groundwater sources 50 kms away. This unregulated
mining saw groundwater levels crashing to below 800 feet in the farmers' lands.
Says Subramanian: "The court heard the PIL and ordered that the owners of
wells were not entitled to sell water to non-farmers." --------------------------------------------------------------------------------------------------------------------------------------------- Pune district: what it meant to be the automobile hub--Detroit--of India July 2007 Can Pune district still be considered as the Detroit of India?
With rapidly-changing dynamics in the city and talukas of Pune district and the
industries operating in them, the answer is not a sure-shot yes. Even though
there are around 20 industrial areas getting Maharashtra government's preferred
treatment under the Maharashtra Industrial Development Corporation (MIDC) Act,
and these encompass all types of manufacturing activity, Pune used to bring up
an image of being the hub of India's automobile industry. But when the United Nations Industrial Development Organisation
(UNIDO) selected Pune in the year 2003 as the Dynamic City Region it did so
because of its prominence in not just automobiles and auto components but
equally in the fields of information technology, electronics hardware and
biotechnology. The next year, in 2004, UNIDO chose Bangalore as a dynamic city
region because of its IT, electronics and biotechnology sectors. Pune's automobile industry is no longer attracting new investments
at a rate or value higher than the other parts of India. New entrants in the
last decade like Volvo, Hyundai, Ford and Mitsubishi have preferred the
southern parts of India for the manufacturing units. In fact, Ford had a failed
relationship with Mahindra & Mahindra (M&M) in Maharashtra before
moving to the south. In Pune, at best, one has seen Mercedes Benz India (Daimler
Chrysler) beef up its operations but even there its largely because Mercedes
(Daimler Benz) had a minor equity stake in Tata Motors (then, Telco) from the
1950s to early 1970s and had a working knowledge of how to run operations in
Pune. Even French company Renault's recent tie-up with M&M through a
joint-venture company, Mahindra Renault, resulted in the factory unit being
based out of M&M's utility in Nashik. It is largely due to Tata Motors' passenger car, Indica and
other models, project in Pune and Bajaj Auto's steady 2-3 wheeler production
output that is seeing Pune continue to be a major player, if not the biggest,
player in automobile industry in the country. Wherever the mother manufacturer
units go the connected auto component industry follow. And, again, this is
reflected in the booming auto component sector in Tamil Nadu and other southern
states. Why doesn't Pune tick anymore? Availability of land is no longer
easy. Says Sampat Kale, analyst at Pune-based National Centre for Advocacy
Studies: "In the 1980s the state government literally gifted public land
to auto companies to set up new units or expand their current operations. Then,
about 12-15 years back, under an amended MIDC Act, the state government again
acquired a lot of land in Pune at a cheap rate and leased it out to the many
industrial units many of which were connected with the automobile industry." Today, thats happening in Tamil Nadu, and not in Maharashtra or
Pune in particular. Says a senior official in Automotive Components
Manufacturers Association (ACMA) who did not wish to be named: "Mega auto
projects require availability of land and tax benefits, and the Tamil Nadu
government is providing both." Adds Himanshu Kulkarni, associate faculty
in Pune-based Symbiosis Institute of Business Management: "Companies like
Hyundai or Daewoo went to Tamil Nadu because of incentives given by the state
government through tax rebates and the rate at which the land was allocated to
them." There were reasons for Pune's rapid industrial growth until a
decade back. UNIDO's 2003 report on Pune paints a mixed picture: "The
proximity of Pune to Mumbai and the availability of infrastructure facilities,
existence of transport and communication services and also the presence of
skilled and unskilled manpower attracted a large number of industries to this
region especially after a ban was imposed on Mumbai’s further industrial
expansion in 1960. Barring a few major industries which have been set up on the
eastern side of Pune city, most industries are developed around the Pune-Mumbai
