Sunday, December 30, 2012

RBI: Rate cut on the anvil.

The signal for reversal of monetary policy stand by the Reserve bank will come only when inflation shows definite signs of decline, Prime Minister's Economic Advisory Council chairman C Rangarajan said today.

He also said that high inflation over the last couple of years was due to supply side constrains but that did not mean that monetary policy had no role to play in such condition. Rangarajan was delivering the P R Brahmananda Memorial Lecture on 'Dynamics of Inflation' at a conference by the Indian Economic Association.

"It is true that the extraordinarily high level of inflation in the last three years was due to severe supply side constrains, particularly of agricultural products, but that did not mean that monetary policy or for that matter fiscal policy had no role to play in such conditions," he said.

The PMEAC chief added: "Food price inflation, if it persists long enough, gets generalised. Non-food manufacturing inflation has also remained high since April 2010 and at times crossed 8 per cent, despite a declining growth rate. Thus, monetary policy, along with fiscal policy. has to play part in containing overall demand pressures."

The changes in the monetary policy cannot have a direct impact on food inflation but it can have a moderating influence by containing demand pressure, he stated. Maintaining that inflation level of 5 per cent is acceptable in the Indian context, Rangarajan said the present level was way above acceptable limit. It might take more than a year to bring it down to 6 per cent, he added.

Rangarajan said: "The signal for reversal of the policy will be given when inflation showed definite signs of decline". A former RBI governor, he also said that since the beginning of 2012-13 fiscal, there has been no tightening but only easing of policy in small steps. He said the contention that high growth warranted high inflation was wrong, pointing out that in the three years when the country grew at more than 9 per cent, the average inflation was only 5.2 per cent.

The inflation based on Wholesale Price Index in November was 7.24 per cent. During 2012, the highest rate of price rise was witnessed in August when inflation stood at 8.01 per cent. However, retail inflation, based on Consumer Price Index remained close to double digit at 9.90 per cent in November.

The government expects inflation to moderate during the January-March quarter and March-end at 6.8-7 per cent. Although it would still remain above the RBI's comfort level of 5-6 per cent, a rate cut is on the anvil as RBI is expected to work towards boosting growth.

The central bank had hiked key policy rates 13 times by 3.75 per cent between March 2010 to October 2011 to tame the rising inflation. As inflation showed some signs of easing thereafter, RBI lowered policy rates by 0.50 per cent in April 2012.


Friday, December 28, 2012

India Real Estate Outlook; 2013.

