Interest payment dig a hole into realty companies’ pockets

1
1
1
1
1
1
1
1
1
1
1
1
11111
1
1
1
1
Interest payment dig a hole into realty companies’ pockets
The Financial Express, February 12, 2009, Page 4

Kakoly Chatterjee, New Delhi

The interest payment as part of total income of real estate companies has gone up dramatically in the current financial year. It has witnessed a four-fold increase during the third quarter of the current financial year. In financial year (FY) 2007-08, third quarter income as a percentage of total income stood at 6.5%, while it rose to an astonishing 25.92% for the current financial year. It can be attributed to the fact that income has plunged by half, while the expenditure on interest payment has more than doubled.

In the current financial year for the quarter ending December, the total income of all realty companies stood at Rs 2,516.56 crore, while the total expenditure on interest payment stood Rs 652.28 crore in comparison with the corresponding quarter of FY07-08 where the total income of companies was Rs 5,898 crore while expense on interest payment stood at Rs 362.53 crore.

For the quarter ending September, interest payment as a part of total expenditure almost tripled. From 5.14% in FY 07-08 it rose to 14.85% during the same period of FY 08-09. With piling inventories and low sales, this number started rising from the first quarter itself when it doubled from 5.13% during the last financial compared with 12.21% during this financial year.

“With lack of growth in the top line, realty companies are feeling the pressure as the interest cost continues to grow. We are, however, hoping that things will look up in the fourth quarter as property price is sliding and interest cost is coming down,” Amitabh Chakraborty, president (equity) at Religare Securities said.

During the third quarter of this financial year when the income of the country’s largest real estate player—the Delhi-based DLF Ltd—came down to Rs 694.16 crore, its interest expense stood at Rs 210.19 crore. This means 30.28% of the income goes towards interest payment. In the corresponding period of FY 07-08 DLF’s income stood at Rs 1812.59 crore while its interest payment was Rs 130.12 crore, 7.18% of its income. Currently, its interest payment burden has become more than fourfold as compared to its income.

The impact of rising interest burden compared to income started getting accentuated from the second quarter of this financial year for DLF. Interest expense as a part of income stood at 13.74% with income being Rs 1362.86 crore and interest expense Rs 187.26 crore. In FY 07-08 interest expense as a part of income was 4.49% with income at Rs 1299.74 crore and interest payment at Rs 58.36 crore

Some developers have already started working on decreasing the interest payment. Delhi-based Parsvnath Developers chairman Pradeep Jain said, “We have paid off some of the principal amount during the third quarter of this financial year to reduce the expense on interest cost.”

Cumulative income of the first three quarters of Parsvnath and Unitech has gone down by 45% and 9.3%, respectively, during FY 08-09 compared with the previous financial year. During the same period cumulative interest expense for Parsvnath rose 153.72% and Unitech’s by 65.12%.

The scenario is expected to improve in the next quarter with the vote on account expected to boost this sector through tax breaks. With a few public sector banks bringing down interest rates to as low as 8%, enquiries from customers has already started picking up. Realising the importance of bringing in movement to the sector realty firms are reducing prices of properties. This additional cash flow will help the fourth quarter to look up as income is expected to rise.

Meanwhile, many realty firms are converting their short-term debts into long-term ones. This would raise the interest expenditure component of the realty firms. “Realty firms are converting short-term debts into long-term ones. As a result, the amount to be repaid is increasing. In a scenario where it is quite impossible for them to pay the principal amount, this burden continues to rise. A little movement in the sector is not going to help until volumes pick up,i summed up Shobhit Agarwal, MD, Capital Markets, Jones Lang LaSalle Meghraj.

'Housing sector to see 30% price correction in 4 months'

'Housing sector to see 30% price correction in 4 months'
The Financial Express, February 12, 2009, Page 12

The prices of houses have come down by up to 30% over the last four months but weak consumer sentiments continue to prevail resulting in subdued demand, says realty consultant Jones Lang LaSalle Meghraj (JLLM).

Affordability metrics for homebuyers have started to improve since October due to the sharp correction in property prices, reduction in mortgage rates and smaller unit sizes per apartment, it said.

