The reality of realty
(Feb 3, 2009)
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In this issue:
The problems for Indian real estate companies are getting bigger by the day. Forced to sell properties at lower rates than what they had envisaged in 'good' times, these companies are now scampering for cash flows to meet their working capital and longer term requirements. Some like DLF, Unitech, and Sobha Developers are facing financial catastrophe given that their debt repayments over the next year are almost twice what they can earn from selling or leasing out properties.
» Is the auto landscape looking better?
» Rupee's direction this quarter
» SEBI's amended guidelines
» Satyam's clients not shying away
» ...and more!
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Further, DLF that has been selling its properties to a subsidiary company - DLF Assets Limited - is facing issues in recovering the money back from DAL given that the latter is also in a pitiable position. The company, DLF, has seen substantial price erosion (of around 40%) of the properties it sold last quarter. It has now been forced to lower the prices further by 15%. We hope these times teach serious lessons to these developers given that they have made enough hay when the sun shone.
Worthy of their positions, market leaders Maruti and Hero Honda have posted good sales numbers for the month of January. Both of them have managed to sell nearly 6% more vehicles as compared to same month last year. Not a bad performance in normal times let alone the current troubled times. But people who would assume this performance to be an industry wide phenomenon would be in for some disappointment. Most of the other players have continued to report poor numbers. Maruti's rival Tata Motors and Hero Honda's rival Bajaj Auto are cases in point. And it's not just passenger vehicles and two-wheelers sales we are referring to, even CV sales have come in way below last year's levels.
The only silver lining is perhaps the fact that things are not as bad as they were during 3QFY09, the month of December in particular. Furthermore, if one looks at a more distant period, like say a period of 12-18 months, the scenario does not appear that grim. Lower interest rates, lower fuel costs and richer rural India have the wherewithal to combine together to transform potential customers into actual buyers. What cannot be said with certainty though is - when exactly will the tide turn?
Most of the major pharma companies have announced their December quarter results and the scenario has not exactly been something to cheer about. Two features were notable during the quarter. One was the huge quantum of forex losses that companies with forex debt had to incur due to the sharp depreciation of the rupee against the dollar. The other was the slowdown in revenue growth from the US with the US FDA delaying product approvals. Some companies were also at the receiving end as there was no exclusivity period that they garnered during the quarter, which was present in the corresponding quarter in the previous year.
Growth in the domestic market was either above or in line with the industry growth rate. The European region also impacted revenues as difficult market conditions continued to persist. In Germany, while the AOK (the largest insurance company in the country) announced the results of the tenders for a variety of drugs, the process itself was mired in controversy with a legal suit now pending. Thus, uncertainty will continue to prevail in the German market till the time the court case gets resolved. All in all, it was not a very enthusing quarter for the pharma sector which is not proving to be as defensive a play as FMCG.
The Indian rupee has had a roller coaster ride in the last two years, appreciating in 2007 and depreciating in 2008; in both cases sharply. And now, according to Bloomberg, the Indian currency is likely to strengthen this quarter as growth outperforms most emerging markets and foreign players resume purchases amid waning aversion to risk. As stated by DBS Holdings and published on Bloomberg, the rupee may gain 4% to 47 against the US dollar by the end of March.
Last year was particularly bad when the global financial crisis deepened and foreign investors pulled out a staggering US$ 13 bn from Indian equities causing stockmarkets to plunge and the rupee to fall drastically by more than 19%. This was the currency's biggest loss since 1991. Further, Indian corporates were also at the receiving end, particularly those with a large amount of forex debt on their books as they got saddled with mounting forex losses. Hence, any appreciation in the Indian unit will provide some sort of breather to these companies easing the quantum of forex losses going forward.
One would expect Satyam's customers to move away from the company after the fraud came to light. After all, the company has one third of the Fortune 500 as it clients. Surely they would be wary of dealing with a tainted company. But the truth is, not many have left. In fact, only 1 big company - State Farm Insurance has.
This highlights how integral outsourcing companies have become to their clients' businesses. Gone are the days when outsourcing companies provided basic support to their clients. IT companies today have a role to play in sensitive and complex areas like the client's databases and payroll. No wonder then that over 90% of Satyam's clients have committed to staying with the company, according to its spokesman Jim Swords.