Highway north of Kirkee Cantonment in the vicinity of Pimpri Chinchwad. The
process of migration of people from different parts of the country as well as
from the neighbouring areas also continued because of employment opportunities
created by rapid industrialisation. It also resulted in acute housing problem
and increase in slum settlements." The dynamics
are changing. Unskilled and semi-skilled cheap labour is no longer attracted to
Pune from the remote areas of Maharashtra because the labourers can't cope with
high costs of living. Says Kale: "Quite some of my friends who were working
as machine operators, helpers and fitters in the 6-monthly contract system in
the automobile industry and who had come for other regions of Maharashtra, left
Pune four years ago because they just couldn't pay the high rents for their
accommodation in Pune out of the low wages they were getting." Even the
skilled manpower like engineers and designers no longer find Pune the best
place to choose from available alternatives in the North and South. Says the
ACMA official: "Every year more than 1.5 lakh engineers pass out from the
South and form the talent pool for automobile companies in the South to tap
into." Says Ahmed Bunglowala, head-corporate communications at Pune-based
Thermax: "The engineers from South are considered solid and renowned for
their meticulousness and we are seeing that they are not keen to move outside
of their home state if opportunities are available for them there itself." --------------------------------------------------------------------------------------------------------------------------------------------- Unreal state of affairs in DLF real estate public issue June 2007 Controversies-surrounded real estate developer DLF's public
issue of about Rs 9,600 crore got over on June 14 after a delay of a year. It
had filed its first prospectus with the Securities and Exchange Board of India
(Sebi) in May last year but a motley group of 10-20 minority shareholders in
DLF got together to protest against the shortchanging of about 1,000 minority
shareholders having about 2.5% equity stake in the company, in the December
2005 rights issue of debentures. For an issue size of 17.5 crore shares of Rs 2 each for Rs
500-550 per share it got oversubscribed by 3.4 times. Out of bid for 60.7
crore shares, 48.2 crore shares were at at the highest price of Rs
550 per share. Institutional investors oversubscribed by 5.1 times
primarily due to FIIs' bid which were for 48.54 crore shares. Domestic MFs
bidded for only 1.4 crore shares and insurance companies for 3.5 crore
shares. Non-institutional investors (corporates and high net worth
individuals) barely scaped through at 1.1 times subscription while retail
investors gave the issue a thumbs-down by bidding for 0.97 times its alloted
quota. Comparing these with a small IPO, Vishal Retail, with an issue
size of about Rs 130 crore, that hit the market simultaneously with DLF one saw
some interesting differences. It was one-tenth the DLF issue size. FIIs made
zero bids in its issue while MFs, insurance companies and domestic IIs
oversubscribed by 45 times on their quota. Non-institutional investors'
oversubscription was by 310 times and retail by 50 times. The overall issue was
oversubscribed by 69 times. Post-public issue, DLF has a paid-up equity capital of 170.48
crore shares of Rs 2 each. Therefore, DLF's market capitalisation, if one
assumes a price of Rs 550 on listing, would be about Rs 93,000 crore. This
would not just take it way above the existing listed real estate companies (see
table: 'DLF's market cap would surpass the existing top listed real estate
stocks') but also take it directly in the top 10 market cap companies in the
market (see table: '...and bring it in the top 10 market cap stocks on the stock
exchanges'). It would be perhaps be the first family-controlled group after the
two Reliance groups in the top league. Thats why there were even rumours in the
market that the Ambanis were not looking forward to DLF issue's success!
Despite recent price corrections in the range of 10-20% across
the country government policies and consumer demand has fuelled the interest
enough for old developers to expand and news ones to join in. Says Kunal Kakad,
national director, Colliers International India: "We have witnessed an average increase
of 100 - 200% in property prices in most pockets in the last few years.
