Real Estate Intelligence Report, Tuesday, August 18, 2009

Sensex tanks 626 pts on global cues, monsoon worries

Sensex tanks 626 pts on global cues, monsoon worries
Business Standard, August 18, 2009, Page 1

BS Reporter / Mumbai

Realty and metal stocks lead the fall.

Fears of drought and worries about growth rates in China and Japan, respectively Asia's largest and the world's second largest economies, saw Indian and global indices slide sharply.

The Bombay Stock Exchange’s Sensitive Index, or Sensex saw its steepest decline since July 6, falling 626.71, or 4.1 per cent, to 14,784.92. The benchmark has dropped 5.7 per cent so far this month. The S&P CNX Nifty lost 4.2 per cent to 4,387.90.

Foreign Institutional Investors (FIIs) were net sellers of Rs 1,226.49 crore, although domestic institutional investors (DIIs) were net buyers of Rs 460.32 crore, according to provisional data from the BSE.

“Markets could witness around a 10 per cent correction, but there is a high amount of liquidity in the system that can support them. If liquidity moves away in the short run, there could be a 20 per cent correction,” said Andrew Holland, head (institutional equities), Ambit Capital

The China factor, he added, will have to be watched since markets there are already down 17 per cent.

Domestic concerns like the poor monsoons in parts of north India continued to worry foreign institutional analysts. “Indian stocks may decline as much as 15 per cent on concerns that lower monsoon rainfall will slash farm output and cut consumer spending,” wrote Bank of America Merrill Lynch analyst Jyotivardhan Jaipuria in a report.

Market experts said Japan’s GDP growth at 3.7 per cent was below Bloomberg analysts’ median expectation of3.9 per cent. In China, Yunnan Copper, the country's third-largest producer of the metal, fell 10 per cent after posting a loss in the first half of the year. Both the Shanghai copper and zinc hit their lower circuits.

The Shanghai Composite Index slipped 5.8 per cent or 176.34 points.

The Nikkei-225 and Hang Seng fell 3.10 and 3.62 per cent respectively. The MSCI Asia Pacific index took its biggest hit in five months.

US markets closed in the red on Friday after the consumer confidence dropped. Both the Dow Jones Industrial Average and Nasdaq fell by 0.82 per cent and 1.19 per cent.

In India, market breadth was negative with 3,036 stocks declining, 823 rising and 95 closing unchanged.

Realty and metal stocks led the fall, with HDIL, DLF, Sterlite, Tata Steel and Hindalco all falling significantly.

The realty index was down 7.58 per cent and metals 6.15 per cent, but all sectoral indices closed in the red. Auto, oil & gas, bankex and FMCG were down over 4 per cent.

Aviation stocks ended in red as the price of aviation turbine fuel increased 4.5 per cent. Kingfisher Airlines dropped 8.58 per cent while Jet Airways slumped 7.26 per cent and SpiceJet declined 3.97 per cent.

Some market players, however, were not too perturbed with this fall. Said Ramdeo Agarwal, joint partner, Motilal Oswal,“I am quite surprised by the extent of this fall. In the medium- and long-term, the undercurrent continues to be positive, but in the short term, we are in the realm of no knowledge.”

Sensex sinks with global markets, drops 626 points

Sensex sinks with global markets, drops 626 points
The Hindu Business Line, August 18, 2009, Page 1

In sync rupee tumbles 71 paise, breaches 49-mark against dollar.

Our Bureau, Mumbai

Stock markets took a battering on Monday on the back of fears that the global economic recovery will be slower than expected even as poor monsoon continued to cast its shadow on investor sentiment.

The benchmark stock index Sensex slipped over four per cent or 626 points and fell below the 15,000-mark on sustained selling pressure. The index closed at 14,785, after touching an intra-day low of 14,740.

The broad-based Nifty too closed below the 4,400-level shedding 192 points.

Stockbrokers said the sharp fall in Chinese and other Asian markets triggered the 127-point opening loss for the Sensex.

FII net sellers

Foreign institutional investors were net sellers of equities worth Rs 1,226.5 crore. However, domestic institutions were net buyers of equities worth Rs 460 crore. According to marketmen, Australia-based FIIs were seen selling in the market.

Retail investors also picked up stocks taking advantage of the steep fall. They were net buyers of equities worth Rs 360 crore on the BSE. Proprietary traders (brokerages) net sold stocks worth Rs 180 crore on the BSE.

