Unsold tag is getting bigger in Mumbai's property mart

45% of city's under-construction residential apartments find no takers

Mumbai-based realty developer, HDIL, had a Rs 12,043-crore inventory last financial year, while its net sales stood at Rs 1,025 crore, implying an inventory-to-sales ratio of 12:1.

HDIL is not alone; Mumbai’s residential market, the biggest in the country in value terms, is seeing an unusually high unsold inventory level. About 130,000 of the city’s 290,00 under-construction residential properties (45 per cent) are lying unsold due to weak demand and high prices, shows a report released by global property consultant Knight Frank on Tuesday.

Though the number of under-construction units in the National Capital Region (NCR) is twice that in Mumbai, the unsold inventory level in the former, at 26 per cent, is much lower. In Bangalore, the level at present is about 35 per cent. “This explains the dire situation of Mumbai’s residential market,” the consultant said. The stress is so much that Mumbai requires nearly nine quarters to clear its unsold inventory, while Bangalore and NCR need less than six quarters.

REAL WOES

A snapshot of mumbai’s housing scene 290,000 Units under construction 130,000 Unsold units 52% Unsold units priced at Rs 2 crore or above 47,500 Units launched so far this year (down 28% from last year) 26% absorption of units 26% Discount offered on premium housing units by developers

“We expect a more pronounced price correction in Mumbai which may drive the market to a better equilibrium,” said Samantak Das, Knight Frank’s chief economist & director (research).

The slowdown in real estate has also led companies like HDIL and Orbit Corporation to defaulting on loans taken earlier this year from non-banking financial companies, such as Indiabulls Housing Finance and LIC Housing Finance.

The Mumbai real estate markets’ stress has also led to decline in stock prices of listed players. So far this financial year, the shares of city-based HDIL, Orbit and Hubtown have fallen 57 per cent, 72 per cent and 34 per cent, respectively. The BSE Realty Index has declined 37 per cent during the period.

Most of the unsold inventory comprises apartments priced at Rs 2 crore and above — around 52 per cent of unsold homes are in this price bracket. Knight Frank said developers were open to negotiations, especially in the premium segment, reducing prices by up to 25 per cent for sizeable upfront payments.

Other consultants paint an even grimmer picture. Ashutosh Limaye, head of research at Jones Lang LaSalle, estimates unsold units in the Mumbai Metropolitan Region at 60 per cent of all under-construction and ready properties.

According to Pankaj Kapoor, chief executive of realty research firm Liases Foras, Mumbai has an inventory of over 150 million sq ft. “Mumbai needs 1.5 million homes, but the city can’t sell more than 40,000 flats a year due to high prices,” Kapoor says. Developers, it seems, are taking note of unsold inventories. The number of units launched in the city between January and September this year has come down by 28 per cent, on an year-on-year basis, to 47,500 units. The absorption of units during this period has fallen 26 per cent, according to Knight Frank.

Lalit Kumar Jain, president of Confederation of Real Estate Developers Association of India (Credai), however, said the unsold inventory was not very high, given that developers sold only 50 per cent of their inventory during the construction stage and 20 per cent during the completion stage.

But he admitted sales were down due to a negative sentiment. “Prices are higher than prospective buyers’ budgets and inflation and higher interest rates are also hurting buyers,” he said. Jain added the large number of investor transactions in Mumbai might not have been captured by unsold inventory data.

Meanwhile, a report released by HDFC Securities on Monday, said property registrations in Mumbai and its suburbs had seen a 19 per cent jump in October 2013 to 4,900 units. The increase was due to continued registrations of properties sold from 2010-11 to 2012-13, under revised development control rules, the report said.

At 35,948 so far this financial year, the number of registrations has been nine per cent more than 33,142 in the same period last year. This was led by 20 per cent year-on-year growth in Island City registrations; the growth rate in Mumbai suburbs was a muted six per cent, the report said.

“...We expect fresh sales/transaction volumes to remain tepid, as developers continue to hold prices in the face of deterioration in volumes,” said Adidev Chattopadhyay, analyst at HDFC Securities.

India poised for more stupendous leap: Mukesh Ambani

NEW YORK: India is poised for another even more "stupendous leap" in its growth trajectory, Reliance IndustriesBSE -0.28 % Chairman Mukesh Ambani has said but underlined that economic expansion has happened only after the government loosened its "regulatory shackles".

"I believe India today is potentially poised for another even more stupendous leap on its upward trajectory. India's relative weight in the global economy and in the world affairs in general is bound to grow," Ambani wrote in an essay titled 'Making the next leap' in the book 'Reimagining India: Unlocking the potential of Asia's next superpower' edited by global consulting firm McKinsey. 