The economy: India’s GDP was revised downward consistently in the last three quarters of 2012. In 2013, this trend will prevail, though the quantum of revision will be lower. The country’s economic environment will certainly improve in 2013, with a corresponding (though lagging) gain in momentum for real estate. The most tangible benefits of economic improvements on the Indian real estate space will be seen in the second half of 2013.
The average inflation rate (based on the wholesale price index, or WPI) moderated to 7.4 percent in the third quarter of 2012.
This can be seen as sensibly low when compared with the average CPI, which remained at 10.2 percent. As a result of the slight moderation in WPI inflation, the Reserve Bank of India started softening banks’ cash reserve ratio to improve the credit situation.
Further easing of liquidity with the prime objective of reviving the GDP is expected in the first half of 2013. Base rates, which peaked in the third quarter of 2012, are likely to start falling in the fourth quarter on the heels of monetary easing by the RBI.
Residential: Property prices in this segment have breached affordability limits in cities like Mumbai. Nevertheless, developers will have to factor in the ground realities of the business while debating the lowering of prices to catalyse sales in 2013.
Obtaining the 57-odd permissions to begin construction of a project can take as much as two years. During this time, the cost of acquisition or even just holding the land for a project rises. Builders are already beset with the increased costs of licence costs and cost of construction.
However, it became evident in 2012 that homes are not selling at the current price points, and developers do need to recalibrate their bottom lines while still remaining viable as businesses. It is extremely doubtful that the previously offered freebies and other such incentives will prove to be much of a booster in the current environment. Since the only way to catalyse healthier sales at this point is offering buyers tangible financial relief, we are likely to see drastic trimming of frills in projects to make them more marketable from a pricing point of view, and innovative payment schemes.
Developers will also offer buyers attractive pre-launch benefits in a bid to accelerate sales momentum in the initial months following a launch.
Developers with large-scale projects with a greater share of unsold inventory will be under greater pressure to offer discounts than those with smaller projects and limited inventories.
Although most of the cities of India will see an increase in residential launches in 2013, the southern cities of Bangalore and Chennai will witness a decline in launches as compared to 2012 year to date. It is important to note that these two cities recorded a historical high in terms of the number of launches during 2012.
To illustrate —Pune has recorded an average of close to 6,000 units per quarter over the past three years (2010-2012YTD). This is more than twice the average quarterly launches recorded during the period 2007-2009. As a market that has grown too fast in such a short time, launches in Pune will be moderate in the near term.
Commercial: The fact that the major cities of Mumbai, NCR-Delhi, Bangalore and Chennai saw 72.5 percent of the total commercial space absorption in 2012 is a telling one, and indicates the forward path. These cities will grab the lion’s share of contribution in total commercial space absorption in 2013, certainly within the range of 74-76 percent.
In terms of commercial real estate investment potential, Mumbai, Bangalore and Delhi NCR will continue to be of highest interest to big ticket investors focused on real estate in 2013. We also expect investor-driven demand to remain upbeat in Chennai, Hyderabad and Pune. Mumbai will see the highest share of commercial corporate property transactions from companies focused on their own occupancy needs. The Delhi NCR region, will be more popular with high net-worth and institutional investors.
We expect 2013 to bring a larger-than-usual number of NRI investors into the commercial space arena. This is because NRIs are currently enthused by the prevailing exchange rate benefits and the fact that commercial real estate capital values are still 15-25 percent under their 2007-08 peak levels.
Retail: In 2013, new organised retail project completions will increase significantly (by 109 percent year on year). Chennai, Hyderabad, Kolkata and Pune will be among the major contributors to this increase, with a 53 percent share of the country’s overall mall supply for 2013. The primary reason is that a sizeable amount of supply that was expected to reach completion in 2012 has been pushed to 2013. Altogether, India’s major cities like Mumbai, NCR-Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata will see the addition of close to 9.5 million square feet of mall space in 2013. Mumbai, NCR-Delhi, Bangalore and Chennai will together contribute 70 percent of the total retail space absorption. Other cities like Pune, Hyderabad and Kolkata will account for the remaining 30 percent.
The government’s nod to FDI in multi-brand retail will be a major driving factor for increased activity in 2013. Since the policy opens the portals to major MNC retail brands in India, the organised retail sector will see a major transformation in terms of its overall contribution in the mid-term.
This, in turn, will positively impact the absorption of retail space over the next 12-24 months. The absorption is forecast to touch 6.8 million square feet and 7.1 million square feet in 2013 and 2014, respectively.
That said, the benefits of the much-awaited FDI decision will not become fully evident in 2013, as it will take mall developers at least two years to incorporate the design elements and dimensions required to meet global standards. Mall developers are expecting a massive increase in demand for their projects in 2013. However, those whose shopping centres do not meet the requirements of international brands in terms of location, overall size, design, professionally managed operations will fail to see any action.
Policy: The much-debated policy on FDI into the multi-brand retail sector was finally implemented in September 2012. The policy now permits FDI of up to 51.0 percent into this sector, which is likely to boost the retail real estate market with the entry of international products, practices and technologies into India. Back-end retail infrastructure such as logistics and warehousing (both of which are critical growth catalysts for the retail sector) will receive a significant boost from this policy, as 50 percent of the total FDI into the retail sector is directed at these segments.
The power exchange and civil aviation (and also broadcasting) sectors have been permitted FDI in a bid to improve efficiency and productivity. At a time when liquidity is down and the performance of various sectors is deteriorating, a shot in the arm for power and aviation will have positive (albeit only over the long term) ramifications on the real estate sector, as well.
The Direct Tax Code (DTC), a major evolutionary step in the country’s taxation system, will change the entire financial landscape of India. As it spells major change, it will require a fairly in-depth study from an occupier’s perspective before all its implications can be understood and assimilated. The government has deferred the implementation of DTC from 2014 to 2015, which gives occupiers more time to capitalise on their expansion decisions while carefully negotiating with developers.
The delay in the implementation of DTC has resulted in a good portion of the office space demand for IT SEZs to spill over from 2013 to 2014. With the demand for IT SEZ space to remain healthy in the next 12-18 months, we expect the developers of IT SEZs to focus on execution and completion of projects for the duration, to ensure ready supply to match the immediately upcoming demand.

Wednesday, December 26, 2012

Griffin Coal to get AUD 50m from Bluewaters Power.

Griffin Coal, the Australian subsidiary of Indian infra giant Lanco, is set to get AUD 50 million as an upfront payment from Bluewaters Power in the third week of January next year towards long-term coal supply agreement, a senior official of Lanco Group has said.

Chief Financial Officer of Lanco Infratech T Adibabu said the amount would help Griffin Coal to meet its financial requirements for the next seven to eight months.

"The agreement with Bluewaters helps the company (Griffin Coal) operate on its own. The company will get AUD 50 million cash immediately as upfront fee between January 15 and 20," Adibabu told PTI.

The Supreme Court of Western Australia last week gave its nod for the Griffin Coal to enter into revised Coal Supply Agreement (CSA) with the Bluewaters power which is set to be sold to a Japanese consortium of Sumitomo Corp and Kansai Electric Power Co for an enterprise value of around USD 1.2 billion.

Under the agreement, Griffin Coal will supply 1.8 million tonnes of coal for over 25 years to Bluewaters Power Station. The agreement with Bluewaters will fetch Griffin coal additional amount of AUD 150 million (in NPV terms) for the entire course of the agreement including about AUD 50 Million upfront, a senior Lanco Group official had said earlier.

Griffin Coal Mining Company which was taken over Lanco for AUD 730 million in March last year is currently dependent on the parent company for working capital requirements.

"Griffin Coal, which is depending on its parent company Lanco for working capital requirements, can operate on its own for next seven or eight months without any funding requirement," Adibabu said.