A Bank of America Merrill Lynch report on Monday indicated a 10-15 pet cent pull back in Indian equities led by drought-led growth cuts. This should result in near term earning downgrades in auto and consumer segments. Investors’ participation in the cash market was subdued. BSE’s turnover was Rs 4,956 crore (Rs 5,650 crore on Friday) and Rs 15,425 crore (Rs 16,421 crore) on the NSE.

According to market participants, negative economic data from several parts of the globe hurt investors’ sentiment badly. A survey by the University of Michigan showed lower than expected US consumer sentiment.

The growth in Japanese economy in the June quarter was also below expectations. “Indian markets fell following the sell-off in the global markets, especially the Chinese markets. Metals such as copper and zinc have been weak on the LME and metal stocks were trending weak in the Chinese markets,” said Mr Saurav Arora, Senior Vice-President, Jaypee Capital Services Ltd.

Hindalco, Tata Steel and Sterlite Industries fell by 6-7 per cent.

Rupee impact

The fall in equity market had its impact in the forex market too.

The rupee weakened sharply tracking other Asian currencies and the domestic equity markets.

The domestic currency opened at 48.55 and moved in a one-way downward direction to end at 48.95, 71 paise lower from Friday’s close of 48.24.

During the day, it touched a low of 49, a level last seen a month-ago.

Signs of IPO market revival

Signs of IPO market revival
The Economic Times, August 18, 2009, Page 12

Strong Appetite For Good Quality Paper

THE strong response to the Rs 6,048-crore public offering of NHPC — subscribed 23 times over — indicates that the primary market is becoming more robust. Public issues of Adani Power (Rs 3,000 crore) and Mahindra Holidays and Resort (Rs 275 crore) also drew similar response earlier. This contrasts with the situation a little over a year ago, when companies that had lined up public issues had to withdraw their offerings from the primary market. The Reliance Power IPO was the last public offering to scrape through before the financial crisis led to a panic in markets. Clearly, risk aversion has come down significantly, particularly after markets recovered, post elections, from its March 2009 lows. Investors are now willing to move out of cash and various low-risk low-return instruments to place their bets on good quality reasonably-priced paper from both public and private sector companies. That should augur well for the government’s disinvestment plans and encourage the Centre to bring well-run PSUs to the market for new listing as well as to improve liquidity of stocks already trading on the bourses. In doing so, the government must ensure it does not crowd out fund-raising by the private sector entities. That is perceived to be a real threat.

Yet, going forward, the government would do well to widen the stock market with good PSU paper at a time when excess liquidity from the developed economies chase more emerging market scrips. There is far too much liquidity sloshing around the globe, thanks largely to the stimulus packages put in place by governments and central banks to revive sagging economic growth. Much of that money has found its way into equity and commodity markets, including those in India. For instance, FIIs net invested more than $7 billion in the current calendar year in Indian equities, after withdrawing about $12 billion in 2008. With India set to grow faster than most other economies, despite the looming drought, more money would flow into the country. The government must seize this opportunity to tap the markets for resources for itself as well as the capex plans of the PSUs. And, it can take comfort that appetite for PSU shares would be strong if the offering is reasonably priced.

No comfort in GDP numbers

No comfort in GDP numbers
The Economic Times, August 18, 2009, Page 12

Drought Still Painful For Millions

THE low and declining share of agriculture in the economy means the drought in nearly a third of the country would not have a significant impact on GDP growth. That does not mean that human suffering is going to be any less. Agriculture and allied activities have a 17% share in GDP. A big reversal in agriculture this year would, therefore, only knock off about half a percentage point from the GDP growth. With the global economy looking up, we could hope to make up that loss of output elsewhere — through a pick up in exports, for one. That, however, does not mean we close our eyes to the plight of over 50% of population, still dependent on agriculture — most of them marginal farmers or agricultural labourers. The higher prices of farm produce will partly make up for the lower production for the surplus producing farmers. But the marginal farmer may not have enough to feed himself and could end up buying costly grain from the market to meet his basic necessities. Agricultural labourers will be hit equally hard as farm employment will be severely affected because of the drought. Sure, services contribute to an increasingly larger share of the rural GDP — share of agriculture in rural incomes is down to about 40% now — but a large percentage of non-farm income has its source in the farm sector. Even the Economic Survey 2008-09 sees the rural economy as a ‘continuum of interrelated economic activities’. So, while the economy has diversified to an extent where it can afford to shrug off perhaps the worst monsoon in two decades, a vast section of the population is still going to feel the pain.

The government would do well to take measures to lessen the impact of the drought. It must protect real incomes in the affected region through the employment guarantee scheme, and also make food items available through adequately stocked public distribution system using the 50 million tonnes in foodgrain available with the state agencies. From a longer-term perspective, we need to appreciate the acute water crisis the country is heading into. Water must command its economic price to discourage misuse, and conservation of both groundwater and annual precipitation must receive utmost policy attention.