"Currently, transaction prices in most markets are down by 25-30% across the board, "JLLM Chairman and country head Anuj Puri said.

Weak Deepawali sales last year and a "virtual standstill"in incremental credit lending during October-December period of the current fiscal have forced developers to mark down their asking rates, he added.

"Price corrections are more pronounced in new launches than existing projects, which are mostly sold to end-users or investors and hence are cost covered, "Puri said.

He, however, said demand of housing properties still remain subdued with end-users postponing their home-purchase decisions given an uncertain job market and expectation of further price corrections.

The consultant said though many developers have shifted their focus towards building affordable houses in the last few months, but due to thin margins on account of high costs of existing land inventories (mainly acquired over 2006-08) and the current level of construction costs, companies are finding it difficult to remain afloat.

"JLLM expects Rs 1,800-Rs 2,000 per sq ft as the bare minimum pricing level in the current market,"Puri added.
PTI

DLF stalls 2 of its biggest projects

DLF stalls 2 of its biggest projects
Business Standard, February 12, 2009, Page 4

The affected projects are DLF New Town Heights in Gurgaon Sector 90 and Express Greens in Sector M1 in Manesar, launched in January and August 2008, respectively. –DLF Chairman K P Singh

NEERAJ THAKUR New Delhi

Facing acute liquidity crunch and poor buyer sentiments, the country’s biggest property developer, DLF, has stopped work at two of its biggest mid-income housing projects. The move comes after the developer stalled at least a quarter of its commercial projects.

The New Delhi-based builder has halted construction at DLF New Town Heights in Gurgaon Sector 90 and Express Greens in sector M1 in Manesar, both in Haryana. The two projects were launched in January and August 2008, respectively.

Even after a year, the company has merely begun some basic work at its New Town Heights project, according to a report by Nomura Financial Advisory and Securities. In the Town Heights project, DLF has merely undertaken excavation work while in the Express Greens project, the company has just marked the boundary with its bill boards, the report said.

According to sources, the company has sold most of its apartments in New Town Heights in the first few months, offering 3 and 4 BHK apartments at Rs 2,125 and Rs 2,505 square feet, respectively.

However, sales in the Express Greens that offers 3 and 4-bedroom apartments for Rs 1,760 and Rs 2,125 respectively have not been very good. DLF did not respond to a detailed questionnaire sent on Friday.

DLF’s third quarter profit has dropped by 69 per cent to Rs 670.79 crore. The developer has stalled work on nearly 16 million square feet of office and retail mall space out of the 62 million square feet under development.

“All big developers have invested future earnings from soft launches in buying land for future projects. With the demand for new projects drying up, they don’t have money to complete the pre-sold projects,” said an analyst.

However, buyers who have booked houses at the DLF projects may be partly compensated if DLF fails to complete the project in 36 months after the launch, a company official, who declined to be identified, said. The company’s debt has spiralled by Rs 1,500 crore to reach Rs 14,800 crore in the third quarter of FY09, compared to the previous quarter, according to sources.

DLF had recently announced that new mid-income housing projects in Panchkula, Gurgaon, Hyderabad, Bangalore and Chennai to cater to the increased demand in this segment. However analysts say if the company could not start construction on its already sold mid-income housing projects, it is unlikely that the company can come up with any new projects.

Repays Rs 400-cr debt
Mumbai: DLF has repaid Rs 400 crore of debt to lenders, a top company official said. The repayment comes on the back of its stalled commercial and residential projects. The New Delhi-based developer, which owes Rs 14,800 crore to lenders, said it has repaid about Rs 2,000 crore of debt to lenders. “The debt was paid through internal accruals,” a company official said, declining to give more details. The company’s stock dropped 1.08 per cent to close at Rs 150.85 on the Bombay Stock Exchange on Friday.
BS Reporter

Market price of pledged shares vital: Experts

Market price of pledged shares vital: Experts
Times of India, February 12, 2009, Page 21

Investors To Benefit More From This Added Disclosure

MUMBAI: Sebi's decision to force companies to disclose the quantum of shares pledged by promoters has come as an important step for investors who buy and sell stocks based on company fundamentals. However, market players feel another crucial information the price at which the pledged shares could be put up for sale in the market (trigger price) by lenders should also be disclosed since this could help investors take a better view of a stock. Post the Sebi directive, nearly 300 companies have disclosed the extent of shares pledged by their promoters. On Wednesday, over 30 companies disclosed the data to the bourses.