James Riordan Company Secretary and Chief Financial Controller of Griffin Coal in an affidavit to the Australian court said the coal miner forecasts that for the year ended November 30, 2013, it will be cash positive by around AUD 80 million on a stand-alone basis based on the agreements it had with Bluewaters and future agreement with other companies.

Lanco India made AUD 132 million of funds available to Griffin Coal from July 2011 to October 2012, approximately AUD 10 million per month. 


Monday, December 24, 2012

Australian Court Favours Lanco

Power producer Lanco Infratech Ltd said on Monday the Supreme Court of Western Australia ruled in its favour in a lawsuit filed by Perdaman Chemicals and Fertilisers Pty Ltd.
In effect, the court allowed Lanco’s Australian subsidiary Griffin Coal Mining Co. Pty Ltd to revise a coal supply agreement (CSA) withGriffin Power entities, which includes Bluewaters Power Station that is being acquired by Japanese companies.
Lanco, through its Australian subsidiary Lanco Resources Australia, acquired Griffin Coal Mining and Carpenter Mine Management for A$720 million in February 2011. Last year, Griffin produced more than 3 million tonnes of coal.
Griffin Coal has a long-term fuel supply agreement with Bluewaters that it sought to revise. But Perdaman challenged this as part of a A$3.5 billion lawsuit it filed against Lanco after the Indian company cancelled a supply agreement Perdaman had with Griffin Coal.
Lanco, in a statement to BSE on Monday, said the court rejected Perdaman’s plea and that “the revised CSA will result in a gain of approximately A$150 million in net present value (NPV) terms, including a substantial upfront payment to Griffin Coal Mining Company Pty Ltd”.
The state of Western Australia too had urged the court to reject Perdaman’s request, saying cessation of operations at Bluewaters would remove 431.8 megawatts of generating capacity from the grid.
“This is a positive development for Lanco. Griffin is coming to a good shape...We will be getting more revenues once the revised CSA is in place,” said Lanco chief executive for business development,Nagaprasad Kandimalla.
A revised pact is expected to be signed by the middle of January, Kandimalla said, but refused to give details of the pricing.
Lanco has subsidized the operations of the coal unit, which made a loss of A$43 million in the year ended 31 March. Lanco invested around A$132 million between 14 July 2011, and 23 October this year in the unit, the company said.

Thursday, November 22, 2012

US Earning Cliff: Earnings Matter.

I was still fearful of the earnings cliff, which will likely constrain the market's upside (albeit, possibly to higher levels for the S&P 500).
And there is nothing that I saw in the third-quarter reports that reduces my concerns:
  • 95% of the companies in the S&P 500 have reported third-quarter results.
  • Third-quarter 2012 EPS rose by 0.5% (above the consensus, which was down by 2%), but company share buybacks added about 1% to reported EPS. So, EPS before buybacks were actually -0.5%.
  • Excluding financials, S&P earnings per share were -1.6%.
  • 65% of S&P companies exceeded consensus forecasts, down from 69% a year ago. (The long-term average of beats is 60%, and the average beat since the Great Recession has been 74% over the past three to four years.)
  • In third quarter 2012, 25% of the S&P reported worse-than-expected EPS vs. 22% a year ago. (The long-term average is 19%.)
  • Third-quarter 2012 sales growth was a paltry +1.2%, as only 27% of the companies beat consensus while an outsized 54% missed expectations.
  • Profit margins slipped modestly in the third quarter.
To summarize, third-quarter 2012 sales growth fell about 0.8% less than consensus, and third-quarter 2012 EPS growth (year over year) was about 1.5 points above expectations (excluding financials). Profit margins are still 200 basis points above trend line and should continue to trend lower in the face of punk revenue growth.
The top-down consensus for the S&P 500 is for 2013 EPS of $108, and bottom-up consensus is $113 -- both these numbers are clearly way too high.
Most strategists on the Street live at about $103-$105 a share, which, from my perch, is too high as well.
I expect that profit margins will begin to mean revert in 2013 and that S&P earnings will disappoint and will likely fall in the $95-$100 a share range next year.
Fears of an earnings cliff are not overblown. While I believe the S&P can rise to 1410-1430 by year-end, a weakening profit trend could cap the upside to the U.S. stock market in early 2013.

Thursday, November 15, 2012

Fiscal Cliff -> US Bear Market Indicators.

The U.S. economy was almost there, almost ready to spring higher, Jim Cramer told his"Mad Money" TV show viewers Thursday. But then Washington got involved, and all was lost. We're now facing the first congressionally mandated bear market we've ever seen, said Cramer, all because 536 people couldn't agree.