Ambani stressed that the actions India should take to move forward should be sweeping and comprehensive and not timid.

"As the old India gives way more completely to the new India, a certain amount of flux will be generated. However the good developments will far outnumber others," he said.

The billionaire industrialist noted that economic empowerment for the hundreds of millions of excluded Indians and jobs for the nation's youth can be achieved only through concerted action by the citizens, businesses and government working together. 

That is one of the great lessons of the past two decades, when the economy expanded at a rapid pace only after the government loosened its regulatory shackles," he said.

He said India is projected to overtake China by 2030 as the most populous country in the world with the third-largest economy in US dollar terms. 

Also working to India's advantage is that it is a very young nation, with nearly two-thirds of its people below the age of 35. 

"The possibilities are breathtaking. The most exciting prospect of all is the impetus that could come from tapping the surging aspirations of the 700-800 million Indians who remain excluded from India's success story," Ambani said. 

"If we manage to bring this segment of the population into the economic mainstream, the result will be an enormous enhancement in India's economic and non-economic power as we generate equality in access despite inequality in income," he added. 

Inflation: Is the Worst Over?

The last round of inflation prints have dealt an ugly blow to markets, with CPI breaching the dreaded double digit mark and even WPI climbing to the psychological 7% level. This caused sufficient panic amidst participants ultimately forcing the RBI governor to intervene and provide his interpretation on the CPI print. This wasn’t nearly as worrisome as market had made it out to be. Our own hypothesis on inflation is for the momentum to start to weaken as the 2 temporary factors of unseasonal fruits and vegetables price rise along with currency depreciation begin to roll over. The analysis below is aimed at throwing more light on the first of these temporary factors; the effect of rise in fruits and vegetable prices and the possible path ahead in this context.

 The yellow line above tracks month-on-month change in CPI. The purple line tracks the contribution of fruits and vegetables to the month-on-month change in CPI. In the last 2 years, it can be seen that the contribution of fruits and vegetables to CPI momentum has peaked in June – July and then fallen till December. Hence, there has been a seasonality to fruits and vegetables specifically and primary articles inflation generally that has led momentum on headline CPI lower as well during this period. This year, although a similar turn in momentum happened for fruits and vegetables starting June – July thereby reducing its contribution to headline CPI momentum, this fall in contribution wasn’t as severe as the past 2 years. Furthermore, in the latest October print, the contribution actually increased thereby reversing direction entirely from what has been the case in the past 2 years. Most of this is presumably accounted for by the supply disruption that has been caused owing to skewed rainfall distribution over the past few months. By the same logic now that (as media reports suggest) the supply disruption is smoothening out, fruits and vegetables should re-adopt their historic trend of falling momentum and hence falling contribution to the headline CPI. Whether the CPI momentum falls overall will also depend upon momentum on other variables. In this regard it has been heartening to see momentum in core inflation falling sharply in the October print. If this trend were to continue alongside a reversion to normal seasonality in inflation momentum for fruits and vegetable prices, it is quite likely that CPI momentum and indeed headline CPI readings begin to ease over the next couple of months. If true, this would be a major positive trigger for market sentiment especially as bond supply pressures would abate considerably once we are past November.

Wheat exports tender gets bids higher than floor price

Buyers in Singapore and Dubai have placed the highest bids for export of Indian wheat through State agencies — STC, MMTC and PEC Ltd — for which tenders were opened on Monday.

At the top-end, bids received by these agencies ranged from $284.70-289.90 a tonne, broadly in line with the prevailing global prices, which have increased in the last three weeks.

PEC Ltd received the highest bid of $289.90 a tonne from the Singapore-based Agri Commodities International for about 30,000 tonnes of the 70,000 tonnes wheat offered from Krishna patnam port.

MMTC received highest bid of $285.95 a tonne for 50,000 tonnes of the 60,000 tonnes offered from Kakinada Port by Agrocorp International Pte Ltd, another Singapore-based firm.

Agri Commodities was also the highest bidder at $286.20 a tonne for 30,000 tonnes of the 1.2 lakh tonnes offered by STC through Mundra Port.

Bids from Dubai

The Dubai-based Al Ghurair had placed a highest bid of $284.70 for 30,000 tonnes of the 90,000 tonnes offered through Kandla Port.

The responses to the latest tenders are higher than the floor price of $260 a tonne. On October 30, the Government had cut the floor price for wheat exports by $40 a tonne to $260 to make Indian wheat shipments more viable in the global market after the State entities received poor response to export 1.6 lakh tonnes last month. Against a floor price of $300 a tonne, the bids received by these entities for the October tender ranged between $260 and $267 a tonne, forcing the Government to cut the price.