While disclosing the trigger price would not be of much use to investors in a bull market, it could come handy in a bear market like the present one, they said. Additionally, end use of funds raised by pledging of shares could also give investors some indications about a company's future.

"Of course Sebi has taken a welcome step by making promoters disclose the quantum of pledged shares. But it would also help investors to know more about the end use of funds received by pledging and also the trigger price at which the lenders could sell these shares,'' said Puneet Nanda, CIO, ICICI Prudential Life Insurance.

As of now companies disclose the quantum of shares pledged by promoters, percentage of promoters' holding pledged and also percentage of total equity capital pledged. "Disclosing the price at which shares were pledged and the trigger price will help investors take a better view of the stock,'' said Arun Kejriwal, director, KRIS, an investment research and advisory firm.

Independent directors bail out of boards

Independent directors bail out of boards
The Economic Times, February 12, 2009, Page 1

115 Resign In A Month As Satyam Case Underlines Liabilities Of Board

Mahima Puri & Vivek Sinha, ET Bureau, New Delhi

There has been a sharp rise in the number of independent directors stepping down from boards of listed Indian companies in the past month, after the recent fraud at Satyam Computer Services put the spotlight on the responsibilities and potential liabilities that could accompany this vital, yet hitherto largely ceremonial function.

Some 115 independent directors on the boards of more than 100 listed firms have quit between January 7 and February 7 this year, data compiled by research firm Prime Database along with the Bombay Stock Exchange show. This compares with a monthly average of 50-60 resignations in the past two years.

The link with the developments at Satyam is clear from the fact that it was on January 7 that the Hyderabad-based company’s founder B Ramalinga Raju confessed he had fudged the firm’s accounts for years. The revelation, which took the lid off India’s biggest corporate scam, culminated in a spate of resignations from the company’s board and ultimately led to the government sacking and replacing the board with directors nominated by it.

The Satyam episode tarnished the reputations of its six independent directors, and some of them have been forced to engage lawyers to fight possible litigation by investors, both in India and abroad.

SAFE THAN SORRY

Independent directors shy away from promoter-led cos & firms with strong govt links

Real Estate Intelligence Report, Wednesday, February 11, 2009

Govt to borrow Rs 46k cr more to perk economy up

Govt to borrow Rs 46k cr more to perk economy up
The Financial Express, February 11, 2009, Page 1

Economy Bureau
New Delhi

Faced with a surging expenditure bill and dwindling tax revenue, the Centre announced a massive dose of additional borrowing of Rs 46,000 crore from the market, to be completed in two months. The additional funds for 2008-09 will be raised in four tranches through the sale of dated securities between February 20 and March 20 to finance the slew of stimulus measures announced over the past two months to prop up the growth rate in the economy that has dipped to 7.1%- a five-year low.

But government managers were quick to point out this will not stifle the demand from companies for additional funds. Planning Commission deputy chairman Montek Singh Ahluwalia said, “There will be no difficulty in accommodating the government borrowings. There will be no liquidity crisis.”

He was referring to the trend for banks across Asia which have found government debt as a safer avenue to invest as risk levels have increased in all economies, that, in turn, has exacerbated the crisis. An ADB report on Tuesday said, ‘Private companies in Asia were being crowded out of debt markets this year as governments in the region boost bond sales to fund economic stimulus measures.’ The flood of government bonds has reduced the prices of GOI paper, making it the worst performer among 10 Asian economies, a Bloomberg report said.

With the additioanl borrowing, the government will raise Rs 1,16,000 crore of extra funds from the markets in 2008-09, above the gross budget estimate of Rs 1,45,000 crore. The government has also doled out as tax concession Rs 50,000 crore to the industry.