Cramer said it's downright infuriating, just when the housing market was beginning to recover, just when autos were getting stronger, when retail sales were growing and when the banks looked like they were finally finding their footing, Congress has been able to undo it all and send our markets sharply lower. For the year, U.S. stocks are now up just half of their counterparts in Europe, and Europe is in a recession.
So how can investors measure the damage and begin to ascertain when things might be getting better? Cramer came up with three indicators to help. First was the "Washington on TV" indicator. He said anytime the president or member of Congress gets on the air, expect the markets to go lower.
Cramer's second indicator was Lockheed Martin (LMT), the defense contractor with a 5% dividend yield. If the U.S. falls over the fiscal cliff, Lockheed will get hurt by both defense spending cuts and a rise in dividend taxes, Cramer noted, making this stock uniquely positioned to feel the blow.
Finally, Cramer said investors can use Cisco (CSCO)Home Depot (HD) and Petsmart (PETM)as gauges for Washington's damage. Cramer said all three of these companies posted stellar earnings, so if they can't hold onto their gains, no one can.
All of these indicators should help investors figure out whether the effects of the fiscal cliff are baked into the markets and whether its time to begin buying back in.

Saturday, October 27, 2012

3 reasons why young investors should invest in real estate.

One of the most frequent advices that can be given to the youth when it comes to investment is starting young. And just because, the advice is so frequent, most of us tend to forget that it is actually the BEST advice anyone can be given.

Why is starting young so important? The answer is hardly rocket science. By the sheer luxury of time that youth has on hand in terms of the period of investment, the risk appetite is multiplied several times which in turn leads to investments that by design are high risk, high returns. At a simpler level, starting young means you have a lot scope for distributing your investments over a long period of time, ultimately leading to a substantial increase in the net amount invested. At a still simpler level, starting young means your money has that more time to grow and hence, higher returns.

While this common wisdom has had many young investors coming into the market, investing largely in equities and debt instruments , real estate continues to be an area out of the purview of the obvious choice of the investors. Going by the volatile nature of the economy these days however, real estate has rapidly emerged as a mode of investment that should ideally be on the top of the investment priority list, especially for the young investors. We give you a lowdown on the reasons why real estate should be preferred by the youth.

The Anti-Inflation Investment - Real estate investments are an almost guaranteed way to get around inflation. Real estate is growing market, more so because of the rapidly shrinking supply of land. You only have to go house hunting in a city like Mumbai to know the extent of land shortage in the country. A shortage supply logically means a growth in market and so long as this shortage persists, the market shall not slow down. The core point here is a careful market research before investing into the real estate. You can hardly expect your money to grow exponentially if you chose to invest your money in a landed property in remote UP. It shall still grow but not as much as it would in a more favorable location like Mumbai or Delhi-NCR. There are other considerations too, which need to be taken into account. For instance, in cities like Pune and Gurgaon, which thrive on floating population, investing in residential properties that can be leased out at a later stage is a good strategy.

These examples are illustrative. The moot point here is that investment in real estate can be an excellent strategy for the young investors to get past inflation. The essential corollary is proper market research and careful consideration before investment. Read up, ask around and ask plenty of questions. If you there is any doubt about importance of market research, read all that can go wrong with your real estate investment 6 Things Your Builder Can't Do But Still Does.

Affordable Option - Yes, you read it right. Contrary to the popular perception, investing in real estate is actually one of the more affordable options with banks funding up to 80% of the cost. The young investors also get income tax benefits. A slightly more complex benefit is derived from the fact that young investors are expected to pay fixed installments over years which in effect amounts to purchasing an asset at a lower cost, whose value is bound to appreciate while the investor's own income too keeps rising. For those young investors looking to discipline their investments, servicing regular EMIs is an excellent method. Of course, real estate is a volatile asset but from a reasonable perspective, it is still a safer bet than stock markets, especially when trade pundits across board have been reiterating the fact that the probability of appreciation in case of real estate investments is very high.

Tangible Assets - This is not exactly an objective benefit but may hold significant importance in several cases. Unlike old times when owning house marked a definite landmark in one's life, young investors can now enjoy the benefits of a tangible asset pretty early on in their lives. If the property is a residential one meant for personal purposes, the obvious benefits are manifold. In several cases, the investors' end up paying an EMI which is only slightly more or almost equal to the rent they would be paying otherwise, with an added benefit of actually residing in their 'own' place.

As we had stated earlier, real estate is a volatile option, even if relatively less so. And hence, the prudent way ahead is to make real estate one of the modes of investment in your portfolio and not the only one. An ideal portfolio has a balanced distribution between various options and irrespective of the benefits or the risk factors, concentration of wealth in any mode is problematic. The ideal way ahead is to start off with SIPs (systematic investment plans) and gradually proceed to real estate, as and when you reasonably acquire enough spare wealth to distribute between various investment options. The key is to be prudent with your money and invest as soon as you possibly can. And while investing in real estate, always remember, an aware investment is the only safe investment and a thorough market research is a must.

Monday, October 22, 2012

Pune - 3 Development Plans.

As the State government has given its nod to include 28 new villages within the jurisdiction of Pune Municipal Corporation, the civic body will have to frame a new development plan for these newly merged villages.

Pune will remain as one city but will have three different rules.

There already exists two development plans in the city-one development plan is of the old city limit and the second is of the merged 23 villages which were included in the PMC limit in the year 1997.

Now the civic body will have to start the development plan for these newly merged 28 villages in the PMC.

The city improvement committee of the PMC on Thursday approved the draft development plan for the old city limit and the panel approved the construction on Hill Top and Hill Slope (HTHS).

In the old city limit area, the land owners will be able to erect houses on HTHS areas.

