Investing in India - 5 Minute WrapUp by Equitymaster
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Maturity or greed that drives Indian realty firms? 

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In this issue:
» India's fiscal woes to continue
» Power companies not happy with e-auction of coal
» India's solar power needs US$ 110 bn
» 'India Inc should stay away from farm lands'
» ...and more!

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00:00
 
Indian real estate firms have seen domestic options for funds drying up. The companies' poor fundamentals are the key reason for this. In recent times, real estate firms have found it increasingly difficult to meet their financial obligations. The reason for this is slower sales which is a result of the lower demand from the residential housing sector. The demand has been hit by a double whammy of higher interest rates combined with exorbitantly high property rates offered by the realty firms.

Therefore, these realty companies are now turning their focus outside the boundaries of the country. They are flocking to foreign research firms for advice on how to approach the target audience better. The target audience here is not the customers but the foreign investors. That's right. The realty firms are seeking help of foreign research houses like Knight Frank, CB Richard Ellis, etc to access foreign investors to raise funds.

Most of these research firms offer a variety of services like project feasibility, market research, property management, etc. A combination of any of these services can actually help realty companies in becoming more professional. And over a period of time, this can help in improving the fundamental strength of the companies. However, most realty firms choose to ignore these and concentrate solely on the firms easy access to foreign funds. That is the star attraction.

Some experts have stated that this focus on foreign research firms actually indicates maturity in the Indian real estate sector. However, we strongly believe that that would have been the case only if the firms had focused on the professional services. Not when they are only interested in raising funds.

Do you think real estate companies accessing foreign research firms is a sign of maturity or just pure greed? Share your comments with us or post your views on our facebook page.

01:10  Chart of the day
 
Internet is a part of our daily lives in one way or the other. So it is but natural that internet would also contribute towards the GDP (Gross Domestic Product) growth of countries. As per a study conducted by leading consultant, McKinsey, internet contributes towards the GDP growth by creating jobs as well as through wealth creation. Today's chart of the day shows the percentage of GDP growth contributed by internet for the BRIC nations. Interestingly, India tops this list. In fact, as per Mc Kinsey, the internet contributed nearly 5% to India's GDP growth in the past 5 years. This is higher than the average of 3% for all the BRIC nations put together.

Data source: McKinsey & Co.

01:30
 
"When things go wrong, you'll find they usually go on getting worse for some time." This quote seems quite apt for the Indian economy right now. Be it the government, be it the corporate world or be it the 'aam aadmi', everyone is facing some severe challenges.

Take the government's concerns. High interest rates and rising crude oil prices are going to make it difficult to achieve the revenue and fiscal deficit targets for the current financial year. On the other end, the corporate world is reeling under the ill-effects of high inflation. Investments have slowed down. Margins have eroded. Finally, high food prices have been burning the pockets of the common man. Though it is expected that the rainfall will be good this year, it will most likely ease food prices for just a brief period. Poor storage and distribution infrastructure spoil the benefits of high food production. You would recall that last year food prices rose substantially despite a very good harvest.

As if all our own domestic problems weren't enough, the quantitative easing in the US and the debt crisis in the euro-zone pose a major risk to the global economic recovery. So at least for the short to medium term, the Indian economy is not going to have a smooth sail.

02:15
 
Power projects of 80,000 MW generation capacities are under construction in the country. The aim is to have all the capacities commissioned by 2017 to meet the targets of the 12th 5 year plan. However, the government has warned that coal linkages for plants with a combined capacity of 40,000 MW are yet to be obtained. The two ministries - power and coal- however do not seem to be seeing eye to eye in the fulfillment of this goal. The power ministry wants sufficient coal supplies at reasonable rates to help the generation companies. The coal ministry on the other hand wants to ensure the best price for coal miners. Coal India's production may be slightly short of the targeted production of 460 m tonnes in the FY12 due to lack of environment clearances. In FY10, the company had witnessed a 7% slump in production vis-a-vis the targeted output. However, the coal ministry does not seem to be getting over the greed of allowing e-auction of coal which can fetch rates that are at 85 to 90% premium. This will certainly makes the case of coal availability for state owned power producers worse. It seems that our policymakers have very little to agree upon when it comes to the long term benefits of the economy as a whole.