“We had discussions with the Reserve Bank of India. The extra borrowing between February 20 and March 20 is going to be Rs 46,000 crore”, Ashok Chawla, secretary in the department of economic affairs said on Tuesday after a meeting with RBI deputy governor Shyamala Gopinath.

“RBI will release details about the government’s extra borrowing programme and ensure it is conducted without disrupting the market,” RBI governor Duvvuri Subbarao said later. He said there are no plans for a private placement of government bonds with the central bank.

Former RBI governor C Rangarajan, now a member of the Rajya Sabha, indicated that RBI still had room for a rate cut. “The stance of the monetary policy should be to stimulate growth. With prices on the downswing, RBI has room to manoeuvre with rates in the monetary policy,” he said.

Bankers said that the additional borrowing was anticipated and was already getting priced in 10-year bond yields. “With the government having an expected deficit of anywhere between Rs 1,50,000 crore and Rs 1,80,000 crore, this additional borrowing was expected. But liquidity is comfortable, especially since credit demand is falling, and so there should not be an increase in interest rates,” Abheek Barua, chief economist at HDFC Bank, said.

Bond yields rose after the government’s announcement — the yield on the 8.24% note due in April 2018 rose by as much as 13 basis points to 6.43%. It had stood at 6.30% before the announcement.

As a result of the borrowing, the fiscal deficit could touch 6% of GDP. “This represents a massive slippage in fiscal policy, especially as most of it will be used for revenue expenditure. But at this time, when an economic stimulus is needed, this was unavoidable,” DK Srivastava, director, Madras School of Economics, said.

Did we become too gloomy?

Did we become too gloomy?
The Financial Express, February 11, 2009, Page 6

Mahesh Vyas

According to the Central Statistical Organisation’s advance estimates, India’s GDP would grow by 7.1% in 2008-09. This is higher than expectations. Most agencies had predicted a severe slowdown in growth this year, compared to the average growth of 9% recorded in the preceding three years. The median forecast of real GDP growth in 2008-09 according to the RBI’s Survey of Professional Forecasters was 6.8%. The lowest forecast of 6.3% is by the World Bank. More generally, there have been low expectations reflecting a sense of pessimism amongst commentators in the media and in business. CSO’s 7.1% growth estimate is reassuring compared to these gloomy prognostications.

An interesting statistical observation of the CSO’s advance estimates (AE) is that at least since 2001-02, in all but one year, these have been lower than the quick estimates (QE). Quick estimates are generated about ten months after the year is over and in many ways give the first estimate of growth based on reasonably sufficient data. And, they almost always show a higher estimate of GDP growth than the AE. The QE for 2007-08, released by the CSO a few days earlier was 9%, which was higher than the AE estimated earlier at 8.7%. If this recent past is any indication, then it is likely that the QE for 2008-09 would turn out to be higher than the 7.1% estimated in the CSO’s AE.

The AE has underestimated growth in 2008-09 because it was compelled to use an outdated index of industrial production. The IIP is based on a basket of products and weights that reflect the country’s industrial setting in 1993-94. We have changed dramatically since then. But, the IIP does not reflect this. As a result, it systematically underestimates growth. The degree of this underestimation keeps increasing as the years go by. The quarterly financial results of listed companies provide evidence that this underestimation is not small.

There are efforts underway to upgrade the IIP to a base year that is more recent. When these get reflected into a new series of the IIP, the GDP estimates for 2008-09 and the earlier years would look much better than they seem now.

2008-09 has been a challenging year to forecast. Growth forecasts have been revised downwards systematically during the year. The median forecast of the Professional Forecasters published by the RBI was 8.1% in April 2008. This declined to 7.9% in July and then to 7.7% in October 2008 before it came down to 6.8% in January 2009. The Economic Advisory Council of the Prime Minister had predicted a growth of 8.5% in January 2008. This was revised down to 7.7% in July 2008 and then to 7.1% in January 2009. Most forecasters feared high interest rates, high inflation and the RBI’s policy to suck out liquidity from the system. Additional fears were the extraordinary rise in crude oil prices and the slowing global economy.