China's growth may have considerably slowed down in the last quarter impacted by the global economic meltdown. But the Chinese Premier has stated that he saw signs of recovery in the final days of 2008. Although, he believes that more stimulus measures will be needed. China has been hit hard by falling exports, waning demand, fears of social unrest as thousands of workers were forced to leave cities to move back to villages in the wake of factories closing down. China's economic growth slowed to 6.8% YoY in the last quarter of 2008, dragging down the annual rate of expansion to a seven-year low of 9% YoY.
Interestingly, China's stockmarkets have a different story to tell. After being relentlessly battered in 2008, which saw the Chinese indices plunge by a massive 65%, the Shanghai Composite index gained 9.3% in January, the most among the world's 10 biggest markets. This has compelled the world's largest money managers to be confident about the fact that China will avert a recession. However, according to Bloomberg, Chinese stocks are trading at less than a third of their peak valuations reached in January 2008. It is expected that the country will enjoy faster growth than the rest of the world in 2009 and 2010 too. While this is most likely to be true given that its developed peers have already slipped into recession, China still has a tough task ahead of it in terms of overcoming the slowdown in its economy fuelled by the global financial crisis.
After being battered in the months of October and November 2008, India's exports showed some signs of recovery in December, as reported in a leading business daily. While exports during the month still declined, the same was restricted at 1%, while October and November had seen exports falling by 12% and 10% respectively. Sectors which contributed to the better performance in December were pharmaceuticals, engineering products and some agricultural commodities. However, textiles, gems and jewellery and chemicals continued to face rough weather.
India's cumulative exports growth for the period April-December 2008 was US$ 132 bn, clocking a growth of 17%. Conditions in the global markets continue to deteriorate and with no respite being visible in terms of economic recovery in 2009, a robust growth in exports will be difficult. This means that the export target of US$ 200 bn aimed for FY09 will be hard to achieve.
Sensing that a company might have to take its floor price lower at the last moment in order to entice investors to buy into its IPO, market watchdog, SEBI has come out with an amended rule. The rule says that a price band for a public issue can now be declared just two working days before the opening as opposed to the earlier rule of atleast 2-3 weeks. However, this is not the only rule that SEBI has managed to amend. It has also asked companies to report dividends on a per share basis rather than on a percentage basis, since different companies have different face values.
In order to curb speculation further, SEBI has also informed listed entities to issue bonus shares within 15 days from the day of announcement in cases where shareholder approvals are not required and within 60 days in cases where approval may be required. This is a marked change from the earlier rule that gave the companies as much as six months to issue bonus shares. And lastly, the regulator has raised the margin of conversion of warrants to 25% from 10% now. While we do not appreciate the rationale for the first move as it is driven more by sentiments than fundamentals, the fine tuning with respect to the other rules are indeed praiseworthy.
Home loan seekers may look forward to cheaper rates going forward as banks compete to garner a larger share of the pie. As much as the government and the RBI would prefer all players in the Indian banking sector to simultaneously pass on the benefit of rate cuts to borrowers, SBI's early mover and aggressive pricing strategy is being seen as a threat to other players. The behemoth has taken cues from the RBI's signals and priced its mortgage rates lower, wishing to cannibalise the share of other banks. The reason for the bank's aggressive pricing of home loans is also due to the fact that it currently has a very healthy CASA (low cost deposits) proportion (40% of deposits) and has seen a significant growth in the same over the past six months. While other players in the sector try to compete on the basis of lower rates, they may be compromising their margins and asset quality while doing so.
And yet another government is busy rediscovering its generous side. Australia's central bank cut its benchmark interest rate today, lowering the overnight cash rate target to 3.25%, the lowest in 45 years. Over and above that, as per a Bloomberg report, the government has also announced it will spend US$ 27 bn as a stimulus package, thus going full throttle in its efforts to fend off a recession. The spending will account for 2% of the country's GDP this year and 1.3% in the subsequent year. This comes on the back of the Australian government's view that the economy would be sure to contract in the financial year 2010 without the stimulus.
The Indian markets closed higher by 1% today. BSE Oil & Gas and BSE FMCG (up 1% each) contributed to the rise. While the Asian markets closed mixed, the European indices are trading in the red currently. As reported on Bloomberg, crude oil rose by 2% to US$ 40.8 a barrel on the reports that OPEC, led by Saudi Arabia, cut its output in January to avoid a supply glut and bolster prices. Gold prices, meanwhile, fell by 1% to US$ 895 an ounce as some investors sold the yellow metal to gain from its rally to a six-month high.
"The most important quality for an investor is temperament, not intellect...You need a temperament that neither derives great pleasure from being with the crowd or against the crowd" - Warren Buffett
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