The other development plan for the merged 23 villages is pending with the State government. In the plan, construction is not allowed on HTHS areas and all these areas are reserved for the Bio Diversity Park (BDP).

PMC is going to frame the third DP and there will definitely be different rules for the newly merged villages.

At present there are two different rules in the existing two DP. Municipal commissioner Mahesh Pathak said that once the process to include the 28 villages is complete, the civic administration will need to start the Development Plan for these 28 villages.

It is true that there will be three Development Plans for one city. The elected members and State government will decide the rules and policy for these 28 villages, he added.

There will be three different rules in one city. Pune Janhit Agadi's president, Ujwal Keskar said that had PMC a uniform policy, there would not have been any need to have different policies for each DP.


Friday, October 19, 2012

28 new villages into the Pune Municipal Corporation’s limits.

The State government has taken a decision to merge 28 new villages into the Pune Municipal Corporation’s limits even as the civic body dithered on the issue.

The State urban development department’s nod to allow the merger of the 28 villages has enabled the PMC to become the biggest civic body in the state, in terms of area.

According to the State government’s notification, the 28 villages that would be included within the PMC limit include Mahalunge, Sus, Bavdhan Budruk, Kirkatwadi, Pisoli, Lohegaon, Kondhwe Dhavade, Kopare, Nande, Khadakwasla, Shivane (Uttamnagar), Hadapsar (Sadesatra Nali), Mundhwa, Manjari, Narhe, Shivane, Ambegaon Khurd, Undri, Dhyari, Ambegaon Budruk, Uruli Devachi, Mantarwadi, Holkarwadi, Authade (Handewadi), Vadachi wadi, Shewalewadi, Phursungi and Yeolewadi.

The State government had published the notification on October 11 and sought suggestions and objections within a month .

The resolution to merge the villages was pending with the law committee of the PMC. Political parties differed on the issue.

As the PMC dithered, the State’s urban development department bypassed them and took the decision to merge the villages.

Municipal Commissioner Mahesh Pathak welcomed the decision saying,” If political leaders do not take a decision in time, naturally the state government will take a decision on the issues related to development.”
The Bhartiya Janata Party and Nationalist Congress Party welcomed the decision and sought funds to establish basic infrastructure in these villages.

As Uruli Devachi and Phursungi are going to be part of PMC, there will no longer be any bitterness between the PMC and villagers. The garbage depot will now come under the PMC. In the past, the villagers had protested that the city’s filth was being dumped at their door steps. The merger will also benefit the PMC as most warehouses are located in these villages and as they were outside the PMC limit, no octroi was levied on goods arriving there. Henceforth, the PMC can levy octroi, earning much needed revenue.


Friday, October 5, 2012

Lanco Infra - The Full Picture.

A holding company with a diversified basket of businesses in supposed to be an ideal to setup risk. But, on the flip side, the parent's illness can have a contagion effect, spreading to other companies in the group. Take for instance, Lanco Infratech, which acts as a holding company for several diverse businesses like power, natural resources, infrastructure and real estate. The stock has lost a whopping 86% from its five-year high of Rs 88 reported in December 2007 to the present level of Rs 12.3. It has shed over Rs 17500 crore in market capitalisation. Currently, the scrip commands market value of Rs 2850 crore.

The prime reason for the counter's decline is the hefty debt the company has accumulated over the years. Debt of Lanco Infratech rose more than 85% to Rs 22152.1 crore end March 2012 from a year earlier. The company's finance cost rose nearly 40% to 1053.8 crore in the financial year ended 31 March 2012 (FY 2012) from FY 2011. It plunged into red with loss of Rs 150.5 crore (adjusted PAT) in FY 2012 as against profit of Rs 449.5 crore in the previous year. The worse seems to be still ahead for its shareholders. Lanco Infratech's finance cost rose nearly 75% to Rs 538.9 crore in the first quarter ended 30 June 2012 over the previous-year period. The finance cost is around 15.4% of its total income from operations. This magnitude reveals the uphill task the company is staring at. It reported a massive loss of Rs 441.1 crore in the June 2012 quarter compared with profit of Rs 13.7 crore in the corresponding quarter of the previous year. This is despite 87.2% jump in the revenue in the June 2012 quarter. A massive increase in cost of material, which spurted by 150.7%, is one of the reasons for erosion in profit apart from higher interest outgo.

The second concern is supply of raw materials. Lanco Infratech has operational power generating capacity of 4,480 MW. Capacities under construction total 4,888 MW. These capacities were spread over 12 states end June 2012.
Coal India is still in the process of approving fuel supply agreements (FSA) with coal supply trigger of 80%. Whenever this happens, it would be positive development for the power sector. Intervention of the prime minister is likely to bear fruits. The FSA is mainly stuck due to lack of consensus over the issue of the clause pertaining to penalty in case of short supply. However the scenario on power supply would take its own sweet time to improve.
Lanco Infratech's Griffin coal mines have the largest operational thermal coal mines in Western Australia, with reserves of 1.2 billion tonnes. The company plans to increase production to 4-5 times 18 million tonnes per annum (mtpa) by FY 2018. However, this is another problem area. At present, Griffin is a loss venture. The Australian company reported negative earnings before interest tax depreciation and amortization (Ebitda) of Rs 73.6 crore. Lanco Infratech had acquired Griffin coal mines in FY 2011.

