Real Estate Intelligence Report, Thursday, June 18, 2009

The great SEZ rush skids on slowdown, land issues

The great SEZ rush skids on slowdown, land issues
Business Standard, June 18, 2009, Page 1

Rituparna Bhuyan / New Delhi/ahmedabad/mumbai

Almost half the proposals to be taken up by the Board of Approval involve developers wanting to curtail their plans.

When the Board of Approval for special economic zones (SEZs) meets on Friday, liaison and corporate affairs executives will jostle for space in the narrow corridors on the ground floor of Udyog Bhavan, which houses the commerce department.

In stark contrast to last year, however, few of them will be pushing proposals for new zones. Demand dynamics brought on by the global slowdown and persistent land acquisition problems are forcing developers to alter their plans.

As a result, almost half the proposals that the inter-ministerial panel headed by Commerce Secretary Rahul Khullar will consider have to do with extensions to acquire land or cancellations of these tax-free enclaves that were supposed to catapult India’s exports into the big league.

Of the 58 SEZ proposals on the agenda, only two are for setting up new zones; 23 zones are applying for an extension of the validity period and two — from K Rajeha Universal — are seeking de-notification on the grounds that the economic downturn has resulted in lower demand.

Then there is Mansarovar Industrial Development Corporation that has decided to expand the focus of its zone from handicrafts to information technology-enabled services (ITES), and to split the 131 hectare-zone.

“The developer has requested that due to the present downturn in the economy, the additional sectors (ITES) may kindly be permitted to be included in the SEZ,” the commerce ministry said in its note for the BoA meeting.

Similarly, financial constraints have forced Diamond Software Developers, which was setting up an SEZ focused on information technology (IT) and ITES in Noida, to drop its plans.

Meanwhile, companies such as Parasvnath SEZ have had to move the proposed 10.11 hectare Biotech SEZ from Ranga Reddy district in Andhra Pradesh to Medak in the southern state owing to legal hurdles in land acquisition.

Similarly, with only 63 per cent of the land acquired, Rajasthan Explosives and Chemicals has sought more time for developing a multi-product zone.

Plagued by insufficient demand for space, land acquisition problems and the liquidity crunch in the first half of 2009, nearly 27 developers with all approvals in place had already sought more time to operationalise SEZs. Ministry officials said the number could go up to 50 at Friday's BoA meeting and much more at subsequent meetings.

According to the norms, an SEZ has to be up and running within three years of receiving the formal approval, which is only given after land is in the developer’s possession.

When the economy was growing at 9 per cent, there was a rush to set up SEZs. Between February 2006 and May 2009, the government gave formal approvals to 568 proposals, nearly 60 per cent for IT. Of these, 315 have been notified, which means they can claim tax and duty benefits.

But work has been completed and exports are taking place in only 90 zones. So, only 16 per cent of the formally approved proposals are contributing to India’s exports.

Exports from these 90 operational SEZs are projected to grow 38 per cent to over Rs 1,25,000 crore in 2009-10, as against Rs 90,000 crore last year. This will, however, be just a quarter of the Rs 5,00,000 crore projected if all the formally approved zones were to become operational.

Government officials, however, said this was only to be expected. “When we started giving approvals, we expected at least one-third of the approved SEZs to fall by the wayside. But the slowdown and restrictions on state governments acquiring land could see more projects not seeing the light of the day,” said an official who was associated with SEZ policies and approvals for over five years.

“The number of approved zones is already high. The serious players are here to stay and our focus will be to facilitate SEZ-related matters,” added another official.

Experts said with prospective clients putting their expansion plans on hold, developers do not want to take risk and build zones. This is because, unlike the real estate business model, SEZs require a long gestation period before developers see any financial gains.

“Scrapping unviable zones is a systemic correction. When the business cycle is on an upturn, the zones will bounce back,” said Aradhana Agarwal, senior fellow at ICRIER and reader at Delhi University’s Department of Business Economics.

PricewaterhouseCoopers Executive Director Vivek Mehra, who is advising many developers, said the downturn had lowered demand for space in the IT zones. Besides, the extension of the Software Technology Park scheme also meant that the rush for SEZs has come down.

“There are pressures on timeline and builders, who have put in more than the requisite 25 acres, are looking at other options. Even if you de-notify now, you have the option to seek a re-notification later or a set up a zone with a smaller land area,” he said.

Developers seeking extensions include fraud-hit Satyam (three zones), Infosys (two zones), NIIT, and ONGC-promoted Kakinada SEZ in Andhra Pradesh.

The former commerce ministry official said the manufacturing sector-related SEZs, which have not shelved their plans, could stage a comeback over the next eight to 10 months if production shifted to low cost destinations.

For the moment, the absence of demand and liquidity crunch has also forced real estate major DLF to get conditional approval to scrap four of its notified zones, while its plea to get another of its Delhi-based zone has already been accepted.