Increased returns in the property development business has got many
entrepreneurs who are interested in making a fast buck to join the bandwagon. I
believe if there were to be a correction in the near future, it would probably
be in certain micro markets which are overheated, but not in Tier 1 cities." Corrections are even getting welcomed. Says Ramesh Jogani, CEO
of Indiareit Fund, a real estate venture capital fund with a current corpus of
$300 million: "The property markets have already corrected by 15-20% in
all cities. Such small corrections are a very healthy way. Otherwise we have
seen many people having tears of blood." The tears of blood would also be shed by thousands of home loan
borrowers in the country if property prices crashed quickly. Devendra Nevgi,
CEO & CIO, Quantum Mutual Fund, writing in an investor education paper,
puts its explicitly: "Though the impact of a distress in the sub-prime
market in India is not quantifiable like in US, a steep fall in real estate prices
would certainly be a risk to the overall financial system, since the lending
(by banks, finance companies & institutions) to the real estate sector has
been on rise fuelled by the sky rocketing property prices." Jogani warns against speculation. He says "What is
glaringly coming out is that in large development projects there is a huge
capital infusion it is not possible for the developers to hold on to their
construction because they need money for construction. As a result they have to
sell their properties and if they keep the prices affordable there won't be any
speculation." Uncertain land reserves and overvalued prices. The risk factors
in the first few pages of DLF's issue prospectus says it itself. Of its claimed
land bank of 10,255 acres it said "60%...consist of agricultural lands for
which we have not yet obtained a certificate for change of land use. The title
to these lands is often fragmented and the land use, in many cases, have
multiple owners." Macquarie Research, in its June 7 research report on
DLF, said that "any delay in obtaining such a certificate can
significantly affect the company's development schedule." There's
worse. Another risk factor in DLF's prospectus stated "Though our Company and its subsidiaries own 1,160 acres, or
11.3%, of the 10,255 acres that comprise the Land Reserves as of April 30,
2007, our Company directly owns only 0.5% of these Land Reserves. The balance
10.8% is held by the subsidiaries of our Company." With land
titles in doubt, Macquarie goes a step further and raises serious doubts about
even the developable area of DLF's doubtful land reserves: "Of the total 574million square feet, 217m sqf is land where DLF
has sole developing rights, but does not own the land. For this 217m sqf, DLF’s
prospectus states that “the commercial effect of sole development rights is to
entitle us to substantially all the revenues from the relevant development.”
The definition of substantial revenues needs to be clarified, however, because
‘substantial’ is a vague term and does not quantify DLF’s share of revenues". For real estate companies doubts on land reserves means one can
not say that the acquisition has taken place. And land acquisition costs are
going up. As Sanjay Chandra, director in Unitech (the largest real estate
company listed on the stock exchange till DLF gets listed) put it to a business
news channel recently: "the expectations of the land owners—be it
government or private—have gone up and that is what is driving up the prices in
the auctions." Transparency levels in property acquisitions are considered to
be very low. But there is mixed opinion about this. Says Kukad: " Land acquisitions remains a challenge
in the Indian market with complexities involved in acquiring a 'clean' parcel
of land. There could've been cases where Land acquisitions have been made using
political connections at a price much lower than the going market rate. But I
don't think we can generalise this for all major investors." Even though FIIs were the only investors very enthusiastic in
DLF's public issue as seen from their oversubscription level, non-investing
international observers openly question the veracity of land deals in India. Says
Graham Chase, president of Britain-based Royal Institution of Chartered
Surveyors: "What India needs, so as to give
confidence to investors in the property market, is for transactions to be
accurately recorded and for the records to be readily available. Proper
valuation to international standards is also crucial." According to Chase, real estate investment trusts the world over
are trading at 5-10% below their asset value due to improper valuation and that
in India the discount could be higher. Not everyone agrees though. Says Kukad:
"Our market is
too nascent and there is a severe lack of institutionalization in addition to
the fact that leverage is not easily obtainable. As a consequence, cash rich
entities are able to swing and speculate on the limited product that is
available in the market today. The artificial scarcity of land created by zoning
and agricultural authorities have further worsened the situation. In
short, we are far far away to even attempt to compare real estate overvaluation
in India to other developed economies." Yet
research firms like Macquarie Research endeavoured to value DLF public issue
pricing. Macquarie put the figure to Rs 400 per share, 25-30% below the issue
