Real Estate Cos. Should've Suffered More - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Real Estate Cos. Should've Suffered More 

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In this issue:
» Ramesh Damani on India's future
» What stops Buffett from coming to India?
» Stockmarket bubble to get bigger, believes Marc Faber
» Emerging markets' the place to be?
» ...and more!!

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If you are associated with one of India's leading housing finance institutions for more than three decades now and have been its Chairman for virtually half that tenure, you surely know a thing or two about the state of the Indian real estate market. Hence, when Deepak Parekh, Chairman of HDFC and the man we are referring to, spoke about the real estate scenario in the country in a wide ranging interview to a business news channel, we were all ears.

Mr. Parekh opined that the current pain for the Indian realty players in the industry was a rather short lived one and hence, they seemed to have forgotten the same and are again back to raising all kinds of money as well as increasing prices. However, he also observed that the market exists currently only for housing whereas there seems to be a glut of commercial property with very few takers.

Mr. Parekh also appeared critical of the sorry state of infrastructure in cities like Mumbai and added that rather than aspiring to become a Shanghai, the government needs to first focus on improving the standard of living of Mumbai citizens. "Let's go to the government and tell it that it should have a single-point agenda of improving the living standards of its people. Let's just forget about wanting to be an international financial centre," is how he chose to put it across. We couldn't have agreed more.

00:54  Chart of the day
Today's chart of the day indicates why Indian companies have had to face tremendous volatility in terms of mark-to-market losses in FY09. As the chart shows, India Inc's foreign exchange borrowings as a percentage of its total borrowings (unsecured) increased sharply during the boom period of FY03 to FY08, only to fall back marginally in FY09. The underlying fact is that Indian companies, in their pursuit of rapid growth, borrowed aggressively from the international markets where money was relatively cheap. But when times turned bad (FY09) and the Indian rupee became extremely volatile, they had to pay in terms of massive mark-to-market losses.

Note: Data representative of 150 out of BSE-200 companies that have released their FY09 annual reports so far;
Data Source: Yahoo Finance

India is poised to go from a US$ 1 trillion economy to not just a 2 or 3 trillion dollar one, but in fact something far greater. If renowned investor Ramesh Damani is to be believed, that is the mouthwatering fate that awaits India over the next few years. In fact, he had many other interesting views to share in a recent interview with a business news channel, including his opinion that in one generation's time, we will take the population of India from affliction to affluence, from poverty to prosperity, would probably go from 100 m people in the middle class right now, to 1 bn people in the middle class, thus having profound implications for investors and companies alike.

All in all, he believes that the way the market has snapped back suggests that the recent fall in the market was just a very severe correction in an ongoing bull market, and that Indian markets are now on the cusp of a multiyear bull run.

One of the striking aspects of the investing legend Warren Buffett's success is that he stuck to US companies for most of his career. Now of course, he is looking for opportunities outside of the US. Within Asia, he has picked up stakes in Chinese companies in the past. Now, as per Bloomberg, Buffett plans to visit Japan in about a year in search of investment opportunities. That comes as a surprise given that he is on record expressing his disappointment over the poor returns on capital of Japanese companies. Recently he did find a Japanese stock worth investing - Tungaloy Corp., a maker of tools for cars and planes.

After China and Japan, the question we ask is - Will Buffett ever find an Indian company worth investing in? We believe certain Indian companies do pass his acquisition criteria of demonstrated consistent earning power, good returns on equity while employing little or no debt, management in place and simple businesses. The difficult thing for Indian companies is to pass the test of size. Buffett looks for large purchases, which according to his standards are difficult for the Indian markets to digest at this point in time. Though in a few years, if corporate India continues to grow and stocks become more liquid, maybe we will have Buffett travelling to India as well!

Is the stockmarket bubble going to get bigger? Marc Faber believes it is possible. He reasons that, as the US is on an unprecedented level of trade deficit, it will have to print more dollars to finance its spending. This will result in too many dollars chasing the same goods and combined with lower interest rates will result in high inflation and the weakening of the dollar.

In the absence of a fundamentally strong economy, it is possible that this money can be lent for speculation in the equity and the commodity market. Faber advises that one has to differentiate between the stock market and economy activity and be cautious as consumption is not going to return to pre-recession levels. Time to watch out, Uncle Sam!

There's no gainsaying the fact that emerging markets (except China) have been the leaders of the current bull-run that began taking wings in March 2009. Now while there are murmurs abound that valuations of these markets have reached their multi-year highs, the fact remains that emerging markets are showing better signs of growth after last year's crisis than what is seen in the developed world of the US and Europe.

Note: Country names represent their benchmark stockmarket indices
Data Source: Yahoo Finance

Take for instance India. Since the run up started in March, foreign institutional investors have alone pumped in US$ 10 bn into stocks thereby helping the benchmark BSE-Sensex double from its lows. Stocks from the mid and small-cap spaces have risen even faster, outpacing gains in the large caps. All this has come on the back of improving fundamentals of the Indian economy - pickup in industrial production, low inflation, and rising corporate profitability are some instances that indicate recovery.

At the current levels, while the large caps represented by BSE-Sensex are trading at an average P/E valuation of 21 times their trailing 12-months earnings, the mid and small-caps represented by BSE-Midcap and BSE-Smallcap indices are trading at 18.1 times and 16.7 times respectively. While value can still be found in selective stocks in each of these spaces, these aren't any attractive levels to make a blind entry into the stock markets.

Anyways, women investors, who would like to know how to find some worthwhile investment opportunities in the Indian market might find our special investment guide for women - Rendezvous With Money - interesting.

Anyways, after a positive last week, stocks in India have opened this week on a lackluster note. At the time of writing, the BSE-Sensex was trading down by around 80 points (0.5%). Except China (up 1.2%), most other key Asian markets also closed in the negative, led by Japan (down 2.3%) and Singapore (down 1.7%). Markets in Europe have also opened the day on a weak note.

04:54  Today's investing mantra
"We like stocks that generate high returns on invested capital where there is a strong likelihood that it will continue to do so. For example, the last time we bought Coca-Cola, it was selling at about 23 times earnings. Using our purchase price and today's earnings, that makes it about 5 times earnings. It's really the interaction of capital employed, the return on that capital, and future capital generated versus the purchase price today." - Warren Buffett, Berkshire Hathaway's annual meeting, 1995
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4 Responses to "Real Estate Cos. Should've Suffered More"

mahendra patel

Oct 18, 2009

I want to invest in land approxmate RS 20 lac now. what -
what is future in land market?

-can we invest in land?

pl guide me about investment in land now.......
send email for the same true guideline I will wait for your replay




mayank pandya

Sep 14, 2009

Excellent view,,, thanks for your wonderfull insights it helped me lot in understnding indian economy.



Sep 14, 2009

It has been observed that when the market falls your
team become bearish and all news coming from
equitymaster will be negative and vice-versa.
I request your team to be more accurate of the present
scenario- may be bullish or bullish.



Sep 14, 2009

In future, I am sure if the efforts of the Equitymaster team remains to be consistent with the level of quality standards that they maintain today alongwith the service level they offer to their customers, Quantum group will one day become Berkshire Hathaway of India and Ajit Dayal would be the next Warren Buffet.
All the Best to him & his wonderful team !!!

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