Tuesday, December 29, 2009
India, Japan sign agreements on Rs 360-kcr DMIC project
India, Japan sign agreements on Rs 360-kcr DMIC project
The Economic Times, December 29, 2009, Page 7
Our Bureau NEW DELHI
INDIA and Japan signed two agreements on Monday for implementing the ambitious Rs 3,60,000-crore Delhi-Mumbai Industrial Corridor (DMIC) project that seeks to create integrated investment regions and industrial areas across six states. The agreements include collaborating in the development of eco cities, that is cities that are environmentally and ecologically sustainable, along the corridor and setting up of a project development fund to undertake activities like master planning and feasibility studies, preparing project reports and obtaining approvals and bid process management for projects.
“DMIC is an important project and Japan has been an important partner in India’s development journey,” commerce and industry minister Anand Sharma said after the agreements were signed.
The Delhi-Mumbai Industrial Corridor Development Cooperation signed a memorandum of understanding with Jetro (in cooperation with Japan Bank for International Cooperation) for facilitating collaboration between Japanese and Indian companies from environment-related sectors and providing expertise in development and promotion of DMIC projects, including model eco cities or smart community initiatives at various locations in the DMIC region.
The DMIC project development fund will be set up with equal contribution from the governments of India and Japan. India has approved a grant of Rs 330 crore (approximately $75 million) as the country’s contribution. The Japanese component of $75 million is being provided in the form of untied loan from JBIC.
Bidding for the early-bird projects — around 24 identified by five states — is likely to begin in four-five month, DMICDC CEO and MD Amitabh Kant said. Most of the infrastructure work connected to the industrial corridor will be executed in PPP format. The DMIC, which is conceived to be developed as a global manufacturing and trading hub with emphasis on expanding the manufacturing and services base, will pass through Delhi, Rajasthan, UP and Maharashtra, Haryana and Gujarat.
The Economic Times, December 29, 2009, Page 7
Our Bureau NEW DELHI
INDIA and Japan signed two agreements on Monday for implementing the ambitious Rs 3,60,000-crore Delhi-Mumbai Industrial Corridor (DMIC) project that seeks to create integrated investment regions and industrial areas across six states. The agreements include collaborating in the development of eco cities, that is cities that are environmentally and ecologically sustainable, along the corridor and setting up of a project development fund to undertake activities like master planning and feasibility studies, preparing project reports and obtaining approvals and bid process management for projects.
“DMIC is an important project and Japan has been an important partner in India’s development journey,” commerce and industry minister Anand Sharma said after the agreements were signed.
The Delhi-Mumbai Industrial Corridor Development Cooperation signed a memorandum of understanding with Jetro (in cooperation with Japan Bank for International Cooperation) for facilitating collaboration between Japanese and Indian companies from environment-related sectors and providing expertise in development and promotion of DMIC projects, including model eco cities or smart community initiatives at various locations in the DMIC region.
The DMIC project development fund will be set up with equal contribution from the governments of India and Japan. India has approved a grant of Rs 330 crore (approximately $75 million) as the country’s contribution. The Japanese component of $75 million is being provided in the form of untied loan from JBIC.
Bidding for the early-bird projects — around 24 identified by five states — is likely to begin in four-five month, DMICDC CEO and MD Amitabh Kant said. Most of the infrastructure work connected to the industrial corridor will be executed in PPP format. The DMIC, which is conceived to be developed as a global manufacturing and trading hub with emphasis on expanding the manufacturing and services base, will pass through Delhi, Rajasthan, UP and Maharashtra, Haryana and Gujarat.
Delhi-Mumbai industrial corridor gets Japan’s push
Delhi-Mumbai industrial corridor gets Japan’s push
Hindustan Times, HT Business, December 29, 2009, Page 23
The ambitious Delhi-Mumbai Industrial Corridor (DMIC) has received major boost with India and Japan inking an agreement to set up a project development fund.
The initial size of the Fund will be Rs 1,000 Crore (about $212 milion). Both the Japanese and Indian governments contribute equally.
The fund will initially finance the preparation of overall development and feasibility studies for the 1483 km DMIC.
The corridor would include six mega investment regions of 200 square kilometers each and will run through seven states – Delhi, Uttar Pradesh, Haryana, Rajasthan, Gujarat, Maharashtra and Madhya Pradesh.
Each investment region would have a combination of production units, public utilities, logistics, environmental protection facilities, residential areas, social infrastructure and administrative services.
The first phase of the project is likely to be completed by 2012 with an estimated $90 billion ( Rs 4,23,000 crore) to be invested to develop infrastructure in the investment regions.
An official said the government would invite bids soon.
“This is the right time to invite bids. The sentiment is positive domestically as well as internationally,” said the official.
“The project is almost mapped on paper. Perspective plans are being firmed up.”
The six specifically delineated investment regions planned for manufacturing facilities for domestic and export led production along with associated services and infrastructure.
The minimum processing area in these regions will be about 40 per cent of the total designated area, which may or may not be contiguous.
In addition to the investment regions, the DMIC will also have six industrial areas of 100 square km each. A steering authority, headed by the Finance Minister, is overseeing the project.
A corporate entity, Delhi Mumbai Industrial Corridor Development Corporation has been set up to undertake planning of the project, development of its various components, coordinating with all stakeholders, monitoring of implementation and raising all finances.
The corridor will have a 4,000 mw power plant, three greenfield ports and six airports. It will also link 10 cities with population of more than 1 million. It will built along a dedicated rail freight corridor, and once commissioned, will reduce the Delhi-Mumbai transit time from 60 hours to 36 hours.
The corridor, spread across 2,700 km with an additional 5,000 km of feeder lines connecting Mumbai to West Bengal.
Hindustan Times, HT Business, December 29, 2009, Page 23
The ambitious Delhi-Mumbai Industrial Corridor (DMIC) has received major boost with India and Japan inking an agreement to set up a project development fund.
The initial size of the Fund will be Rs 1,000 Crore (about $212 milion). Both the Japanese and Indian governments contribute equally.
The fund will initially finance the preparation of overall development and feasibility studies for the 1483 km DMIC.
The corridor would include six mega investment regions of 200 square kilometers each and will run through seven states – Delhi, Uttar Pradesh, Haryana, Rajasthan, Gujarat, Maharashtra and Madhya Pradesh.
Each investment region would have a combination of production units, public utilities, logistics, environmental protection facilities, residential areas, social infrastructure and administrative services.
The first phase of the project is likely to be completed by 2012 with an estimated $90 billion ( Rs 4,23,000 crore) to be invested to develop infrastructure in the investment regions.
An official said the government would invite bids soon.
“This is the right time to invite bids. The sentiment is positive domestically as well as internationally,” said the official.
“The project is almost mapped on paper. Perspective plans are being firmed up.”
The six specifically delineated investment regions planned for manufacturing facilities for domestic and export led production along with associated services and infrastructure.
The minimum processing area in these regions will be about 40 per cent of the total designated area, which may or may not be contiguous.