“It is interesting that the large and medium-sized traders in Singapore and Dubai have made the highest bids. May be they are taking new positions,” said Tejinder Narang, a grains trade analyst. Further, none of the multinationals, such as Cargill and Louis Dreyfus, submitted bids at the highest levels.

Narang also pointed out that the Indian wheat has come at a par with supplies from the Black Sea region, where it is quoted between $280 and $290 a tonne.

The Government has decided to ship out about two million tonnes of wheat to cut surplus stocks and create space for other cereals such as rice, for which paddy procurement is currently on in states such as Punjab and Haryana. On November 1, India’s wheat stocks stood at 34 million tonnes, three times more than the target for the October-December quarter.

The State entities had exported 4.2 mt of wheat in fiscal 2012-13 and the value of these shipments was $1.4 billion. The average price fetched by the Indian wheat stood at $311.38 a tonne last fiscal.

For some sector, election is party time

It is not just pollsters and political parties who are all geared up for the five State elections and the general elections to be held over the next six months.

Companies running print and television media houses, the ones manufacturing utility vehicles and those engaged in power generation and trading are in a tizzy too, for their business gets a direct boost from the Great Indian Elections.

Ad revenues

What’s a poll campaign without full-page photos and adverts extolling the social schemes of the big leaders? Well, that translates into strong ad revenues for newspaper companies, particularly the language media.

Consider what happened during the 2009 parliamentary elections. The global financial crisis had cast a shadow on the Indian economy that year, and for 2008-09, advertising growth for media companies was below 5 per cent. But DB Corp, publisher of Dainik Bhaskar, saw its ad revenue for the year grow nearly 12 per cent. The parliamentary elections were held in April-May 2009, and ad revenues got a boost in the January-March quarter.

Macho vehicles

Don’t forget the long cavalcades of muscular vehicles ferrying the netas, security men and sidekicks to their speaking venues. That means strong sales for companies churning out macho sports utility vehicles. In the January-March 2009 quarter, sales of utility vehicles by Mahindra & Mahindra Ltd grew 12 per cent to 48,088 units, compared with 42,999 units the previous year.

Industry volumes shrank 15 per cent that quarter. But M&M notched up strong sales of Bolero and the then newly introduced Xylo. M&M’s good run continued in the April-June 2009 quarter, too, with its utility vehicle sales growing about 30 per cent. New launches helped, but elections provided the additional zing.

Power play

Come elections and the powers-that-be, anxious not to sour voter sentiment, go the extra mile to ensure better electricity supply. This means more short-term transactions in merchant power. Companies that export excess power to the grid and power exchanges such as the Indian Energy Exchange and Power Exchange India benefit from this.

Rahul Prithiani, Director, Crisil Research, confirms that there was an increase in the price and volume of short-term power traded in the months to the 2009 elections.

The average tariff on the Indian Energy Exchange went up to as much as Rs 10.1 a unit in April 2009 only to subside once polls were concluded. Again in 2011, prior to State elections, power volumes in the short-term market saw a spike of 25-50 per cent.

‘Buy’ ratings

With history providing ample evidence of a business boost from elections, brokerages have begun to put out ‘Buy’ ratings on some of these stocks. A report by brokerage Anand Rathi, expects regional print players DB Corp and Jagran Prakashan will grow 2013-14 advertising revenues by 12-13 per cent, compared to 4-7 per cent in 2012-13.

There are already encouraging signs. Nai Duniya, a Hindi daily published by Jagran Prakashan in Madhya Pradesh and Chhattisgarh (States going to polls this month) reported 30 per cent growth in advertising revenue in the September quarter.

The auto sector is in not doing well, but for M&M, things are looking up. From an average of 15,000 units in June-August 2013, the company’s utility vehicle sales have risen to 18,000-22,000 units in the last two months, helped mainly by the Scorpio and XUV 500.

Short-term power contracts also seem to be on the rise. In September, Chhattisgarh and Rajasthan doubled the power purchased from the market. As we enter the frenetic election months, at least some companies and stocks will be quite busy, no matter if the economy remains in the doldrums.

Beware of speculation that Bernanke likes

Zero Hedge, a financial website, used a spreadsheet created by Aswath Damodaran of New York University to make the point that Twitter had to generate revenue of $32 billion by 2023 to be worth $45 per share today. The stock of Twitter was priced at $26 in its initial public offering (IPO). On the first day of trading, it traded at an intra day high of over $50 per share and closed the week ended 8 November at $41.65 per share. That is still more than 60% above the IPO price. Online retailer Amazon.com clocked annual sales of $60.0 billion in 2012 alone. Yet, in its nearly two decades of existence, the company has made cumulative profits of just $2 billion. Amazon’s stock has gone up by about 150% since mid-2010.