B’lore realtors scout Goa,Mumbai for new projects

B’lore realtors scout Goa,Mumbai for new projects
The Economic Times, August 18, 2009, Page 7

Sachin Dave MUMBAI

WITH the real estate sector story looking up in large parts of the country, Bangalore-based realty companies are now exploring options to enter new markets. Among the interested players are Puravankara Developers, Sobha Developers and Nitesh Estates, three of Bangalore’s large real estate companies. It is learnt that these players are drawing up plans to invest in cities like Mumbai, Goa and Pune.

Provident Housing, a fully-owned subsidiary of the Puravankara Group, is said to be in talks with individual land owners in Mumbai to buy land in three locations for affordable housing projects. An industry tracker said Provident Housing is largely looking at western Mumbai for this venture. Ashish Puravankara, director, Provident Housing confirmed the plan to enter the Mumbai market through affordable housing projects though he declined to share details on locations. “We have not bought any land yet and are exploring options in Mumbai,” he said.

The cause for concern, according to analysts, comes from the fact that companies in the sector are highly leveraged. Purvankara, for instance, had a debt of Rs 582 crore on its books at the end of FY09 even as company officials maintained that the the debt-equity ratio at 0.56 was favourable.

Like Purvankara, Sobha Developers is also keenly looking at Mumbai and Pune. A source in the industry said that the company is close to sealing a deal with another developer for an affordable housing project. JC Sharma, managing director, Sobha Developers, when contacted said, “Mumbai is an attractive market and we are certainly interested in it though nothing concrete has been decided so far.” After a recent debt restructuring exercise, Sobha has reduced its debt from Rs 1,900 crore to Rs 1,450 crore. “We are at a comfortable position as far as debt is concerned,” he added.

Joining Purvankara and Sobha is Nitesh Estates which has already bought a large tract of land in Goa for a high-end project. “We would be developing higher end villas in Goa,” L.S. Vaidyanathan, Director, Nitesh Estates. The company is planning to raise around Rs 1,200 crore through an infusion of private equity (PE) funding and a planned public issue. Nitesh is also said to be interested in the Mumbai market.

The consensus is that money will not be easy to raise at a time like this. “It will be interesting to see how these companies arrange for the funds for these projects. While PE money is hard to come by, it will not be easy to take the capital markets route,” said a consultant at an international real estate firm.

RBI for super regulator in fin mkt

RBI for super regulator in fin mkt
The Financial Express, August 18, 2009, Page 2

Economy Bureau, New Delhi

Reserve Bank of India governor D Subbarao on Monday flagged the need to develop a super regulator by giving statutory powers to the High Level Coordination Committee on Financial Markets. The committee brings together, under the chairmanship of the RBI governor, the heads of Sebi, Irda, PFRDA and the finance secretary in the finance ministry.

Releasing a book authored by the Prime Minister’s Economic Advisory Council chairman C Rangarajan, Subbarao questioned whether HLCCFM can made a kind of a super regulatory institution tasked to maintain financial stability. Other option that has to be debated is whether this committee can be given an organized, formal structure.

He said ensuring financial stability has to be an ‘explicit objective’ of the government and the central banks. However, he said it was difficult to define financial stability and pin point an agency responsible for ensuring it.

HLCCFM discusses a wide range of issues concerning financial market regulations, how they should evolve. However, the committee does not have any legislative power, which some critics argue reduces its effectiveness and reach. The minutes of the HLCCFM meeting are also not made public. HLCCFM increased the frequency of its meeting after the collapse of the Lehman Brothers in September 2008.

At the release function, which was also attended by Thirteenth Finance Commission (TFC) Chairman Vijay Kelkar, the RBI governor urged that the Commission the must address three critical issues: whether fiscal adjustment over a cycle is a viable proposition in India, secondly, defining the guidelines for recognition of the fiscal deficit and the government debt, and finally, how the should the government achieve fiscal deficit targets outlined by the TFC.

The TFC is expected to come out with is report in October 2009. Subbarao said the TFC must study “why should we (India) do it (fiscal adjustment) over a cycle. This is very neat in theory but does it work in India.” The governor said the TFC should also go a little beyond that pointing out fiscal deficit reduction targets.

“It should also study how it should come about. How much of the fiscal consolidation should come from the tax side and how much from the expenditure side,” Subbarao said, indicating there was a need to control quality and quantity of expenditure.