In addition to the investment regions, the DMIC will also have six industrial areas of 100 square km each. A steering authority, headed by the Finance Minister, is overseeing the project.
A corporate entity, Delhi Mumbai Industrial Corridor Development Corporation has been set up to undertake planning of the project, development of its various components, coordinating with all stakeholders, monitoring of implementation and raising all finances.
The corridor will have a 4,000 mw power plant, three greenfield ports and six airports. It will also link 10 cities with population of more than 1 million. It will built along a dedicated rail freight corridor, and once commissioned, will reduce the Delhi-Mumbai transit time from 60 hours to 36 hours.
The corridor, spread across 2,700 km with an additional 5,000 km of feeder lines connecting Mumbai to West Bengal.
US to grow 3.5% next year, its best since ’04
US to grow 3.5% next year, its best since ’04
The Economic Times, December 29, 2009, Page 19
Timothy R Homan & Bob Willis WASHINGTON
THE US economy next year will turn in its best performance since 2004, as spending perks up and companies increase investment and hiring, said Dean Maki, the most-accurate forecaster in a Bloomberg News survey.
The world’s largest economy will expand 3.5% in 2010, according to Maki, the chief US economist at Barclays Capital in New York. The rebound in stocks and rising incomes will prompt Americans to do what they do best — consume, said Maki, a former economist at the Federal Reserve. Faced with dwindling inventories and growing demand, companies will soon become confident the expansion will be sustained, he said. Household spending “will pick up steam as we move into the second half of 2010,” said Maki. “The overall picture for 2010 will be an economy growing rapidly enough to bring down the unemployment rate” to an average of 9.6%.
Maki, who specialised in researching household finances at the Fed from 1995-2000, said the economic recovery thiss time will be similar to past rebounds. Maki holds a doctorate in economics from Stanford University near Palo Alto, California. —Bloomberg
Punjab to set up IT park at Rajpura
Punjab to set up IT park at Rajpura
The Financial Express, December 29, 2009, Page 11
fe Bureau, Chandigarh
In a major decision, the Punjab government has decided to establish a self-contained integrated Information Technology and knowledge industry park spread over an area of 1,276 acre at Rajpura. A decision to this effect was taken at a high level meeting chaired by Punjab chief minister, Parkash Singh Badal here on Monday.
Badal gave in-principle approval for acquisition of common land in contiguity of six villages in Sehra, Pabra, Sehri, Takhtu Majra, Akri and Akar in one go for the setting up of the prestigious industrial park for IT and IT enabled services industry.
It was informed at the meeting that the upcoming industrial park would house the companies operating in business process outsourcing (BPO), knowledge process outsourcing (KPO), legal process outsourcing and engineering process outsourcing. Besides software companies, software testing companies etc, hardware manufacturing companies, multimedia, graphic, animation and gaming industry, eAdvertising, eMarketing and ePublishing houses, consultancy firms and education & training institutions etc would also come up in the IT park.
The chief minister asked the Punjab Information and Communication Technology Corporation Limited which was the nodal agency to implement this project to engage the services of some renowned international consultant for designing and developing the project and suggested to invite a global tender for seeking expression of interest from the interested consultants.
Briefing the chief minister about the prospects of the IT park, principal secretary industries and commerce, SS Channy informed the project would be developed in a phased manner with residential and social infrastructure facilities such as healthcare, recreation, health clubs and hotels.
He said that efficient and reliable power, water, waste management and technology facilities would be provided to the prospective entrepreneurs. A comprehensive network of logistic system encompassing road, rail and air linkages would be ensured besides adequate focus on security and disaster management systems.
It had also been proposed to install internet tower with satellite connectivity for direct software export and communication and WiMax technology for high speed wireless connectivity in SEZ. Exhibition centers including IT-BPO and international trade facilitation centre would also be set up there.
The chief secretary, SC Agrawal informed the CM that this project would involve a huge investment and be developed through a special purpose vehicle to ensure its expeditious implementation as discussed in the IT infrastructure task force under his chairmanship.
The Financial Express, December 29, 2009, Page 11
fe Bureau, Chandigarh
In a major decision, the Punjab government has decided to establish a self-contained integrated Information Technology and knowledge industry park spread over an area of 1,276 acre at Rajpura. A decision to this effect was taken at a high level meeting chaired by Punjab chief minister, Parkash Singh Badal here on Monday.
Badal gave in-principle approval for acquisition of common land in contiguity of six villages in Sehra, Pabra, Sehri, Takhtu Majra, Akri and Akar in one go for the setting up of the prestigious industrial park for IT and IT enabled services industry.
It was informed at the meeting that the upcoming industrial park would house the companies operating in business process outsourcing (BPO), knowledge process outsourcing (KPO), legal process outsourcing and engineering process outsourcing. Besides software companies, software testing companies etc, hardware manufacturing companies, multimedia, graphic, animation and gaming industry, eAdvertising, eMarketing and ePublishing houses, consultancy firms and education & training institutions etc would also come up in the IT park.
The chief minister asked the Punjab Information and Communication Technology Corporation Limited which was the nodal agency to implement this project to engage the services of some renowned international consultant for designing and developing the project and suggested to invite a global tender for seeking expression of interest from the interested consultants.
Briefing the chief minister about the prospects of the IT park, principal secretary industries and commerce, SS Channy informed the project would be developed in a phased manner with residential and social infrastructure facilities such as healthcare, recreation, health clubs and hotels.
He said that efficient and reliable power, water, waste management and technology facilities would be provided to the prospective entrepreneurs. A comprehensive network of logistic system encompassing road, rail and air linkages would be ensured besides adequate focus on security and disaster management systems.
It had also been proposed to install internet tower with satellite connectivity for direct software export and communication and WiMax technology for high speed wireless connectivity in SEZ. Exhibition centers including IT-BPO and international trade facilitation centre would also be set up there.
The chief secretary, SC Agrawal informed the CM that this project would involve a huge investment and be developed through a special purpose vehicle to ensure its expeditious implementation as discussed in the IT infrastructure task force under his chairmanship.
FII fund flows set to top 2007 levels
FII fund flows set to top 2007 levels
Mint, December 29, 2009, Page 1
$17.13 billion of FII funds have already been pumped into India till 24 DecAnirudh LaskarMumbai: The year 2009 began with a whimper but has ended with a bang, at least as far as portfolio investments by foreign institutional investors, or FIIs, into the Indian stock market go.
Foreign money moves markets in India, and the huge FII inflows after March inevitably helped equity prices bounce back from their panic-stricken lows. FIIs have already pumped in $17.13 billion (around Rs80,000 crore) till 24 December and they are on course to surpass the levels seen in 2007, at the height of the bull market. This gush of money in 2009 comes after FIIs sucked out $12.18 billion in 2008 by selling Indian shares, the most in 15 years, in the aftermath of the global financial meltdown after the collapse of investment bank Lehman Brothers Holdings Inc. FIIs continued to head for exits in January and February as well.
Market experts expect strong inflows to continue in 2010, as the Indian economy outperforms most other national economies. The huge capital needs of Indian companies as they try to repair balance sheets and fund capacity additions with money raised from share sales are also expected to act as magnets for foreign equity investors.
