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.