Gitanjali Gems, which has permission to set up nine SEZs, has also applied the brakes on its plans. Although the company has decided against going ahead with a proposed zone in Nanded, the development of six zones in Gujarat and Maharashtra is yet to pick up. Only one SEZ in Hyderabad is expected to be operational, but that is one-and-a-half years away.

In pharmaceuticals, chemicals and biotech, most of the 16 notified SEZs have been non-starters. Apart from the projects of Divi’s Laboratories, Biocon and Serum Institute of India - the first among the notified SEZs in 2006 – the others are still under implementation. Issues such as land acquisition, delays in developing physical infrastructure, setting up of plants and regulatory approvals from the US and Europe are delaying the projects, sources said.

“The development of a pharmaceutical SEZ may take three-seven years as pharmaceutical plants need quality water, effluent treatment plants and good physical infrastructure,” said Hitesh Gajaria, head - pharmaceuticals and executive director, KPMG India.

Even government-promoted projects such as development of Kandla Port Trust’s Rs 7,000 crore port-based SEZ is in pause mode.

“A majority of the developers want to see how the situation evolves in the coming days. So, they do not want to scrap their plans for the zones as of now. But there is an oversupply issue in zones,” said Abhishek Goenka, partner at consulting firm BMR & Associates.

With the inputs of Maulik Rajnikant Pathak & P B Jayakumar

Sensex sees fourth-biggest fall of the year

Sensex sees fourth-biggest fall of the year
Business Standard, June 18, 2009, Page 1

Press Trust Of India / Mumbai

After a brief mid-session recovery, sluggish European stocks and sustained sell-off by foreign funds today dragged the market down, with the benchmark Sensex plunging 435 points, registering the fourth biggest single-day fall of the year.

The bellwether index fell 749.05 points on January 7, 480.35 points on March 30 and 437.63 points on June 8 this year.

After a high level of volatility, the Bombay Stock Exchange 30-share barometer settled the day at a two-week low of 14,522.84, netting a fall of 435.07 points or 2.91 per cent from its previous close.

The Sensex touched the intra-day low of 14,447.02. The market spiralled downwards in afternoon trade as European stocks extended losses to a fourth day after a sharp fall in the American market yesterday.

The dramatic selling pressure surfaced after a leading brokerage, Kotak Securities, reportedly lowered RIL's rating.

SMC Capitals Equity head Jagannadham Thuguntla said: "The market is showing signs of fatigue because of valuation concerns; besides, there is apprehension that the Budget may not have that many sweeteners."

Market sentiment was also adversely affected by sustained pullout by foreign institutional investors (FIIs), which were believed to be aggressive sellers during the day.

Sensex sheds 435.07 points on weak cues

Sensex sheds 435.07 points on weak cues
The Financial Express, Corporates & Markets, June 18, 2009, Page I

fe Bureau, Mumbai

Weakness in the major Asian and European equity indices along with a disappointing advance tax payment reported by corporate India on Tuesday prompted investors back home to book profits that pulled down the domestic equity indices to register its biggest drop in last seven weeks.

According to finance ministry data, Indian companies paid around Rs 23,000 crore of taxes in advance for the first quarter of FY10. This is almost flat as compared to the previous year's receipts.

The 30-share Sensex of the Bombay Stock Exchange (BSE) fell by 435.07 points or 2.91% to close the day at 14552.84 points. On the other hand the broader 50-share Nifty of the National Stock Exchange (NSE) ended the trading session at 4356.15 points losing 3.58% or 161.65 points.

Majority of the Asian equity indices too ended the day in the red with Hong Kong’s hang Seng shedding 0.45%, Singapore’s Straits Times losing 0.73% while Kuala Lumpur’s KLSE Composite ending the day lower by 1.56%.

European shares too traded weaker after Office for National Statistics in Britain reporting the unemployment rate for the three month ending in April 2009 at 7.2%, up from 6.5% reported during January 2009.

Market experts attribute the sharp correction in the share prices to stretched valuation. “The market was definitely in a overbought territory. Since the equity prices have rallied higher unabated in the last couple of weeks, investors chose to thin down their positions to re-enter at the lower level”, said, Gopal Agrawal, head of equity – Mirae Asset Global.

Further the adverse court ruling against the Reliance Industries Ltd (RIL), largest company in terms of market capitalization, on the RIL-RNRL gas issue continued to dampen the sentiments in the domestic bourses. RIL extended its loss by another 4.24% or Rs 90.80 to close the day at Rs 2,141.60.

According to the provisional figures released by the stock exchanges, Foreign Institutional Investors (FIIs) were net sellers of equity worth Rs 363.99 crore while Domestic Institutional Investors (DII) bought equity worth Rs 569.10 crore.