“India has recovered faster than other emerging markets. As long as the Western economies do not call for an exit from the stimuli packages and the pressure on the local currency is kept under control, there will not be any significant change in FII inflows during 2010,” said Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership Llp, a global fund registered as an FII in India.
FIIs have invested at least $72.39 billion in India since 1993, when the government opened the doors to foreign portfolio capital.
However, foreign investors may be a bit watchful in the first quarter of 2010 as they figure out how soon the government and the Reserve Bank of India will withdraw the accommodative policies put in place to keep growth on track during the global economic collapse at the end of 2008. A growth revival and renewed inflation make tighter monetary and fiscal policies very likely in 2010.
According to a report by Deutsche Bank AG, India Outlook 2010, “…Wholesale Price Index inflation could readily exceed 7% by the second quarter. So far the central bank has refrained from tightening monetary policy as the economic recovery has been at a nascent stage, but we expect liquidity tightening measures from January onward and rate hikes from April onward.”
A report by Citigroup Global Markets cautions against two polar risks. “A bout of risk aversion triggered by negative global events could lead to a fast reversal of such flows and is the key risk to our positive stance... Conversely, a strong positive catalyst could attract large inflows, which can trigger a liquidity-driven rally and take markets into an overvaluation zone.”
Even as the existing FIIs stepped up investments into India, new players came to sniff out opportunities in 2009, which saw 110 new FII registrations and 432 new FII sub-accounts.
“Money will chase growth. The FIIs are confident about domestic growth and the abundant liquidity for money market instruments. Also, a lot of this FII money will be absorbed by IPOs and QIPs during the coming year,” added Bhat. IPOs are initial public offers and QIPs are qualified institutional placements.
The good times may roll on, but there is an important difference in the way FII money has come into India in 2007 and 2009—a difference that may offer some clues about 2010. While a majority of FII inflows came via participatory notes, or PNs, till 2007, fund managers have opted for the sub-account route in 2009.
Till 2007, FIIs were mostly using the PNs, derivatives used by foreign funds not registered in India to trade local shares while the actual investors remained anonymous. Capital market regulator Securities and Exchange Board of India (Sebi) had banned PNs in October 2007, amid concerns that volatile foreign exchange inflows were fuelling an asset bubble.
A year later, the credit freeze forced the regulator to lift the ban as part of its efforts to keep capital within India.
But foreign investors now prefer to park their funds through the sub-account route as there is an uncertainty whether Sebi will continue to allow FIIs to issue PNs or not.
A sub-account, an actively managed investment book, is run in the name of registered FIIs, but managed by separate fund managers.
From the peak of 55.7% in June 2007, PNs now account for 16.5% of total assets managed by FIIs in October 2009. This proportion has remained almost constant since January, despite the surge in FII inflows.
Meanwhile, according to a report by Citigroup Global Markets, a combination of external factors such as global liquidity, a weak dollar and higher risk appetite coupled with the domestic story of higher growth and interest rates sets the environment for a continuation of dollar inflows in 2010.
Teaser rates a marketing gimmick
Teaser rates a marketing gimmick
Mint, December 29, 2009, Page 1
The confidence in the real estate sector is not yet back, people feel that prices will keep going up
Tamal Bandyopadhyay
Mumbai: Deepak Parekh, chairman of India’s oldest and biggest mortgage firm Housing Development Finance Corp. Ltd, or HDFC, does not see demand picking up for commercial real estate in the near future, with the action continuing to be in the residential space where there is a huge shortage. The prices of residential property in some parts of the country have almost returned to the 2007 levels after a slump and may go up further, depending on the demand-supply gap in a particular market, but cannot rise hugely from the current level as there will be resistance from buyers. “The builders will try (to raise prices) but...they won’t get the buyers if they do it,” Parekh said.
Consumer first: HDFC’s Deepak Parekh says India should have a regulator for the real estate sector. Abhijit Bhatlekar/MintAccording to him, consumer confidence has not yet returned. One way of restoring this could be the creation of a real estate regulator.
In an interview on Monday, Parekh, 65, who will step down from the executive chairman’s post later this week, said India should have a regulator for the real estate sector who can classify developers, evaluate and grade them. He also said a real estate regulator would be concerned about home loan products in which a borrower pays 8% or 8.25% for the first two years and the rates are revised subsequently. If interest rates go up substantially after two years, it will create problems for individual home-owners. “To some extent, we are playing with fire,” he said. Edited excerpts:
The euphoria of 2007 seems to be coming back to the real estate sector. Do you see any bubble being formed?
I don’t see (that). I think the foreign investors have learnt a lesson. Today there is universal acceptability, and even developers agree that the demand for IT (information technology), commercial real estate, retail and shopping malls, SEZs (special economic zones) and industrial parks is a thing of the past.
At HDFC, we have taken a decision that we will not fund any developer who is building any of these because there is a huge amount of surplus space.
I know readymade, state-of the-art buildings across cities in India (that) have no tenants. The new owner of Satyam Computer Services Ltd (now branded Mahindra Satyam) has moved out of Bangalore and Chennai and gone to Hyderabad because there is a lot of surplus space (in Hyderabad). So all the space that Satyam was occupying in Bangalore and Chennai—a few lakh sq. ft—is now vacant.
At the national level, in Gurgaon, Mumbai...everywhere, offices are ready but vacant and unleased.
What about residential property?
The action is in this space. There is a huge shortage. In India, every family wants to own a house and every family wants to upgrade over a period of time. There is huge demand in this segment and, according to me, this will continue for the next 10 years.
The prices will continue to increase, depending on demand and supply. If more land is given in the city and more developers start constructing, then prices won’t go up.
Can there be a huge price rise?
There will be resistance. The builders will try, but if they want to sell their stock, they should not go for a hike as they won’t get the buyers.
Why aren’t the foreign investors coming in large numbers now?
Three years ago, the Reserve Bank of India (RBI), knowing well that a bubble was being created, prohibited banks and housing finance companies to lend for land.
We could not fund any land. The guidelines were very clear that we had to get the commencement certificate before we could lend money. The commencement certificate is the last document a developer gets before he starts digging. At that stage, real estate was hot. Foreigners had no exposure in real estate in India and they showed huge, huge amount of interest, as if there was no tomorrow.
My estimate is at that stage, around $20-25 billion (Rs93,600 crore-Rs1.17 trillion) came into the country through private equity, QIPs (qualified institutional placements), AIM (Alternative Investment Market, an offshoot of the London Stock Exchange that allows smaller companies to float shares with a more flexible regulatory system) listing, foreign currency convertible bonds, structured finance, debt in the garb of equity—whichever way you look at it.
The money has come for land (buying) and land prices have come down. The foreign investors have learnt the hard way. They have lost money. I would say that those who funded land have lost nothing less than 30%.
But even now some of the real estate firms are raising money from QIPs.