The Indian economy survived high interest rates, high inflation and high crude oil prices well. It also survived RBI’s enthusiasm to rein in a misunderstood indicator for inflation—the wholesale price index, when they should have been targeting the consumer price index. Real GDP grew by a handsome 7.8% in the first half of the year. Growth could have been higher if RBI had been less enthusiastic. And, growth could have continued at a robust pace but for the extraordinary global liquidity crisis of September-October 2008.

We will have a measure of the damage that the global liquidity crisis inflicted on India when the CSO releases estimates of GDP growth in the October-December 2008 quarter. I expect it to be closer to 4.5%. But the economy will recover from this trough in the next quarter. Early indications are promising.

The area sown under rabi crops is up 4.1%. Maruti Suzuki and Tata Motors have reported a higher growth in sales in January 2009 compared to a year ago. So has TVS and Hero Honda in respect of two wheelers. Cement consumption continues to grow at a healthy pace. Production data had started to improve in December itself. Infrastructure sectors such as railways and ports that had recorded a steep fall in October and November recovered in December. Growth in consumption of petroleum products accelerated to 4.6% in December compared to 2.9% in November and 0.9% in October.

The CSO’s 7.1% growth for 2008-09 as a whole and its 7.8% growth estimate for the first half implies a sharp fall in the growth rate to 6.5% in the second half of the year. The industry-wise break-up of the CSO implies that the fall would be the sharpest in the construction sector—from 10.5% in the first half to 2.8%. However, given the continued increase in cement consumption, this estimate may have to be revised upwards.

While the economy did suffer a hit from the global liquidity crisis, its impact was neither as severe nor as long-lasting as most commentators would have had us believe. A good part of the credit for this recovery goes to the quick response to the crisis by the government and RBI. The damage is also limited because our growth trends are not really as “coupled” with the West as many have assumed.

The author heads the Centre for Monitoring Indian Economy

Debt funds have high exposure to real estate firms, NBFCs

Debt funds have high exposure to real estate firms, NBFCs
Business Standard, February 11, 2009, Section II, Page 1

VANDANA Mumbai, 10 February

Debt mutual funds continue to have high exposures to realty and non-banking financial companies (NBFCs).

Sample this: LIC Mutual Fund’s Liquid Scheme has invested around 13.5 per cent (Rs 1,650 crore) of its portfolio in just two NBFCs — Reliance Capital and Indiabulls Financial Services.

ING Mutual Fund’s longterm fixed maturity scheme (FMP) 1 has 84.6 per cent of its portfolio in just one company — Unitech. Another of ING’s schemes, FMP series 53, has invested 100 per cent in the short-term debt of Reliance Capital, according to data from Value Research, a mutual fund tracking agency.

Others like Escorts Income Bond and Fortis FTP series 10 plan F have invested 56 per cent and 18.43 per cent respectively in Unitech. Even SBI Mutual Funds Short Horizon Liquid-Plus Fund has invested 3.72 per cent, or Rs 207.39 crore, in DLF.

Nikhil Johri, managing director, Fortis Mutual Fund, said, "We had communicated to investors at the time of the launch that though returns are much higher in these schemes, credit rating is lower. There were heavy redemptions during the September-October period in these schemes.” Recently, Crisil, in one of its reports titled, ‘Small debt funds face concentration risk’ said that a majority of schemes have single industry concentration and many small schemes have single company concentration. “Funds with large and illiquid single-company exposures could be affected by redemption pressure,” the Crisil report said.

The high exposures continued despite the overall concern over the last six to nine months that these sectors may be unable to service their loans because of tight liquidity conditions.

Unitech, Indias second largest real estate player, is overburdened with short-term loans and is struggling to repay its debts. At present, the total debt of the company is Rs 8,000 crore. Out of this, Rs 2,500 crore has to be repaid by March 31 and another Rs 2,500 crore later in the year. According to a fund manager, the total industry’s exposure to Unitech is Rs 2,500 crore.