price of Rs 500-550 per share. At the official issue price the Price Earnings
Ratio works out to 45 times while the industry average is around 22 times. Adds
Kukad: "The market needs to understand that real estate companies cannot
and do not get valued on future cash flows, at least not when they are trying
to access the capital markets. It is always on an 'as is'/'go dark' basis
and if we were to apply this concept to DLF, then the valuation should be
somewhere around sub 20 times i.e. equating to an approximate 11% cap
rate." Accounting jugglery? Used to financial jugglery there is a
concern that real estate companies won't mind using it to bloat revenues and
profits when tapping the capital market. In the DLF case, 55%, i.e. Rs
2,400 crore, of its March'07-ended total income of Rs 4,030 crore (which
includes an 'other income' item of Rs 1,320 crore) are through sales
to its promoter group company DLF Assets Pvt Ltd contributed Rs
1,560 crore of the company's profit before tax of Rs 2550 crore. Further, DLF
has paid only about Rs 50 crore to DLF Assets and the balance Rs 2,350 crore is
still payable. Outlook did some digging and found some strange transactions in
DLF Assets' book just a fortnight before the public issue. Its paid-up capital
was just Rs 2 lakh as of May 31 2007. On June 1 2007 it has issued and allotted
5 crore equity shares of Rs 10 each at par for Rs 50 crore. Then, as of May 24
2007 there was zero preference shares issued and paid up. On May 25 2007 the
company allotted 16.2 crore preference shares of Rs 100 each at par for Rs 1,620
crore. Virendra Jain, head of Midas Touch Investors Association which
has been raising discrepancies in DLF's various prospectuses filed with Sebi
since May 2006 says "its a matter of concern that transfer or sales of
assets by public limited companies to promoter owned companies or other parties
takes place without disclosing the conditions and the sale prices of such
transactions." Sebi needs to ensure the truthfulness and completeness of the disclosures and take legal action against the lead managers which gives the 'due diligence certificate' to the issuer. Concludes Jain: "If unchecked, this may become one of the convenient routes for inflating / diversion of income and assets by unscrupulous managements." And real estate companies might just be the ustaads in exploiting it. --------------------------------------------------------------------------------------------------------------------------------------------- IPO scams and Sebi's horn swaggling! May 2007 The stock market watchdog,
Sebi (Securities and Exchange Board of India), continues to bark in the
matter of scams pertaining to IPOs (initial public offers), as it has been
doing so since the one and a half year. It has dealt out 10-15 interim
orders in this time. But like the bite is missing from a barking dog so
are the final orders from Sebi! On April 26, in its latest
IPO-related interim order, Sebi uncovered what it says is a listing-day
"manipulation of order book (on the trading system of NSE and BSE) to
create artificiality in the market" on the first day of listing of
six IPOs this year. Six day-traders and one broker would place large buy
orders at price much lower than prevailing and cancel their orders as the
trading day progressed with a miniscule fraction getting converted into
trades (all Sebi orders are put up on their website). A few days later, in its
law-making role, amended IPO norms to make grading of all IPOs mandatory.
Companies, tapping public money for the first time, will now compulsorily
have to get one or more of four credit rating companies—Crisil, Care,
Icra and Fitch—to assess its fundamentals vis-a-vie existing listed
companies in the same sector. They will be graded from 1 to 5 with a lower
number representing weaker fundamentals. But Sebi chairman, M.
Damodaran, has time and again elaborated that the grading will not
indicate the investment worthiness of the IPO at the issue price or
book-building price range. The unstated implication is that of investors
not necessarily benefiting from a grade 5 IPO if the issue price has more
than factored in the strong fundamentals. Inversely, weak fundamentals due
to lack of track record, will not always hurt investors if the issue price
is kept low enough to warrant the risks involved. Grading idea has been around
for exactly a year emanating as it did from a perceived lack of some kind
of guidance on IPOs and Sebi, in April '06, permitting IPO issuers to
voluntarily seek rating. By the end of last year no one came forward and
Sebi started resorting to unofficial force on IPO issuers to seek rating.
One of them, Celestial Labs, had mentioned in its Sebi-filed prospectus
that it had not opted for grading. But, through BSE, Sebi made it go for
grading and the company filed a revised prospectus later. But investors, particularly cautious ones, are more or less capable of sifting the chaff from the wheat. What is required for a control on the abuse of the allotment of shares and authenticity of disclosures in prospectuses and post-IPO corporate announcements. Jayshree Dhabaria, a young retail investor from Bombay, says: "Allotment in reasonably fundamentals-sound IPOs doesn't really happen and you have to block very high application money to | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||