Very few of them. Look at Godrej (Properties Ltd). One of the best names in India. Every one expected their equity issue to be 30 times subscribed, but it has been subscribed only four times. So, there is hesitancy among investors. I was surprised; I thought it would be minimum 10 times subscribed.
There is caution; people are concerned about real estate. The confidence is not yet back and people feel that prices will keep going up.
How do you bring back the confidence? Will the creation of a real estate regulator help?
I have been always advocating that we need a regulator in real estate. It’s the largest purchase any family makes. You try to buy a house in any part of India and see the problems and the sleepless nights you would need to spend.
It’s a very complex subject—you can lose money very easily; you can get gypped very easily; your money can get stuck for a long period as the developers may take two, three, four years extra to complete the project. Then, there are other issues: the specifications, quality may differ. All kinds of things can happen.
Why can’t we have a regulator who classifies developers, evaluates them, grades them? We need to bring in some code of ethics.
You advise the government on many policy issues. Why isn’t this happening?
It’s a state subject. It’s very difficult to introduce something at the Centre and then get it to filter down to the state level. We need to do something on the lines of the power sector, which is a state subject. The Central government recommended the splitting of transmission, generation and distribution of power. Many states have complied and many haven’t.
More and more states are complying with it, but it takes a long time. Most of the states now have got regulatory body for the sector at the state level—the state electricity regulatory commission. The tariff cannot be increased unless the regulator agrees.
Low-cost housing is the buzzword now.
Affordable housing is the buzzword. We need affordable housing in India because the demand is in that category. In Mumbai, the demand is not for flats that cost Rs10 crore but those that cost Rs25-30 lakh.
Our land policies are wrong; They have not been changed. Land is the biggest hindrance—it’s the largest component when it comes to the cost of a house. The land laws will have to be amended. Either you allow the developers to go for higher FSI (floor space index, the ratio of total floor space to plot size). You have to make the cost of land more affordable.
Many home loan lenders are now offering loans cheap for the first two years, enticing borrowers. But if the rates go up substantially after two years, won’t there be a problem as many borrowers may not have the capacity to service loans at higher rates?
It’s not a very healthy way of lending. It can create problem, as you said, in future, particularly if the rates shoot up.
Today what we are saying is, if it’s 8% or 8.25% for the first two years, the rate will be 9% afterwards and so the gap is very little. Suppose interest rates in India shoot up in the next three years, then what will happen? These are all floating rate loans and fixed only for first two years. So, 8% interest will become 12% or even more. Then, the gap will be too much and it’s a problem for the individual home-owners.
To some extent, we are playing with fire, but it’s a marketing gimmick. It’s a tool—I always say it’s a teaser rate—to get a customer attracted towards you. Financial innovation doesn’t take time; if one does it, everyone copies. It can be done in 24 hours.
Now most banks have this product.
If a regulator were there, he would have been concerned about it.
You see seeds of a problem in such loans?
Yes, if interest rates go up in the future.
But aren’t you also offering this?
We are appraising these cases today as if the borrowers need to pay more than 9% and not 8.25%. Because that’s where the rates will be after two years. A borrower’s affordability or repaying capacity is gauged today at a higher interest rate. We are building that buffer today, but if 9% or so becomes 12.5%, then there is no buffer.
Your plan has all along been to position HDFC as the GE Capital of India. Any plan to merge the bank with the parent or any different structure for the group?
We have taken cognizance of whatever opportunities existed in the financial sector in the last few years. Rather than remaining a purely housing finance company, we expanded into practically all areas of finance—banking, mortgages, asset management, insurance, property fund, stock-broking… everywhere. We are the only conglomerate in India where the housing finance company is the holding company of the group. In most cases, the bank is the holding company.
RBI was going to come out with some norms for holding companies, but that has been delayed. When it comes out with the norms, we will explore opportunities.
Today we feel that the two large firms of the group, the parent and the bank, are both growing well. Both have good top-line and bottom-line growth and very low non-performing assets—probably among the lowest in the industry. We don’t have excessive stuff and there is no problem whatsoever. At this stage, I think, it’s better for us to continue the way we have been growing in the past.
I think consolidation has to happen in Indian banking sector. We have a large number of small banks and we need a small number of large banks. We need to see how it impacts us. I am still around as chairman.
You can go for a reverse merger and make the bank the holding company.
We can do any type of things but we would prefer to wait and see what the regulator has in mind. I am simply making a point that we do not see the need for it.
When do you plan to take your insurance firms and the asset management company to market?
Sometime in early 2011.
How critical is banking consolidation?
The global financial crisis was caused by banks. We should not be in a desperate hurry to reform the banking sector.
We have been reasonably unscathed by the subprime crisis and credit has to be given to the regulatory bodies for their conservative approach all these years, which has helped all of us.
There is no urgent need for consolidation. In its own time, RBI will come out with something. We don’t need to be in a hurry.
Should foreign banks be allowed a larger play in India?
I feel foreign banks play an important role. We are part of the global community. If we follow the reciprocity method—if I give you one branch, you must give me one branch—I don’t see enough Indian banks wanting to open a large number of branches overseas.
It’s not easy to open 100 branches in US and make money. You may use it as an argument but which Indian bank has that kind of reserves, capital, manpower to go and open many branches in the US, even if they get permission?
Don’t forget that some of the foreign banks have been in India for more than 100 years. They have been playing an important role in India and I don’t see any harm in allowing them to expand their role in India in a proper format.
Now that you will guide HDFC as a non-executive chairman, is there anything you plan to do differently?
No. I wish I can detach myself a little bit. It’s difficult when you’re in the driver’s seat for so many years.
Anything different on the personal front?
I want to take it easy for a few months. I have a large amount of paper work which I would need to do in the office. I have stored these papers all these years. I will need to go through all my old files and destroy some of them. It will take me a few months to do all that. I have not yet made up my mind about life after that.
Anything else you would like to mention that I should have asked you?
No, bahut ho gaya.
Mint, December 29, 2009, Page 1
The confidence in the real estate sector is not yet back, people feel that prices will keep going up
Tamal Bandyopadhyay
Mumbai: Deepak Parekh, chairman of India’s oldest and biggest mortgage firm Housing Development Finance Corp. Ltd, or HDFC, does not see demand picking up for commercial real estate in the near future, with the action continuing to be in the residential space where there is a huge shortage. The prices of residential property in some parts of the country have almost returned to the 2007 levels after a slump and may go up further, depending on the demand-supply gap in a particular market, but cannot rise hugely from the current level as there will be resistance from buyers. “The builders will try (to raise prices) but...they won’t get the buyers if they do it,” Parekh said.
Consumer first: HDFC’s Deepak Parekh says India should have a regulator for the real estate sector. Abhijit Bhatlekar/MintAccording to him, consumer confidence has not yet returned. One way of restoring this could be the creation of a real estate regulator.
In an interview on Monday, Parekh, 65, who will step down from the executive chairman’s post later this week, said India should have a regulator for the real estate sector who can classify developers, evaluate and grade them. He also said a real estate regulator would be concerned about home loan products in which a borrower pays 8% or 8.25% for the first two years and the rates are revised subsequently. If interest rates go up substantially after two years, it will create problems for individual home-owners. “To some extent, we are playing with fire,” he said. Edited excerpts:
The euphoria of 2007 seems to be coming back to the real estate sector. Do you see any bubble being formed?