02:50
 
Its summer time and everyone in the country is complaining about the heat. But, if India manages to harness solar power, the blazing sun could be used to power your homes in a few years. The country needs US$ 110 bn in investments over the next decade in order to develop solar energy. This will enable this segment to meet almost 7% of India's power demands by 2022, according to a report by KPMG.

Coal availability of is a key issue for power projects. Plus, thermal power is dirty, producing harmful pollution. Using solar power will help reduce India's dependence on imported coal, stop environmental degradation by coal mining, and reduce carbon emissions. But, one major barrier is cost. The cost of producing a unit of solar power ranges between Rs 11 to 13. Conventional power costs between Rs 5 to 5.5 per unit. However, new technologies and growth in this space could help deliver economies of scale. Various measures by the govt. could help power this mission. Including this sector in bank's priority sector funding list could be one way. KPMG says that the solar sector can potentially transform the Indian economy. Well, if solar energy can do in 2020, what the IT sector did in 1990, then this sector could be a renewable gold mine.

03:45
 
Acquiring land in India has become a big problem not just for foreign investors but also for India Inc. The issue that Tata Motors had to face with respect to its Nano plant in Singur is one such instance. That is why Naveen Jindal of Jindal Power and Steel opines that Indian companies should avoid setting up steel plants on agricultural land at least. Given that there is a lot of vested interests at work when it comes to acquiring land for projects, not to mention the bureaucracy; it only makes sense to focus on those plots where the risk is minimal. For instance, about 90% of the area used for setting up Jindal Power's steel unit in Orissa's Angul was barren land. As a result, local people are happy as the project had little impact on agricultural activities. Indeed, India Inc. will have to take the initiative in scouting for land having lesser hurdles rather than depend on the Indian government to offer a solution to the issue.

04:30
 
In the meanwhile the Indian stock markets continued to trade in the negative territory after opening trade on a weak note. At the time of writing, the benchmark BSE Sensex was trading lower by 208 points (1.2%). Barring consumer durables and healthcare, all sectoral indices were trading weak. There were red marks across all Asian stock markets as well. However, Malaysian stock market managed some gains.