The governor reiterated that the government’s heavy borrowings programme has come in the way of lower interest rates. He further argued that it would be difficult to roll back the fiscal expansion programmes. The monetary policy will have to willy-nilly follow the fiscal compulsions going forward, Subbarao said, pointing out the difficulty in returning to the process of fiscal consolidation.

On the occasion, Rangarajan said regulating the financial markets will be the most important thing in the days to come. He also highlighted the need to strike a fine balance between financial innovation and financial regulation. Projecting India to grow at 6-6.5% in 2009-10, he said the interest rates may go up slightly towards the end of the year.

New tax code to cut SEZs’ I-T sops

New tax code to cut SEZs’ I-T sops
The Financial Express, August 18, 2009, Page 3

Rituparna Bhuyan, New Delhi

Factories, Business Processing Units and software development firms inside Special Economic Zones (SEZ) will lose all income tax benefits—the most crucial incentive for the tax free industrial enclaves— if the direct taxes code replaces the Income Tax Act of 1961 without any change. The proposed norms also talk of tightening tax incentives to developers of SEZs, which are notified after the new income tax law is operationalised.

The underlying principle behind not allowing income tax incentives to the SEZs is that new code discourages profit-based exemptions of any kind. Instead, it calls for linking tax benefits to investment related expenditure in nine activities, including development of SEZs.

The SEZ Act of 2005 doles out a slew of direct and indirect tax exemptions for units and developers of SEZs. These exemptions are implemented through various provisions in the existing Income Tax Act.

The code does not mention anything about units inside SEZs, but has a separate chapter on proposed guidelines that specify how developers of the tax-free industrial enclaves will be treated in the new tax regime. If the provisions of the code get translated in to the new Income Tax Act, it is clear that SEZ units set up after the new law is implemented, will not enjoy any direct tax exemptions.

At the moment, there are 2,279 functional units inside the zones, out of which only 478 have been set up after February 2006, when the SEZ Act became operational. There are 98 operational SEZs while the board of approval under the commerce ministry has formally approved over 570. As many as 325 SEZs are notified.

“It seems, SEZ units have been completely ignored by the code, while there are some provisions for developers of the zones,” said Abhishek Goenka, partner, BMR advisors.

The new code could become the new point of friction between the finance and commerce ministries. “The Direct Taxes Code will replace the Income Tax Act 1961 and its provisions including those for exemptions. Those exemptions given in the I-T Act will be grandfathered but no new ones will be given out when the Code comes into force from April 1, 2011,” said a finance ministry official in the condition of anonymity.

Officials in the commerce ministry insist that benefits prescribed by the SEZ Act of 2005 cannot be diluted. “We are studying the provisions. SEZ related benefits cannot be taken back under any circumstances,” said a commerce ministry official, who wished not to be identified.

Experts also warn that the new code does not say anything specifically on how existing functional units of SEZs will be treated when the new Income Tax Act is enforced. This is because discussion paper mentions that that the provisions of the Income Tax Act of 1961 will be grandfathered. A grandfather clause is like an exception, which allows old rules to continue in cases for which it is applicable in a situation where the new rule is applicable to future conditions.

“It is not clear if the existing SEZ units will enjoy tax exemptions through the grandfather clause as it is not specifically mentioned in the discussion paper. It only mentions provisions related to SEZ developers.,” said Hyderabad-based SEZ expert Vikram Doshi. “Why will a unit come to an SEZ if there are no income tax benefits,” he added. Moreover, the new code could lead to imposition of Minimum Alternative Tax or Dividend Distribution Tax on SEZ developers, experts said.

This is because the new code proposes to rejig the nature of tax holiday for developers. It says that a SEZ developer will not have to pay any tax, until he recovers his capital and revenue expenditure (which excludes cost of land).

“The developers can enjoy the incentive till it recovers all its investments and expenditure made in the developing the SEZ. This would promote greater investments in the SEZ as the developers would be allowed to set off the entire capital expenditure, without any cap on the period,” said Hitender Mehta, of Vaish Associates.

According to the discussion paper, if profit is made the basis for exemption, there is no incentive for investment and up gradation during the period of the tax holiday. Terming such incentives as regressive, the paper states it leads to laundering and are a cause of significant loss of revenue and encourage rent-seeking behavior.

Significantly, the SEZ Act links the tax benefits to prevalent tax laws of the country. “The provisions of the I-T Act of 1961, as in force for the time being, to apply to, or relation to, the developer or entrepreneur for carrying on the authorised operations in a SEZ or a unit subject to the modifications specified in the second schedule,” says section 27 of the SEZ Act of 2005. The SEZ Act allows SEZ units to enjoy direct tax exemption for 15 year period. For the first five years, 100% export linked profit is exempted, while for the next five years, it is 50%. In the remaining five years, SEZ units can claim exemption on 50% of the reinvested export profits. For developers, exemption of income tax on income from SEZ development is allowed for 10 continuous years, in a block of 15 years. Thus, a developer can start claiming exemption, the moment he starts getting profits, which is usually about three to five years after the zone becomes operational.