I don’t see (that). I think the foreign investors have learnt a lesson. Today there is universal acceptability, and even developers agree that the demand for IT (information technology), commercial real estate, retail and shopping malls, SEZs (special economic zones) and industrial parks is a thing of the past.
At HDFC, we have taken a decision that we will not fund any developer who is building any of these because there is a huge amount of surplus space.
I know readymade, state-of the-art buildings across cities in India (that) have no tenants. The new owner of Satyam Computer Services Ltd (now branded Mahindra Satyam) has moved out of Bangalore and Chennai and gone to Hyderabad because there is a lot of surplus space (in Hyderabad). So all the space that Satyam was occupying in Bangalore and Chennai—a few lakh sq. ft—is now vacant.
At the national level, in Gurgaon, Mumbai...everywhere, offices are ready but vacant and unleased.
What about residential property?
The action is in this space. There is a huge shortage. In India, every family wants to own a house and every family wants to upgrade over a period of time. There is huge demand in this segment and, according to me, this will continue for the next 10 years.
The prices will continue to increase, depending on demand and supply. If more land is given in the city and more developers start constructing, then prices won’t go up.
Can there be a huge price rise?
There will be resistance. The builders will try, but if they want to sell their stock, they should not go for a hike as they won’t get the buyers.
Why aren’t the foreign investors coming in large numbers now?
Three years ago, the Reserve Bank of India (RBI), knowing well that a bubble was being created, prohibited banks and housing finance companies to lend for land.
We could not fund any land. The guidelines were very clear that we had to get the commencement certificate before we could lend money. The commencement certificate is the last document a developer gets before he starts digging. At that stage, real estate was hot. Foreigners had no exposure in real estate in India and they showed huge, huge amount of interest, as if there was no tomorrow.
My estimate is at that stage, around $20-25 billion (Rs93,600 crore-Rs1.17 trillion) came into the country through private equity, QIPs (qualified institutional placements), AIM (Alternative Investment Market, an offshoot of the London Stock Exchange that allows smaller companies to float shares with a more flexible regulatory system) listing, foreign currency convertible bonds, structured finance, debt in the garb of equity—whichever way you look at it.
The money has come for land (buying) and land prices have come down. The foreign investors have learnt the hard way. They have lost money. I would say that those who funded land have lost nothing less than 30%.
But even now some of the real estate firms are raising money from QIPs.
Very few of them. Look at Godrej (Properties Ltd). One of the best names in India. Every one expected their equity issue to be 30 times subscribed, but it has been subscribed only four times. So, there is hesitancy among investors. I was surprised; I thought it would be minimum 10 times subscribed.
There is caution; people are concerned about real estate. The confidence is not yet back and people feel that prices will keep going up.
How do you bring back the confidence? Will the creation of a real estate regulator help?
I have been always advocating that we need a regulator in real estate. It’s the largest purchase any family makes. You try to buy a house in any part of India and see the problems and the sleepless nights you would need to spend.
It’s a very complex subject—you can lose money very easily; you can get gypped very easily; your money can get stuck for a long period as the developers may take two, three, four years extra to complete the project. Then, there are other issues: the specifications, quality may differ. All kinds of things can happen.
Why can’t we have a regulator who classifies developers, evaluates them, grades them? We need to bring in some code of ethics.
You advise the government on many policy issues. Why isn’t this happening?
It’s a state subject. It’s very difficult to introduce something at the Centre and then get it to filter down to the state level. We need to do something on the lines of the power sector, which is a state subject. The Central government recommended the splitting of transmission, generation and distribution of power. Many states have complied and many haven’t.
More and more states are complying with it, but it takes a long time. Most of the states now have got regulatory body for the sector at the state level—the state electricity regulatory commission. The tariff cannot be increased unless the regulator agrees.
Low-cost housing is the buzzword now.
Affordable housing is the buzzword. We need affordable housing in India because the demand is in that category. In Mumbai, the demand is not for flats that cost Rs10 crore but those that cost Rs25-30 lakh.
Our land policies are wrong; They have not been changed. Land is the biggest hindrance—it’s the largest component when it comes to the cost of a house. The land laws will have to be amended. Either you allow the developers to go for higher FSI (floor space index, the ratio of total floor space to plot size). You have to make the cost of land more affordable.
Many home loan lenders are now offering loans cheap for the first two years, enticing borrowers. But if the rates go up substantially after two years, won’t there be a problem as many borrowers may not have the capacity to service loans at higher rates?
It’s not a very healthy way of lending. It can create problem, as you said, in future, particularly if the rates shoot up.
Today what we are saying is, if it’s 8% or 8.25% for the first two years, the rate will be 9% afterwards and so the gap is very little. Suppose interest rates in India shoot up in the next three years, then what will happen? These are all floating rate loans and fixed only for first two years. So, 8% interest will become 12% or even more. Then, the gap will be too much and it’s a problem for the individual home-owners.
To some extent, we are playing with fire, but it’s a marketing gimmick. It’s a tool—I always say it’s a teaser rate—to get a customer attracted towards you. Financial innovation doesn’t take time; if one does it, everyone copies. It can be done in 24 hours.
Now most banks have this product.
If a regulator were there, he would have been concerned about it.
You see seeds of a problem in such loans?
Yes, if interest rates go up in the future.
But aren’t you also offering this?
We are appraising these cases today as if the borrowers need to pay more than 9% and not 8.25%. Because that’s where the rates will be after two years. A borrower’s affordability or repaying capacity is gauged today at a higher interest rate. We are building that buffer today, but if 9% or so becomes 12.5%, then there is no buffer.
Your plan has all along been to position HDFC as the GE Capital of India. Any plan to merge the bank with the parent or any different structure for the group?
We have taken cognizance of whatever opportunities existed in the financial sector in the last few years. Rather than remaining a purely housing finance company, we expanded into practically all areas of finance—banking, mortgages, asset management, insurance, property fund, stock-broking… everywhere. We are the only conglomerate in India where the housing finance company is the holding company of the group. In most cases, the bank is the holding company.
RBI was going to come out with some norms for holding companies, but that has been delayed. When it comes out with the norms, we will explore opportunities.
Today we feel that the two large firms of the group, the parent and the bank, are both growing well. Both have good top-line and bottom-line growth and very low non-performing assets—probably among the lowest in the industry. We don’t have excessive stuff and there is no problem whatsoever. At this stage, I think, it’s better for us to continue the way we have been growing in the past.
I think consolidation has to happen in Indian banking sector. We have a large number of small banks and we need a small number of large banks. We need to see how it impacts us. I am still around as chairman.
You can go for a reverse merger and make the bank the holding company.
We can do any type of things but we would prefer to wait and see what the regulator has in mind. I am simply making a point that we do not see the need for it.
When do you plan to take your insurance firms and the asset management company to market?
Sometime in early 2011.