04:55  Today's investing mantra
"It's not debt per say that overwhelms an individual corporation or country. Rather it is a continuous increase in debt in relation to income that causes trouble." - Warren Buffett
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14 Responses to "Maturity or greed that drives Indian realty firms?"
VIJAY BAHAD
May 29, 2011
It bewilders me as to why the Policy makers and Government in perticular so inactive towards the Solar Energy as the Solution ot Indias Energy wooes . Whta OIl has done to Gulf countries , the solar energy would do to india . unfortunaley we in india are so engrossed into our Poilitical battles every day that ther is hardly any time spent on Strategic planning for the sustanable growth and needs of the country . We are country of self defeating mentality. We look towrds West for everything including the solutions to our domestic problems .Why Sola Energy being neglected by INDIA is a Billion $ question . Even if it is bit costly , still its worth it to invest into its reserch and developemnt so that repeatitive use would bring more technilogiocla breakthroyugh and it would become Economically viabkle eventually . Anyone listeing pl ??/ Like 
Amalaraj Marian
May 27, 2011
It is heartening to see quite a few knowledgeable individuals here. People are dead right one will never make the kind of money one thinks of in real estate. Real estate is for self consumption then for creating wealth the rate of return would not be the one you were looking for. Saying this if one has to look around and find the acres and acres of land are bought by theee componies the source of these money are debious one could even point out to the scams that have taken place and these money are all put into real estate. and that is the real reason for the flare-up in the prices. now these people want to get out but unfortunately the real situation is the needy buyer now does not want to touch this hot property one he cant afford two he is smarr and is waitng for the fall or the tapering of prices for the next some years. these firms are wanting to take the cheap alternative of borrowing abroad and cushining the impact from the hihger rates here in india.
just wait and watch the situation is going to get much tighter in times to come with the demand further reducing the things would become difficult for these firms unless they are fundamentally strong and are working on the solid grounds.
Like 
Onkar
May 26, 2011
Realty firms and Politicians have one thinng in common - G R E E D Like 
Seth
May 26, 2011
Real Estate the world over is seen as 'nuclear waste' which will remain radio active for the next 3 to 5 years, more so post the sub-prime crisis and the meltdown caused by it. The Indian real estate like the Chinese real estate been effected much, or that is what the Government wants every one to believe. The fact of the matter is that both these countries were as burnt as the rest of the world, only the Goverment did not let the fault line show, with loan rollovers, rescheduling, further loans with suspect collateral, generally preventing DISTRESS SALES and the NPAs to develop. This was cosmetic window dressing done by the Government. The Real Estate industry played ball, everyone made the extra buck. The window dressing can at best be a temporary solution can not right what is already beyond wrong. The real Estate sector in India is largely lead by first generation entrepreneurs, who have migrated from the suburbs and villages around the metro towns. The mania of land price shooting up on the single belief that land is no longer manufactured, farmers grew billionares, and the financers became millionares. The developer aggressively went about finding 'bigger fools' till there were no more bigger fools left in the market.
The Government on the other hand was very much aware of what was wrong with the sector but deliberately chose to ignore the crisis build up and avoided taking any corrective action, for many reasons including the fact that a lot of politicians and public servants had invested in this sector and the system was not capable of taking over the responsibility of delivery of the real estate promissed by the developers to the common man. I can go chapter and verse on this subject, but IO will only summarise my thoughts by saying that THE NEXT GENERATION WILL NOT SEE ANY APPRECEATION IN PROPERTY VALUES IN INDIA, THIS GENERATION MAY JUST SEE SOME APPRECEATION ENOUGH TO OFFSET THE INFLATION.FINAL ADVICE ---BUY PROPERTY ONLY FOR SELF USE AND NOT FOR INVESTMENT. QED
Like 
Shankar
May 25, 2011
Pure greed nothing more than that. We Indian companies need advise from a forgin firm about what software need to be used- ironey here is all those software is built in India. if software firms approch these greedy they say they are comfortable the way they are working. This secor should lear a very hard lesson. Like 
R.Chandrasekaran
May 25, 2011
Realty s have been cheating people same like political parties,because most of the Realtor some how got connection with Realtor or a Realtor him self a politician.Need many Drastic changes in our morale system, otherwise the word development will continue remain as an ornamental bogus on government data Like 
madhavankutty
May 25, 2011
A contry,socity or an individual, if concentrate and control on their income as well as expence and other investment the debt can control. If a contry should not go for war like US and Pak done in its history also should control the population equely in all community in moral ground. I recently red in malayam media(mathrubhumi) in school Childrens of Cristian community and Nair Community marginaly reduced compare to other religen and community so it can learn that others are not known about family planing and also election in kerala can realise which comunity is increasing in poulation, population also also related to economy and debt. Like 
S.Murugan
May 25, 2011
It is not definitely maturity. It is sheer greed. Rather than reducing prices, they go for hot foreign money. Obviously such money, at the first instance of a bubble, will just be pulled out causing great harm to our economy. It had happened earlier to Thailand during the major melt down some years ago. Reserve bank should control flow of hot money into real estate sector. Like 
S.S.Ranganathan
May 25, 2011
It is sheer,undiluted greed that drives Indian Realty firms. Like 
A J WADHWA
May 25, 2011
The Cost solar energy would not be higher than Nuclear energy considering all the aspect of creating Nuclear energy with foreign help, and the the risks to public safety. Use of Hydro energy and the use of its byproduct ,free controlled flow of water for agriculture and forestation has added value.
We must start acting rather wasting time in discussions and consultation with advanced countries who have their own interest in every thing.
Like 
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