Further, short supply of gas from the Krishna Godavari (KG) basin of Reliance Industries is another bone of contention for Lanco Infratech. Decline in natural gas production from the KG has adversely impacted generation from its gas-based power plants. The company's Kondapalli power plant in near Vijayawada in Andhra Pradesh has reported lower plant load factor of 60% due to short supply of gas from KG basin in FY2012. Out of its aggregate power generation capacity of 1334 MW, around 30% is based on gas (Kondapalli 1,214 MW and Tanjore 120 MW). Going forward, Lanco Infratech may be forced to shut its gas-based power plants if supply of gas declines further. Fortunately for the company, out of the total power generating capacities of 4,888 MW, which will be commissioned over the next three years, only 252 MW is based on gas.
The third source of worry is the stagnant order book and choking up the receivables pipeline, resulting in liquidity crunch. Lanco Infratech's engineering, procurement and construction (EPC) division executes projects in areas of thermal and hydro power plants, highways, airports, industrial structures, transmission, distribution, chimneys and cooling towers, water infrastructure and heavy civil construction. The order book of its EPC division was at a robust US$6.1 billion end March 2012. There is no exciting growth in order book, which stood at US$6 billion end FY 2011, but still it is on the higher side. Apart from third-party orders, Lanco Infratech mainly executes order of its group companies including power plants.

The in-house orders have their own concerns. One of Lanco's subsidiaries and an associate had provided mobilisation advance of Rs 434.9 crore on 30 June 2012 for executing EPC contract, which requires approval by the respective lenders. Lanco Infratech has to receive Rs 395 crore as retention money from the subsidiary and associate. The concerned special purpose vehicle (SPV) has approached the lenders for release of the retention money against providing the corporate or bank guarantee by the company. The lender's approval is in progress.

As per the notes to the accounts published along with its quarterly results for the period ended 30 June 2012, the group had receivables of Rs 2773.1 crore on 30 June 2012 (Rs 2369.3 crore on 31 March 2012) from various state electricity utility companies and other customers against sale of power. It has certain long-term borrowings of Rs 2206.1 crore due for repayment in next 12 months and other net current liabilities of Rs 1476.8 crore. Based on the internal assessment and discussions it had with customers and lenders, the company is confident of recovery of receivables and repayment of loans on maturity. However, considerable amount of receivables are under dispute or litigation and, thus, it is not so easy to recover this amount.

The fourth problem centres around the health of Lanco Infratech's subsidiaries. Mid January 2012, Udupi Power Corp, Lanco Infratech's subsidiary, defaulted on its debt repayment. Udupi Power is executing a 1,200 MW thermal power project in Udupi, Karnatka, with a capital cost Rs 6,000 crore. Crisil had downgraded Udupi Power's long-term debt and bank guarantees in January 2012.

Subsidiary Lanco Hills Technology Park Pvt Ltd, which deals in property, is executing integrated real estate project, Lanco Hills, in Hyderabad. The 100-acre project comprises residential, office and IT special economic zone. This is another trouble spot for Lanco Infratech owing to dispute between with the Wakf Board and government of Andhra Pradesh over the title of the land. The Wakf tribunal has restricted Lanco Hills from alienating the property. Lanco Hills has appealed to the Supreme Court, which has granted an interim stay against the orders of high court of Andhra Pradesh and the Wakf Tribunal. The matter continues to be under litigation.

The fifth irritant is corporate governance. In March 20120, Lanco Infratech's shareholders approved sale of its shareholding in some of its subsidiaries and associate companies to its wholly-owned step down subsidiaries and to an associate firm. Accordingly equity stake was sold in March 2012 for cash consideration. The lender and customer approvals and share transfer process is in progress. This was a subject matter of qualification for the year ended 31 March 2012 and limited review report for the quarter ended 30 June 2012.

In February 2012, reports alleged that Lanco Infratech had violated norms of the national solar mission and later rectified that same after a warning from the government. In a clarification issued the Lanco has strongly objected to all the allegations made by Centre for Science and Environment.

As per the information shared by Lanco Infratech through the notes to accounts, investments of the group of Lanco Solar Energy Pvt Ltd (LSEPL), a subsidiary, include investments made line with the Request for Selection and PPA in companies which had won bids for solar projects under Jawaharlal Nehru National Solar Mission Phase-I bid conducted by NTPC Vidyut Vyapar Nigam (NVVN). NVVN has examined these investments and advised some changes in investments, which were complied with. The participation in bids by these investee companies and the shareholding pattern is looked into by a committee set up by the government. The matter is pending and, thus, Lanco has carried these investments at cost in the books of accounts. Receivables of LSEPL include Rs 345 crore, which is the amount due towards EPC contracts executed for investee companies yet to receive financial disbursement towards funding of the projects. LSEPL is optimistic about recovery and taking steps towards the same.