How critical is banking consolidation?
The global financial crisis was caused by banks. We should not be in a desperate hurry to reform the banking sector.
We have been reasonably unscathed by the subprime crisis and credit has to be given to the regulatory bodies for their conservative approach all these years, which has helped all of us.
There is no urgent need for consolidation. In its own time, RBI will come out with something. We don’t need to be in a hurry.
Should foreign banks be allowed a larger play in India?
I feel foreign banks play an important role. We are part of the global community. If we follow the reciprocity method—if I give you one branch, you must give me one branch—I don’t see enough Indian banks wanting to open a large number of branches overseas.
It’s not easy to open 100 branches in US and make money. You may use it as an argument but which Indian bank has that kind of reserves, capital, manpower to go and open many branches in the US, even if they get permission?
Don’t forget that some of the foreign banks have been in India for more than 100 years. They have been playing an important role in India and I don’t see any harm in allowing them to expand their role in India in a proper format.
Now that you will guide HDFC as a non-executive chairman, is there anything you plan to do differently?
No. I wish I can detach myself a little bit. It’s difficult when you’re in the driver’s seat for so many years.
Anything different on the personal front?
I want to take it easy for a few months. I have a large amount of paper work which I would need to do in the office. I have stored these papers all these years. I will need to go through all my old files and destroy some of them. It will take me a few months to do all that. I have not yet made up my mind about life after that.
Anything else you would like to mention that I should have asked you?
No, bahut ho gaya.
Unitech’s $700-m FCCB plan hits regulatory wall
Unitech’s $700-m FCCB plan hits regulatory wall
The Economic Times, December 29, 2009, Page 1
Deepshikha Sikarwar & Arun Kumar NEW DELHI
UNITECH’S plan to raise $700 million through foreign currency convertible bonds (FCCBs) has run into trouble, with the finance ministry and Reserve Bank of India (RBI) objecting to the developer’s request to exempt it from a three-year lock-in clause applicable to such investments in construction.
Unitech is looking overseas to lower the overall cost of debt, at around 13%, though it said the FCCB money would be used to develop a township. India’s second-largest realtor had argued that as FCCBs are convertible instruments, they should be treated as debt till the time of conversion and they would be issued to portfolio investors.
FCCBs are bonds that allow the bondholder to redeem them after the maturity period or convert them into equity at a pre-determined price. Until then, they carry a nominal rate of interest.
Despite the reservations of RBI and the ministry, the Foreign Investment Promotion Board (FIPB)—the nodal agency for foreign investments—will take a final call on the issue at its next meeting, said a government official privy to the development. A Unitech spokesman had no comment on the development.
The department of industrial policy and promotion (Dipp), the key government body responsible for framing foreign investment policy, had supported Unitech’s proposal. It suggested a waiver of the lock-in in a letter to the finance ministry.
Foreign direct investment (FDI) in construction is allowed through the automatic route, but with riders. The government had imposed the lock-in in real estate to prevent an asset bubble.
Unitech raising fund
EARLY last year, the reserve Bank of India wanted the sector to be removed from the automatic route and investments be routed through FIPB.
But in January, realty companies were allowed to raise funds through external commercial borrowings for specific projects as part of the government’s stimulus measures, reversing a blanket ban on such borrowings imposed in May 2007.
If Unitech were to get FIPB’s approval, this would be the first case of a realtor being allowed to raise funds through the FCCB route.
The company had sought FIPB’s permission in March to raise Rs 5,000 crore through global depository receipts (GDRs), but deferred its plan due to the mandatory lock-in.
Unitech has been on a fund-raising spree this year, mopping up $900 million (Rs 4,000 crore) through two rounds of qualified institutional placements. In June, Unitech raised $575 million at Rs 82 per share. In March, it raised $325 million at Rs 38.50 per share. Part of these funds has been used to cut debts, which were at Rs 12,000 crore not so long ago.
The Unitech scrip closed at Rs 82 per share on December 24. At this price, the company has a market capitalisation of Rs 19,600 crore.
The Economic Times, December 29, 2009, Page 1
Deepshikha Sikarwar & Arun Kumar NEW DELHI
UNITECH’S plan to raise $700 million through foreign currency convertible bonds (FCCBs) has run into trouble, with the finance ministry and Reserve Bank of India (RBI) objecting to the developer’s request to exempt it from a three-year lock-in clause applicable to such investments in construction.
Unitech is looking overseas to lower the overall cost of debt, at around 13%, though it said the FCCB money would be used to develop a township. India’s second-largest realtor had argued that as FCCBs are convertible instruments, they should be treated as debt till the time of conversion and they would be issued to portfolio investors.
FCCBs are bonds that allow the bondholder to redeem them after the maturity period or convert them into equity at a pre-determined price. Until then, they carry a nominal rate of interest.
Despite the reservations of RBI and the ministry, the Foreign Investment Promotion Board (FIPB)—the nodal agency for foreign investments—will take a final call on the issue at its next meeting, said a government official privy to the development. A Unitech spokesman had no comment on the development.
The department of industrial policy and promotion (Dipp), the key government body responsible for framing foreign investment policy, had supported Unitech’s proposal. It suggested a waiver of the lock-in in a letter to the finance ministry.
Foreign direct investment (FDI) in construction is allowed through the automatic route, but with riders. The government had imposed the lock-in in real estate to prevent an asset bubble.
Unitech raising fund
EARLY last year, the reserve Bank of India wanted the sector to be removed from the automatic route and investments be routed through FIPB.
But in January, realty companies were allowed to raise funds through external commercial borrowings for specific projects as part of the government’s stimulus measures, reversing a blanket ban on such borrowings imposed in May 2007.
If Unitech were to get FIPB’s approval, this would be the first case of a realtor being allowed to raise funds through the FCCB route.
The company had sought FIPB’s permission in March to raise Rs 5,000 crore through global depository receipts (GDRs), but deferred its plan due to the mandatory lock-in.
Unitech has been on a fund-raising spree this year, mopping up $900 million (Rs 4,000 crore) through two rounds of qualified institutional placements. In June, Unitech raised $575 million at Rs 82 per share. In March, it raised $325 million at Rs 38.50 per share. Part of these funds has been used to cut debts, which were at Rs 12,000 crore not so long ago.
The Unitech scrip closed at Rs 82 per share on December 24. At this price, the company has a market capitalisation of Rs 19,600 crore.
BRICK BY BRICK ATALE OF 10 CITIES
BRICK BY BRICK ATALE OF 10 CITIES
The Economic Times, December 29, 2009, Page 14
With the economy back on track and teaser loans on offer,buyers are doing the home run again.ET gives you a lowdown on the cities where you can build your dream home
Preeti Kulkarni
FTER a lull in the realty space for a significant part of 2009, property developers as well as buyers are gearing up for some hectic activity in the sector in 2010. A rebound in economic growth, the surfeit of home loan offers and continued thrust on infrastructure development have revived investor interest in real estate. ET gets specialists to do a realty check for various cities...
