Look, who's helping the builders

Apr 22, 2009

In this issue:
» Global trade may have bottomed out
» India to grow at 6%
» Office rentals turn cheap
» Rights issues seem to be back
» ...and more!

If you've been wondering how builders have been able to hold on to unsold residential properties in most regions and not slash prices drastically, these numbers should provide the explanation. There has been a lot of talk recently about banks not passing on the lower interest rates. As per a leading business daily, RBI data shows that banks are far more interested in lending to the real estate sector than to individuals. For example, between 19th December and 27th February, housing loans to individuals grew by a mere 7.5%, while loans to real estate companies grew by 18.7%. In fact, the YoY growth in loans to the real estate sector on 27th February was a whopping 61.4%! Little wonder, prices have remained more or less firm across a large number of regions.

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While residential prices may not have come off drastically, office space is witnessing a significant fall in prices. Take the case of office rentals across the country. As reported in a leading business daily, most office markets recorded negative growth in rental values after supply across 8 major Indian cities outstripped demand by 45%. And the city to take the cake was Mumbai, which witnessed the steepest decline in rental values in the first quarter of 2009. In Mumbai itself, office areas such as Lower Parel, Worli and Nariman Point recorded declines of 37%, 29% and 13% respectively. Rentals in the NCR (National Capital Region) namely Connaught Place fell by 17%, while rentals in Bangalore dipped in the range of 3-7% in key markets. Oversupply was also evident in terms of vacancies with Mumbai and NCR reporting vacancies of 11-12% and 8-10% respectively. Going forward rental values are expected to be under pressure but whether they will fall down further is anyone's guess.

Around 41% of India's population, those that have savings bank accounts with Indian banks will be a happier lot come April 1, 2010. This is considering the RBI's latest directive to banks who have been asked to calculate interest on savings account balances on a daily basis rather than for the period between 10th and last day of every month as is the ritual now.

This would mean that you'd get interest even if you keep money in your savings account just for one day in a month. Currently, if you keep money between the 1st and the 10th of a month, but withdraw it after that, you get zero interest even though the bank had your money deposited for nine days. While banks have been opposing such a move arguing that this would involve high levels of computerisation, the fact is that most of them now boast of technology implementation across 100% of their branches. And RBI has taken notice of this fact. But only that the new rules will be implemented almost one year from now.

No one is shouting positive recovery just yet. But increasingly, signs are emanating that global trade may have indeed bottomed out. Following in the footsteps of Bernanke's assertion that 'sharp decline' in US may be slowing and Goldman Sachs upward revision of China's GDP growth rate, Bloomberg has now reported that the slump in Japanese exports slowed down in the month of March, thus putting to rest a four-month streak of record declines. Overseas shipments from the country's ports fell nearly 46% on a YoY basis, which although is still drastic by historical standards, is a tad lower than the previous month, where the drop was an unprecedented 49%. Although one swallow does not a summer make, what imparts confidence is the fact that reports from elsewhere are also suggesting that the worst may indeed be over. However, those expecting economic activity to reach its previous peak soon, might have to wait a little longer as a study by IMF of the previous recessions point to the fact that for economic activity to go back to its previous week, it takes an average of six quarters. And we have only taken the first few baby steps. And mind you, the current recession is touted to be severest in recent times. Hence, practicing temperance would be the best way forward.

Meanwhile, result season for the auto industry was kicked off yesterday by Hero Honda and frankly speaking, there couldn't have been a better company to do so. Belying slowdown blues, the company managed to rake in a neat profit growth of 32% for the full year on the back of a 20% growth in topline, both on a YoY basis. The company's operating margins also expanded by 1.1%. It this impressive performance to its strategy of aggressive product launches as well as focusing more on the rural and the semi urban markets, which perhaps would have proved successful even beyond the company's own expectations. Not one to rest on its laurels, Hero Honda has earmarked a capex of Rs 3.5 bn towards modernization and capacity expansion and is also looking at further expanding its rural network. Will the other players be able to storm the company's rural bastion, we'll have to wait and see.

Both the RBI and the Ministry of Finance see the country's GDP growth sustaining at the long term average rate of 6% even in the worst case scenario of global recession prevailing till March 2010. However, according to Mr. Arvind Virmani, the chief economic adviser in the Ministry of Finance, in the best-case scenario of the global economy recovering after September 2009, the GDP growth rate for FY10 could go up to 7%. It is also pertinent to note that global economic bodies like World Bank and IMF have projected growth rate of nearly 5% for India in this fiscal while predicting the world economy to contract by 0.5% to 1.7% for the first time in 60 years. Besides the comfort zone with regard to growth rate, India has sufficient headroom to bring down interest rates as compared to its global peers. This is why the RBI continues to play its role in nudging bankers to enhance flow of credit to productive sectors.

Financial stocks in the US received a booster dose yesterday led by the US Treasury Secretary Tim Geithner's remarks that the vast majority of US' banks are well-capitalised and doused investor fears that the government will wipe out their holdings. In response to the perilous state that many banks found themselves in after the financial crisis, the US government had pumped in huge amounts of capital into them. However, Geithner has admitted that these rescue efforts so far have been showing only 'mixed' signs of success. The idea of prolonged government involvement in banks is not a scenario which Geithner is comfortable with but at the same time he has not ruled out the possibility of increasing government's equity stake in weaker banks. And that stake, as per the IMF, could cost the US and the European exchequer as much as US$ 875 bn if banks in these regions were to return to levels similar to years before the crisis. Looks like Geithner is massively underplaying the specter of recapitalization.

You can expect several rights issue to hit the market. The pullback in the secondary markets and reduction in the duration of issues from 109 days to 43 days by SEBI, have made this method of raising capital attractive for companies. In fact, as reported in a leading business daily, 20 companies have already applied for SEBI approval for raising Rs 42 bn from rights issues. It may be noted that rights offers are made at a discount to the market price. As a result they attract shareholders' interest when the secondary market is doing well.

In the meanwhile, key markets across Asia closed mixed today. After oscillating between both the camps, BSE-Sensex, the Indian benchmark finally ended the day on the losing side as sharp selling during the latter half of the day resulted in the index closing lower by a little over half a percent. Major European indices are also trading mixed currently.

 Today's investing mantra
"The inflation rate plus the percentage of capital that must be paid by the owner to transfer into his own pocket the annual earnings achieved by the business (i.e., ordinary income tax on dividends and capital gains tax on retained earnings) - can be thought of as an "investor's misery index". When this index exceeds the rate of return earned on equity by the business, the investor's purchasing power (real capital) shrinks even though he consumes nothing at all. We have no corporate solution to this problem; high inflation rates will not help us earn higher rates of return on equity." - Warren Buffett

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