‘Market breadth’ which indicates the overall health of the market remained extremely weak throughout the trading session with 1,990 stocks in BSE declining when compared to 686 stocks that advanced on Wednesday. Among the Sensex pack 29 stocks ended the day deep in the red lead by Tata Steel, Tata Motors, Jaiprakash Associates, Reliance Communication and DLF Ltd.

Advance tax collections touch Rs 23,000 crore

Advance tax collections touch Rs 23,000 crore
The Financial Express, June 18, 2009, Page 1

Economy Bureau, New Delhi

These may not be the vaunted ‘green shoots’ of recovery yet, but advance tax collections are hinting a gradual return to normalcy in some sectors of the economy. While industrial output growth returned to positive territory in April, according to initial trends, advance tax payments by India Inc in the first tranche ending June 15 are expected to touch Rs 23,000 crore, almost equal to the Rs 23,216 crore collected in June 2008.

But the stock markets interpreted the figure as a gloomy sign of corporate recovery. The 30-share Sensex of the Bombay Stock Exchange fell 435.07 points or 2.91% to close at 14,552.84 points. The broader 50-share Nifty of the National Stock Exchange ended down 161.65 points at 4,356.15, losing 3.58%.

Sectors like banks and financial services, FMCG and auto companies have paid a higher advance tax. The tax outgo of realty, oil and mining companies are still lower than last June’s. “Although corporate advance tax payments till June 2008 grew by nearly 20%, the payments in this fiscal’s first instalment can be considered as robust, given the slowdown in the economy,” an official in the finance ministry said.

The fall in the profit margins of oil companies is the result of sustained losses in the sale of LPG and kerosene they have been forced to bankroll. Thus, Oil & Natural Gas Corporation (ONGC) has been replaced by State Bank of India as the highest advance tax payer in the country, which deposited Rs 1,068 crore for the quarter ending June 15, 2009 –a 61% growth over the Rs 663 crore it deposited in the first tranche in 2008-09.

Companies pay advance tax on their estimated earnings every year. Instead of paying a lump sum amount at the end of the fiscal, they break it down into four instalments. They pay 15% of their advance tax estimates by June 15, 30% by September 15, followed by another 30% by December 15. The balance 25% is paid by March 15.

The turmoil in international economies since last October has hit corporate India as well, with most of them battling problems of falling prices and lowering demand. Subsequently, their advance tax payments too have been on a decline. In fact, in 2008-09, corporate advance collection tax fell by 1.4% to Rs 1,32,285.2 crore.

“Although advance tax payments for the quarter ending June 15, 2009 are at par with June 2008, they should not be seen as an indicator for the overall performance of the year. Though some sectors have done well, since economic growth is estimated to be lower in 2009-10, the tax collections for the fiscal will also be affected,” said Rajeshree Sabnavis, tax partner, BMR Advisors.

Within the financial sector, Life Insurance Corporation of India’s advance tax outgo has risen 7.82% to Rs 469 crore in the first instalment, while ICICI Bank has paid Rs 350 crore, just 2.94% more than the Rs 340 crore it deposited a year ago.

Continuing the buoyant trend in the sector, HDFC Bank’s advance tax outgo rose 16.28% to Rs 250 crore in June 2009; Punjab National Bank shelled out Rs 236 crore – a 47.5% rise over June 2008 and Bank of India registered an 89.3% rise in its tax payment at Rs 231 crore.

“Banks continue to be profitable as they have been well regulated and have been safe from the international crisis. While the stimulus measures have had an impact on auto companies and consumer goods sector, real estate prices remain high, leading to their lower tax outgo. Profitability of export-oriented and IT companies too will continue to be hit by the global recession,” pointed out Sandeep Chaufla, tax partner with Ernst & Young.

Significantly, Hindustan Unilever Ltd has registered a 25% rise in its advance tax payment at Rs 75 crore. Mukesh Ambani’s Reliance Industries Ltd, however, saw a 7.6% decline in its outgo to Rs 314 crore.

Meanwhile, the three stimulus packages seem to be having an effect with the advance tax payments by automobile companies registering a marginally higher growth. Although tax payments by Tata Motors and Bajaj Auto remained steady at Rs 30 crore and Rs 50 crore, respectively, Hero Honda’s advance tax outgo surged by 67.5% to Rs 64.5 crore.

Similarly, Mahindra & Mahindra’s advance tax payment rose 25% to Rs 17.5 crore in the first tranche. However, India’s largest car manufacturer Maruti Suzuki’s tax payment fell 3% to Rs 92 crore.

Infrastructure companies seem to be faring poorly, if their advance tax outgo is any indication. Although ONGC is the country’s second largest corporate advance tax payer, it deposited 33% less tax at Rs 890.5 crore in the first instalment. GAIL India Ltd also witnessed a 25.3% erosion in its outgo to Rs 250 crore.