WEST
A handful of cities from this commercially vibrant region – Mumbai, Pune and Ahmedabad – are likely to retain their pre-eminent position as some of the most favoured destinations for investment in 2010 too.
According to Abhishek Kiran Gupta, head of research at real estate consultancy firm Jones Lang LaSalle Meghraj (JLLM), for Mumbai (ranked number 2 in the top 10 real estate destinations), the primary drivers include high income demographics, high-investment activity levels across price bands, massive infusion of commercial office and retail space and infrastructure development projects that are expected to boost residential demand in the suburbs. “While most markets within the city remain unaffordable, some eastern suburbs, Thane and Navi Mumbai could offer affordable deals,” he adds.
Pune is expected to see a huge supply of office space, with an addition of another 19 million sq ft expected in the next three years. The city’s proximity to Mumbai will continue to be an attractive factor. Similarly, states the JLLM report, Ahmedabad (ranked 9), with a population of more than four million, is likely to witness sectors such as pharma, logistics and automotive driving population growth further in the suburban markets.
NORTH
Preparations for the Commonwealth Games in 2010 and other infrastructure projects are likely to perk up the areas in and around New Delhi. The national capital has assumed the numero uno position in Knight Frank’s listing of hot destinations.
Gurgaon tops the chart as per JLLM’s findings, closely followed by Noida at No. 3. Gurgaon, according to the report, will see a huge development of commercial office and retail space — from 22 million sq ft of office space currently, it is expected to grow to 40 million sq ft by 2012. Other plus points include quality developers and developments in the city and improved connectivity, owing to the Metro lines. “Power and connectivity, though, continue to be areas of concern,” says Mr Gupta.
Similarly, Noida is another city expected to shine as an investment destination in 2010. Reasonable price range in the city has led to increased absorption momentum. Add to this, excellent connectivity — through existing road infrastructure as well as metro — has made investment in properties in the city attractive. As per JLLM’s report, it is likely to see an addition of 12 million sq ft of office space in the next three years.
SOUTH
As expected, Bangalore, Chennai and Hyderabad occupy the top slots (in this region) as attractive destinations in 2010. TheIT/ITES story will continue to drive demand for office as well as residential space next year in these cities. In Bangalore (ranked 4th and 5th by Knight Frank and JLLM, respectively), most of the micro-markets are highly affordable. “The city has attained a critical size of IT occupiers, which could help attract more IT occupiers,” informs Mr Gupta. On the flipside, the infrastructure development has not kept pace with the city’s growth. The key triggers for property prices in Chennai could be the huge migrant population working in industrial, logistics and IT & ITES sector. Properties along the Old Mahabalipuram Road benefit from good connectivity and proximity to IT hubs, making it a potentially lucrative locality for investment, according to JLLM.
EAST
By and large, the region resembles a desert for those looking at attractive investment opportunities here, with Kolkata continuing to be the oasis. The city is ranked number 5 on Knight Frank’s list of top 10 destinations in the country for 2010.
JLLM’s research, though, places it several notches lower at 8. “The absorption rate has picked up in Rajarhat, and the city boasts of highly affordable micro-markets,” says Mr Gupta. Growth in office take-up, however, is projected to be low next year.
The Economic Times, December 29, 2009, Page 14
With the economy back on track and teaser loans on offer,buyers are doing the home run again.ET gives you a lowdown on the cities where you can build your dream home
Preeti Kulkarni
FTER a lull in the realty space for a significant part of 2009, property developers as well as buyers are gearing up for some hectic activity in the sector in 2010. A rebound in economic growth, the surfeit of home loan offers and continued thrust on infrastructure development have revived investor interest in real estate. ET gets specialists to do a realty check for various cities...
WEST
A handful of cities from this commercially vibrant region – Mumbai, Pune and Ahmedabad – are likely to retain their pre-eminent position as some of the most favoured destinations for investment in 2010 too.
According to Abhishek Kiran Gupta, head of research at real estate consultancy firm Jones Lang LaSalle Meghraj (JLLM), for Mumbai (ranked number 2 in the top 10 real estate destinations), the primary drivers include high income demographics, high-investment activity levels across price bands, massive infusion of commercial office and retail space and infrastructure development projects that are expected to boost residential demand in the suburbs. “While most markets within the city remain unaffordable, some eastern suburbs, Thane and Navi Mumbai could offer affordable deals,” he adds.
Pune is expected to see a huge supply of office space, with an addition of another 19 million sq ft expected in the next three years. The city’s proximity to Mumbai will continue to be an attractive factor. Similarly, states the JLLM report, Ahmedabad (ranked 9), with a population of more than four million, is likely to witness sectors such as pharma, logistics and automotive driving population growth further in the suburban markets.
NORTH
Preparations for the Commonwealth Games in 2010 and other infrastructure projects are likely to perk up the areas in and around New Delhi. The national capital has assumed the numero uno position in Knight Frank’s listing of hot destinations.
Gurgaon tops the chart as per JLLM’s findings, closely followed by Noida at No. 3. Gurgaon, according to the report, will see a huge development of commercial office and retail space — from 22 million sq ft of office space currently, it is expected to grow to 40 million sq ft by 2012. Other plus points include quality developers and developments in the city and improved connectivity, owing to the Metro lines. “Power and connectivity, though, continue to be areas of concern,” says Mr Gupta.
Similarly, Noida is another city expected to shine as an investment destination in 2010. Reasonable price range in the city has led to increased absorption momentum. Add to this, excellent connectivity — through existing road infrastructure as well as metro — has made investment in properties in the city attractive. As per JLLM’s report, it is likely to see an addition of 12 million sq ft of office space in the next three years.
SOUTH
As expected, Bangalore, Chennai and Hyderabad occupy the top slots (in this region) as attractive destinations in 2010. TheIT/ITES story will continue to drive demand for office as well as residential space next year in these cities. In Bangalore (ranked 4th and 5th by Knight Frank and JLLM, respectively), most of the micro-markets are highly affordable. “The city has attained a critical size of IT occupiers, which could help attract more IT occupiers,” informs Mr Gupta. On the flipside, the infrastructure development has not kept pace with the city’s growth. The key triggers for property prices in Chennai could be the huge migrant population working in industrial, logistics and IT & ITES sector. Properties along the Old Mahabalipuram Road benefit from good connectivity and proximity to IT hubs, making it a potentially lucrative locality for investment, according to JLLM.
EAST
By and large, the region resembles a desert for those looking at attractive investment opportunities here, with Kolkata continuing to be the oasis. The city is ranked number 5 on Knight Frank’s list of top 10 destinations in the country for 2010.
JLLM’s research, though, places it several notches lower at 8. “The absorption rate has picked up in Rajarhat, and the city boasts of highly affordable micro-markets,” says Mr Gupta. Growth in office take-up, however, is projected to be low next year.