Truant monsoon dampens cement prices

Truant monsoon dampens cement prices
The Hindu Business Line, August 18, 2009, Page 2

Rs 8-10 fall in prices of 50-kg bags.
--------------------------------------------------------------------------------

“The poor monsoon has also led to erratic power supply in Rajasthan where many cement companies are located. Though there is captive power back-up, we cannot completely depend on it.”
--------------------------------------------------------------------------------

Suresh P. Iyengar, Mumbai

The weak monsoon has taken its toll on cement prices which are down Rs 8-10 a 50-kg bag in the southern market and by Rs 3-5 in the western and eastern regions.

Prices were more or less stable in the North on the back of good demand for projects relating to the Commonwealth Games and Metro. “We were not able to raise prices in the northern region despite good demand because of cheap imports from Pakistan,” said an executive of a Delhi-based cement company.

The average cement price across the country is now Rs 265 a bag.

Mr Vinod Juneja, Managing Director, Binani Cement, said the prices in the North would also start falling if the rains continued to play truant. “The poor monsoon has also led to erratic power supply in Rajasthan where many cement companies are located. Though there is captive power back-up, we cannot completely depend on it,” he added.

Mr A. K. Saroagi, Chief Financial Officer, JK Cement, said the progress of the monsoon in the next couple of weeks would play a key role in cement demand.

Additional capacity

Besides the dismal rains, the additional capacity of nearly 50 million tonnes expected to be commissioned by the end of this fiscal will exert pressure on prices.

The Aditya Birla Group companies, UltraTech Cement and Grasim Industries, together commissioned 4.1 million tonnes in the first quarter of this fiscal.

Ambuja Cement has targeted completion of its 4.4 million-tonne clinkerisation project at Chhattisgarh and Himachal Pradesh by September-end.

ACC is planning expansion of seven million tonnes at its plants in Bargarh in Orissa, Wadi in Karnataka, and Chanda in Maharashtra.

Most cement company shares were down on Monday. ACC fell five per cent to Rs 790 while UltraTech, Shree Cement and JK Cement lost three per cent each to Rs 720, Rs 1,500 and Rs 111. Grasim Industries and India Cements shed two per cent each to Rs 2,582 and Rs 131 respectively.

Purvankara revisits Colombo after end to war

Purvankara revisits Colombo after end to war
The Economic Times, August 18, 2009, Page 7

Shruti Sabharwal & J Padmapriya BANGALORE

WITH the civil war now over in island nation Sri Lanka, Bangalore-based developer Puravankara Projects — which picked up some land parcels three years ago in Colombo for a song — is ready to try its fortunes in the neighbouring country that is now presenting a huge demand for property.

In its maiden move into the global realty market, Puravankara plans to launch a high-end villa project in its 26-acre parcel on Colombo’s air-port road and a 4 lakh sq ft serviced apartment/office complex in the downtown area. It is in the process of getting sanctions from the planning agencies in Colombo.In an interview with ET, a rare media interaction in recent years, Puravankara chairman Ravi Puravankara said, “with the civil war over, we are seeing huge demand for affordable housing in Colombo. We have already initated the land acquisition process.”

A realty consultant, who has recently visited the Colombo market, says, “the fear factor has reduced, tourism is picking up and the in-vestment market is starting to look up. In the residential space, Co-lombo is still an independent home market. There could be a market for apartments and good quality office space.”

Puravankara’s move abroad comes at a time when the home market (Bangalore) is witnessing a very slow recovery in offtake after at least three quarters of depressed buying sentiment.

The Bangalore-based developer recently launched its sub-Rs 20 lakh affordable housing projects, under its subsidiary Provident Housing, in Chennai and Bangalore after nearly a twoyear-long hiatus. Developers have been shelving their plans after the global financial meltdown coupled with job loss fears among the target buyer community in IT hub Bangalore dulled the appetite for homes carrying a higher ticket price.

Puravankara claims that Provident’s Chennai project attracted 700 bookings in the first month while nearly 400 buyers booked their apartments in the first week of launch of its Bangalore project. The company is on a land-buying spree targeting 37 acres in Coimbatore 110 acres in Hyderabad, 50 acres in Hosur Road, 28 acres in Kochi and 61 acres in Mysore Road across city fringes.