The outlook for metal and mining companies too does not seem very positive. Steel Authority of India Ltd paid Rs 345 crore in advance tax – a 24.5% dip over last June and Tata Steel deposited 35.3% lesser as advance tax in June 2009 at Rs 230 crore. Amongst real estate companies, Housing & Urban Development Corporation Ltd is the only one to have paid an advance tax so far, officials said.

India has borne economic crisis well: Manmohan

India has borne economic crisis well: Manmohan
The Financial Express, June 18, 2009, Page 12

Press Trust of India

On board PM's special aircraftIndia has not remained unaffected by the global economic crisis but has "borne" it well, Prime Minister Manmohan Singh said on Wedenesday.

Returning home after attending the summits of Shanghai Cooperation Organisation (SCO) and Brazil-Russia-India-China (Bric), where the global financial crisis was the main theme, Singh said there was a need for reforming the present systems of global governance and international financial system.

The PM hoped the Bric would not remain a "talk-shop" and the member countries would work together so that their voices are heard in the global arena.

"We live in times of rapid economic changes when the Bric economies are a factor of stability and growth," Singh told accompanying journalists while returning from Yekaterinburg in Russia.

"India has borne the global economic crisis well, though we have not been unaffected," he said.

Talking about the Bric Summit, he said the leaders discussed the need to intensify cooperation among the four nations, international economic downturn and how to prepare for the forthcoming G-8 and G-20 Summits.

To a question, he said, "We (Bric nations) are responsible for 40% of the world GDP and if all the (member) nations join together, I think our voice will be heard in the global councils."

Singh said the Bric nations had decided that their foreign ministers and central bank governors would meet and with the help of experts, examine the further steps that should be taken to enhance coordination of member countries.

"There was general agreement on the need to continue our coordination in Bric on economic matters, to seek implementation of G-20 decisions of interest to developing countries and reform of present systems of global governance and the international financial system," he said.

To a question about demands for replacing dollar as global currency, Singh said such ideas were aired but no concrete conclusion emerged at the SCO Summit.

"It was agreed that these are highly complex issues replacing dollar by other currency, national or SDRs. And it was felt that this matter required proper examination by our foreign ministers and governors of central banks," he said.

On SCO, Singh said India looks forward to increased functional cooperation with the grouping which comprises Russia, China, Kazakhstan, Uzbekistan, Turkmenistan and Kyrgyzstan and form the extended neighbourhood of India.

Property prices set to rise

Property prices set to rise
The Hindu Business Line, June 18, 2009, Page 1

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“There is no reason for builders to lower prices now as liquidity has improved”. - Mr R.R. Nair,CEO, LIC Housing Fin

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N. K Kurup ! Remya Nair, Mumbai

Property prices in India which have been on the decline for several months on account of the credit crunch, are set to rise, according to Mr R.R. Nair, Director and Chief Executive, LIC Housing Finance Ltd.

“People cannot expect a further fall in property prices. That stage is over. Builders had lowered prices when they were in trouble in the last few months. For builders, the liquidity position has eased and the cash flows have improved. They have also cleared off existing inventories. Therefore, there is no reason for them to lower prices,” he said.

As the demand picks up, property prices will go up. This could happen in the next five-six months, Mr Nair, head of the second largest housing finance company in India, said.

“By how much the price will increase, will depend on the builders. In some pockets, they have started quietly increasing prices. However, it has not happened universally,” Mr Nair said in an interview to Business Line.

Moreover, builders had not increased prices in the last 15-18 months. Because of all this, there is a “good possibility’ that property prices will rise, he said.

Citing reasons for renewed housing demand, Mr Nair said that with a stable government in place, people feel that the economy will improve, the liquidity situation would be better and the soft interest regime will continue. They also feel that property prices have bottomed out. This is precisely why there is a renewed interest in buying homes, he said.

The property prices had seen a correction in the last two quarters as demand for housing had dried up. Builders had been forced to lower prices as they were sitting on a large inventory. Some builders who had planned luxury projects had converted to standard projects.

“With the economy looking up, there is confidence among builders that they can raise funds either through loans or through equity or QIPs. That is why builders have regained enthusiasm and started working on the projects”, he said.

Growth pick-up

The housing finance company has seen growth pick up from end- February. In March, the company had a 42-per cent growth. For April and May put together, there was a 120 per cent growth in approvals and a 50 per cent growth in disbursements.

Most of the growth for LIC Housing Finance has come from retail finance, Mr Nair said.

The company has revised its business growth target upward from the 25 per cent it set for itself at the beginning of this fiscal.

“With the first two months of this fiscal registering a 50-per cent growth in disbursements, the growth should be in the range of 30-40 per cent this fiscal”, Mr Nair said.