Steel prices to move northwards
Steel prices to move northwards
The Economic Times, December 29, 2009, Page 7
Santanu Mishra ET INTELLIGENCE GROUP
AFTER trailing for most parts of the year, steel prices in developed economies are set to move northwards. There has been a secular growth across regions, mainly in developed economies, in steel production for the last three months, data from World Steel Association show. In earlier part of the year, growth in steel production was seen in few developing countries, like India and China. For European region, which accounts for close to one-sixth of world’s total crude steel production, the monthly production rate surged to 13-14 million tonnes in the last three months from 10-11 million tonnes in the preceding months of 2009. This holds true for another major economy, North America. The monthly production rate in past three months have been hovering at 8-9 million tonnes from 6 million tonnes earlier. The same trend is seen in other regions, like CIS countries and Latin America, as well. The higher production figures are in line with higher capacity utilisation.
Do all these mean the companies are seeing higher demand from these regions? If the answer to this question is yes, then it should reflect on the global steel prices. Data from Bloomberg, however, reveals that this price impact has not taken place as of now. The current benchmark domestic HRC (hot rolled coils) price in EU region is, perhaps, the lowest in the 2009. In Latin America and CIS region, the benchmark HRC prices have also not gone anywhere in past few months.
However, if the demand continues at the current pace, the prices are bound to surge in the coming months. Though analysts differ in their views about the quantum of rise, most of them agree on the rising steel prices in the next calendar year. And this is likely to benefit some of the Indian steel producers with overseas presence. For instance, any resurgence in steel demand in the EU region will benefit Tata Steel’s Corus operation substantially. Operating losses posted by Corus, which account for around three-fourth of Tata Steel’s total revenue, wiped out most of the operating profit generated by Tata Steel’s Indian operation in the last three quarters. Hence any positive impact of higher prices will drive the consolidated operating profit of Tata Steel significantly.
Steel price rise: Cost pressures
Steel price rise: Cost pressures
Business Standard, December 29, 2009, Page 9
Vishal Chhabria & Jitendra Kumar Gupta / Mumbai
Shares of steel companies have risen significantly in the recent past in anticipation of recovery in demand and prices.
Reversing the soft trend in prices seen in the recent past, two of India’s top steel producers raised prices last week. Tata Steel raised prices by Rs 2,000 a tonne whereas SAIL withdrew the discounts it offered to customers. Very soon, most likely in early January 2010, others such as JSW Steel, Bhushan Steel and Essar Steel are expected to increase prices by about Rs 1,500 per tonne.
The price hikes are in line with the rise in international steel prices, which is due to higher costs of coking coal and iron ore. Also, global demand has been looking up due to improving economic outlook and restocking of inventory. According to data from 66 countries, production was up 24.2 per cent in November 2009; Chinese steel production was up 37.4 per cent whereas India’s was up 4.7 per cent.
In terms of inputs, in April 2009, Indian steel companies entered into annual contracts for coking coal at about $130 per tonne, which was significantly lower than the $300-350 per tonne in early 2008. However, spot coking coal prices are hovering around $170-180 per tonne and are expected to rise to about $200 per tonne in 2010. If the trend prevails, companies that depend on imported coal will have little choice but to renew contracts (due in April 2010) at higher prices, leading to pressure on costs. Similarly, global spot iron ore prices, which had dropped to almost $65 in early 2009, have risen to over $120 per tonne. These, too, are expected to remain firm.
Positively, there is some relief for Indian steel manufacturers given the recent hike in export duty on iron ore by 5 percentage points. However, the move will have some negative implications for companies like Sesa Goa, which exports about 90 per cent of its iron ore production, of which a large part is sold in the spot market. According to analysts’ estimates, the hike in export duty could impact the company’s earnings per share (EPS) by less than 5 per cent. They now peg the EPS for 2010-11 at Rs 34 based on the average spot price of $85 and the contract price of $70 for a tonne of iron ore. At the current price of Rs 404, they believe the stock is fairly valued and could move up only if iron ore prices gain more ground.
Meanwhile, most of the rise in steel prices is on account of the cost push. Hence, gains will not be significant for companies that do not have sufficient captive inputs. Thus, only integrated players like Tata Steel and SAIL stand to gain; for the former, the overhang of its Corus operations could limit the gains. Analysts say while the short-term (five-six months) outlook for the sector looks good, steel prices are not expected to move up drastically in the long run given that the global demand is still low and any meaningful recovery is expected only in 2011. However, shares of steel companies have risen significantly in the recent past in anticipation of the recovery in demand and prices. This is also reflected in their valuations, given that most of these stocks are trading at 9-10 times their estimated earnings for 2009-10.
Business Standard, December 29, 2009, Page 9
Vishal Chhabria & Jitendra Kumar Gupta / Mumbai
Shares of steel companies have risen significantly in the recent past in anticipation of recovery in demand and prices.
Reversing the soft trend in prices seen in the recent past, two of India’s top steel producers raised prices last week. Tata Steel raised prices by Rs 2,000 a tonne whereas SAIL withdrew the discounts it offered to customers. Very soon, most likely in early January 2010, others such as JSW Steel, Bhushan Steel and Essar Steel are expected to increase prices by about Rs 1,500 per tonne.
The price hikes are in line with the rise in international steel prices, which is due to higher costs of coking coal and iron ore. Also, global demand has been looking up due to improving economic outlook and restocking of inventory. According to data from 66 countries, production was up 24.2 per cent in November 2009; Chinese steel production was up 37.4 per cent whereas India’s was up 4.7 per cent.
In terms of inputs, in April 2009, Indian steel companies entered into annual contracts for coking coal at about $130 per tonne, which was significantly lower than the $300-350 per tonne in early 2008. However, spot coking coal prices are hovering around $170-180 per tonne and are expected to rise to about $200 per tonne in 2010. If the trend prevails, companies that depend on imported coal will have little choice but to renew contracts (due in April 2010) at higher prices, leading to pressure on costs. Similarly, global spot iron ore prices, which had dropped to almost $65 in early 2009, have risen to over $120 per tonne. These, too, are expected to remain firm.
Positively, there is some relief for Indian steel manufacturers given the recent hike in export duty on iron ore by 5 percentage points. However, the move will have some negative implications for companies like Sesa Goa, which exports about 90 per cent of its iron ore production, of which a large part is sold in the spot market. According to analysts’ estimates, the hike in export duty could impact the company’s earnings per share (EPS) by less than 5 per cent. They now peg the EPS for 2010-11 at Rs 34 based on the average spot price of $85 and the contract price of $70 for a tonne of iron ore. At the current price of Rs 404, they believe the stock is fairly valued and could move up only if iron ore prices gain more ground.
Meanwhile, most of the rise in steel prices is on account of the cost push. Hence, gains will not be significant for companies that do not have sufficient captive inputs. Thus, only integrated players like Tata Steel and SAIL stand to gain; for the former, the overhang of its Corus operations could limit the gains. Analysts say while the short-term (five-six months) outlook for the sector looks good, steel prices are not expected to move up drastically in the long run given that the global demand is still low and any meaningful recovery is expected only in 2011. However, shares of steel companies have risen significantly in the recent past in anticipation of the recovery in demand and prices. This is also reflected in their valuations, given that most of these stocks are trading at 9-10 times their estimated earnings for 2009-10.
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