Accounting practices is the sixth issue of agitation. The statutory auditors of Lanco Infratech have qualified their audit report for FY 2012 and limited review report for the quarter ended 30 June 2012 on account of revenue recognition of Udupi Power Corporation, which has recognised supply of power as differential revenue of Rs 206.5 crore for the June 2012 quarter and Rs 545.7 crore for FY 2012, as per the Central Electricity Regulatory Commission (CERC) rate based on the application filed to approve tariff with CERC. Udupi Power is confident of CERC's approval. In the meantime, payments have been released by the customer on the basis of provisional tariff approved by the government of Karnataka. This has resulted in receivables of Rs 1060.8 crore as on 30 June 2012, which are higher by Rs 752.2 crore.

Similarly, Lanco Amarkantak Power Ltd (LAPL), a subsidiary, is under litigation. LAPL has power supply agreement with Haryana Power Generation Corporation Ltd. LAPL has recognised revenue as per the CERC rate based on the application filed to fix tariff with Haryana Electricity Regulatory

LAPL is confident of favorable verdict and has accordingly recognized differential revenue as per the CERC rates, while payments have been released by the customer on the basis of erstwhile power-purchase agreement (PPA) rate. The differential or disputed receivables amounted to Rs 116.3 crore as on 30 June 2012. The auditors have qualified accounts on this count for FY 2012 and its limited review report for the June 2012 quarter.

Lanco Infratech has adopted amended Accounting Standard-11 (on the effects of changes in foreign exchange rates). Thus, from 1 April 2011, the company is adjusting foreign exchange difference (gain or loss) to value of capital assets. This, has helped it to report lower losses. The foreign exchange difference that remains unamortized stood at Rs 282.9 crore.

Promoters hold 72.31% equity stake in Lanco Infratech. The higher promoter holding means it has scope to dilute equity to raise funds that can be used to retire debt. Also, the company has certain investments that could flourish in future. Lanco Infratech holds 5% equity stake in the Indian Energy Exchange, promoted by Financial Technologies and Power Trading Corporation.

The challenges seem to be pouring from all the sides for Lanco Infratech. The company would take at least one to two years to emerge from the financial and operational debacle. The firm plan to offload assets to lighten debt is fine. But it is a gigantic task to sell assets at reasonable valuation unless it is fire-sale. Lanco Infratech is supposedly in discussion with private equity firms Bain Capital and Kohlberg Kravis Roberts to offload equity stake in its power business. The equity stake put on block is believed to be around 30%. The company has not officially commented on this report. Second, the industry scenario for power and infrastructure needs to improve for the company to report financial turnaround in future.

The Central government announced a restructuring package for power distribution companies end September 2012. This is expected to ease the cash crunch faced by several financially sick state electricity boards (SEBs). The contours of the scheme are awaited. If implemented, this could help Lanco as it has receivables from SEBs running into several crore.

Thursday, October 4, 2012

Yes Bank Ltd Received Retail Equities Broking Licence

Private lender Yes Bank Ltd received a retail equities broking licence from India's central bank, stepping up competition in the financial sector for a piece of the country's savings.
Yes Bank expects to launch operations of the securities broking business during 2013-14 fiscal year that begins in April, it said in a statement on Friday.
Indian banks compete aggressively for a slice of the retail deposits to help fund a liquidity shortage at a time when lenders are dealing with a pile of non-performing loan portfolios.
Yes Bank said the broking business would offer synergies to its retail savings and loan offerings.
"The timing is opportune given our thrust and focus on retail banking," Rana Kapoor, chief executive of the private lender, said in the statement. 

Wednesday, October 3, 2012

Noida Toll Bridge Lowers Debt.

Noida Toll Bridge is a special purpose vehicle formed to construct and operate an eight-lane bridge connecting Noida to south Delhi across the Yamuna river. 

At present, many road projects are in distress due to less than forecasted traffic flows. However, Noida Toll Bridge Company seems an attractive bet due to its low risk concession agreement. The company's concession agreement assures a 20% internal rate of return (IRR) on the project. 

It has been awarded a leasehold title of 99 acres of land to make good any shortfall if the IRR target is not met. The company has reduced its debt from Rs 107 crore in FY11 to Rs 75 crore at the end of FY12. With lower debt, the company's earnings are expected to improve in the coming quarters. 

At current market price of Rs 28.6, the stock is trading at a price-to-book value of 1.1, which is inline with its peers.


Tuesday, October 2, 2012

What is the Dry Bulk Shipping Industry BDI Index Saying?

During the past decade or so nearly every sector of the transporation industry has run into serious Secular cycle problems. First it was the Airlines, then Trucking, then the Autos, and now Shipping. While the first three sectors appear to be in some early stages of recovery. The Shipping sector has yet to find the bottom. During the 2000′s demand-driven commodity boom, shipping rates skyrocketed and new ships were coming online every month. After the 2008 collapse in demand and commodity prices, the shipping industry found itself dealing with much lower rates and huge excess shipping capacity. During the past four years some shipping companies have been forced into bankruptcy, some are facing bankruptcy, and others a struggling along with high long term debt. To reverse this downward cycle, demand has to rise along with shipping rates while industry consolidation continues.