Parijaat Agarwal, head (fixed income), SBI Mutual Fund, said, “We have not made any fresh investments. Since the assets under management have come down, the percentage of net assets has become higher." There could be a few reasons for the existing high exposure, one of them being inter-scheme transfers. That is, funds could have moved their exposure from say, a liquid fund to FMP or from an equity scheme to liquid fund.

Another explanation could be that because of redemption pressures, the exposures have gone up. In some cases, schemes would have attracted very little money to diversify.

What makes the scenario complicated is both DLF and Unitech’s debt has been downgraded by credit rating agency Fitch. And even, NBFCs are not being viewed too favourably.

Last October, there were redemptions to the tune of Rs 97,000 crore leading to a liquidity crisis in the industry. A lot of securities were either sold at a discount or transferred to other schemes to meet the redemption pressure. In some cases, promoters stepped in to purchase these papers.

OVER-DEPENDENCE

Scheme Company Exposure*
LIC MFliquid Reliance Capital 845.28
LICMF Liquid Indiabulls 805.23
SBI Short Horizon Liquid Plus Reliance Capital 213.08
SBI Short Horizon Liquid Plus DLF 207.39
Magnum InstaCash Reliance Capital 182.49
Fortis Money Plus Reg Indiabulls 158.88

*Exposure of schemes over 100 crore

Banks’ risk aversion slowing down credit growth, says RBI

Banks’ risk aversion slowing down credit growth, says RBI
Business Standard, February 11, 2009, Section II, Page 2

PRESS TRUST OF INDIA New Delhi, 10 February

Acknowledging that the credit growth has moderated in a couple of months, Reserve Bank Deputy Governor Rakesh Mohan today attributed the trend to risk aversion of the private and foreign banks.

The credit growth has slowed down in couple of months, but that of public sector banks was about 28 per cent year-on-year. Overall it was around 22 per cent, Mohan said at a seminar here.

“What has happened very interestingly in terms of risk aversion. It’s private sector and foreign banks whose credit growth is very very low,” he said. Noting that all Indian banks have capital adequacy far in excess of regulatory requirement, he said it is a fact so far that banks remain profitable without exception.

Growth in advances by the public sector banks are high as these entities are subject to government’s exhortation. Besides, the effect of monetary policy is higher on these entities, he said. “So the credit growth so far has been relatively healthy but it is correct to say you have to watch how much risk aversion would be observed and how much it (risk aversion) is rational,” he said.

“What is it we should be doing from policy point of view to preserve the financial systems’ health while helping the real economy not to go down,” he added.

Mohan said even in the backdrop of the Lehman crisis money markets in the country are behaving normally in terms of volume.

During September and October (2008), the daily market volume were not different from any other month when global markets were undergoing worst volatile phase, he said.

Speaking about the impact of global financial crisis on the Indian economy, the RBI Deputy Governor said “on the one hand we have the cushion of the agricultural economy and also the rural non-farm economy.”

The rural economy by and large remains unaffected by the global economic downturn.

Third, Mohan said, the cushion available is the financial system and the central bank’s operations themselves and fourth is the fiscal stimulus for private expenditure.

According to the Central Statistical Organisation estimates India’s economy is expected to expand by 7.1 per cent in 2008-09 despite global slowdown.

Farm sector output is projected to grow by 2.6 per cent in FY09, slower than last year’s 4.9 per cent, manufacturing by 4.1 per cent, down from 8.2 per cent, construction by 6.5 per cent against last year’s 10.1 per cent and financing, insurance, real estate, business services by 8.6 per cent against 11.7 per cent.

The estimates match the one projected by the Prime Minister’s Economic Advisory Council and are a tad higher than what the Reserve Bank has estimated.

IN THE DOWNTURN

Bank group-wise credit growth

Growth in % As on Jan 4, 2008 As on Jan 2, 2009

Public Sector Banks 19.8 28.6

Foreign Banks 30.7 16.9

Privae Sector Banks 24.2 11.8

Scheduled Commercial Banks* 21.4 24

*includes regional rural banks (RRBs)

Source: RBI