Since the middle of the last decade we have been tracking the Baltic Dry Index (BDI). This is a weighted index of international shipping rates. Its three components are the Capesize, Panamax, and Super Panamax (Handy) dry bulk cargo ships. For the past few months we have been examining this index, looking for signs of a potential upcoming bottom in this industry. We have concluded that is likely to occur this year.
When reviewing the BDI from 1985, and using written reports on the shipping industry as far back as the early 1970′s, we believe we have uncovered a regular 13 year cycle. It appears every 13 years shipping rates make a cyclical low: 1973-1986-1999-2012. After the low is in place rates generally rise for the next 9 years, then decline 4 years into the next cyclical low. During the 9 year bull market, rates rise for 5 years, decline for 1 year, and then rise for another 3 years into the cyclical peak. In addition, in the early stages after the cyclical low, rates typically triple during the first 2-3 years. This is the recovery stage for the shipping industry.
That downtrend should end the bear market is dry bulk shipping rates. With three months left in the year, it appears the 4 year down Cycle should bottom before year end. When it does we would expect shipping rates to triple over the next two to three years.


Monday, October 1, 2012

Using Residential Property For Commercial Activity.

In cases where zoning laws and the co-operative housing society in question permit it, there can be cases where running a business from home is viable. Doing so can save on the cost of renting or purchasing a commercial space. It also saves on the cost of commuting to and from work as well as on many operational costs.

It bears mentioning that full-scale commercial use of a residential flat is often opposed by co-operative housing societies. That said, utilizing 20% of the space in a residential flat is legally permissible as long as the business in question falls within certain categories.

For example, the MSC Apellate Court ruled favour of a certain resident in Ghatkopar, Mumbai in 1986, stating that carrying out activities such as yoga classes in a residential flat does not constitute a breach of the bye-laws of a co-operative housing society. The ruling basically meant that the professional activity of teaching certain arts would not be viewed as commercial activity, even if certain charges are levied.

In a case filed under the Karnataka Shops and Commercial Establishments Act, 1961, it was ruled that the use of a residence as an office by chartered accountants, lawyers and doctors would not be considered as a commercial activity. The premise of this ruling was that the work and skill involved in such a profession is predominantly mental or intellectual rather than physical or manual.

These cases clearly indicate that there are some instances where professional activity in a residential flat would be considered legal. However, these should not be taken as blanket rulings. Apart from the individual bye-laws of housing societies, different state laws would nned to be considered.

Whatever the other aspects of the case may be, it is certainly necessary to get the approval of the housing society in a general body before using a residential flat for commercial purposes. Depending on the nature of the business and also subject to the approval of the housing society, it may also be necessary to obtain permission from the local municipal authorities for conversion of the flat into a commercial establishment.

It may be possible to obtain permission from the housing society to conduct a business that does involve any movement of people or storage of goods in the residence. Nevertheless, it is not a good idea to start any kind of business in a residential flat without getting complete clarity on the legal aspects.

Even if a housing society permits business activity in a certain case, such activity can still be deemed illegal and be notified accordingly. It is not advisable to take anything for granted, and to have the legality of such an undertaking examined by a qualified lawyer.

Sunday, September 30, 2012

Lanco Infratech Ltd will raise up to $1 billion by March 2013.

Infrastructure company Lanco Infratech Ltd is set to raise up to $1 billion (about Rs 5,500 crore) by March by sale of assets and equity infusion.
The infusion will be by way of sale of equity covering power projects, road assets and other segments, according to L. Madhusudhana Rao, Executive Chairman.
Speaking on the sidelines of the company annual general meeting here, the Lanco chief said the company has an installed capacity of 4,000 MW and implementing about 10,000 MW of power projects in all. “We plan to raise up to $750 million by sale divestment of equity in the power sector alone.
“We believe that the 10,000-MW capacity which is under the company portfolio, including those under implementation by 2015 are worth $10 billion (about Rs 55,000 crore). By divesting equity stake, we will bring down the overall debt-equity ratio to about 4:1 from about 4.3: 1,” he added.
In fact, Lanco consolidated various power assets and was in the process of finalising a public offer. However, the market conditions are no longer conducive. “Therefore, we are engaged in talks with private equity players to divest stake. We would have actually closed the deals but now we expect to close it by March,” he said.
The company plans to deploy $150 million in solar projects now at various stages of execution. Therefore, the fund raising would span power, roads and solar power segments.
Earlier, shareholders demanded the company management to consider dividend and bonus to reward them. The management stated that the conditions are tough for infra companies and it will take about few quarters more for things to get better.

SP Tulsian's View on Infra:

Q: What is your thought on the processes that are being fast tracked in the infrastructure space and how many projects can come on board and eventually help many of these infrastructure stocks?

A: I think quite positive and this has been the need of the hour, the difficulties which have been faced by National Investment Board will be giving fillip to all the projects. I am keeping my little apprehension on the airport projects except that, all will stand to gain. One can eye this space and mainly power generation because power generations or the power sectors look be the double beneficiary because of the Discom restructuring and formation of the National Investment Board. One can keep an eye on Lanco Infra , IVRCL  , Nagarjuna Construction Company, they will all be seen to be the big beneficiary of this National Investment Board move.