On 6 November, Fitch Ratings released a report (freely available upon registration at their website) on home prices and economic risk factors in the US. This is what they had to say about home prices in California: “Having avoided the worst of the downturn, but participating fully in the drastic growth of the past year, much of coastal California is now approaching the peaks of home prices seen during the expansionary bubble of the early 2000s. In particular, the San Francisco Bay Area has seen some of the largest unchecked growth and at current rates will eclipse its 2006 levels within six months… Most concerning, there is growing evidence that recent gains have been bolstered by an increase in investment sales, both to institutions and local investors. Buying and selling a home within a short time window (flipping) is on the rise and the percentage of all-cash sales has risen dramatically from a year ago, standing now at nearly 50%. Cash sales are often indicative of investor behaviour and the concern is that housing prices are being driven up more through speculative buying than from an increasing base demand.”

These are clear signs of speculation, if central banks are looking for one. Chances are that they are not and they won’t. Instead, the focus is on market and economic instability caused by short-selling speculators. However, we should remember the following: uncovered or naked short positions in bonds or in stocks are the equivalent of anti-incumbency in a democratic political set-up. They are part of the checks and balances of financial markets as the opposition and media ought to be in a democratic set-up. They are legitimate tools to express dissatisfaction with the way a corporation or a sovereign is managed. In the long-run, that is a positive and not a negative for shareholders’ interests, systemic stability, improved governance, economic growth and economic well-being even if there is volatility, turbulence and dislocation in the short run. Without those, lasting changes for the better seldom occur. Many examples can be given.

George Soros’ bet against the British pound in 1992 might have been a humiliation at a personal level for Norman Lamont, the then chancellor of the exchequer, and for the leadership of the Bank of England. But it allowed the currency to break free of the shackles of being tied expensively to the German mark. The substantial depreciation of the pound that followed reflected the British economic fundamentals at that time and facilitated an economic recovery. More recently, without the speculators’ attention on the sovereign debt situation in Greece, Spain and Portugal in 2010-11, it is inconceivable that these countries would have embarked on a severe and difficult but inevitable fiscal restructuring and austerity. It is not without risks, but without painful fiscal reconstruction and restructuring, it might well be impossible for these nations to have a stab at returning to economic growth in the medium term.

While short-selling speculators create a two-way risk for asset prices, long-only speculators are, in the long-run, more dangerous and speculation from the long side is eventually destabilizing as it drives prices higher and creates asset bubbles.

Comments made by Tim Price, a veteran of the fund management industry in the UK, on stock markets in a recent blog post provide plenty of food for our brains. “The stock market, after all, is not—in our view—an engine to create wealth so much as a historical record of where it’s already been created. Listed stocks are second-hand assets; the primary purpose of the stock market is to raise expansion capital for young companies and simultaneously to allow founding entrepreneurs and their backers to cash in some of their chips. If you view the stock market as the default and almost exclusive choice for your savings, you are acting not as an investor but as a speculator. Nobody in their right minds would devote their life savings to hoarding second-hand cars, but then a colossal industry of vested interests and economic agents has not arisen around the second-hand car trading market, spurred on by facile second-hand car cheerleaders in the popular media.”

Our governments are leading us, eyes open, into the purgatory. The tragedy is that we are acting as though we are blindfolded.

End to KG-D 6 Dispute Likely,RIL Agrees to Furnish Bank Guarantee

Govt can encash the guarantee if co is found guilty of hoarding gas 

Reliance Industries and the government took a big step towards resolving their raging dispute as RIL agreed to furnish a bank guarantee,to be encashed if it is found guilty of hoarding gas in the KG D-6 block, while the oil ministry will not ask for lower gas prices for the firm's existing fields. 

After the Cabinet approved a new price formula in June,the government developed cold feet and started discussing a new proposal to deny higher prices for RIL's fields,which produced much lower gas than the approved production plan. This was based on the official view that output fell because the company did not drill the promised number of wells although RIL said production fell because of geological complexity.

The ministry has revised the Cabinet note. We are proposing that Reliance Industries should be permitted to furbish a bank guarantee as security. Encashing it will depend upon dispute resolution of low production from KG-D 6.If RIL is found guilty of hoarding gas,the government will deduct the bank guarantee, a senior government official told ET Now. 

Industry officials said Reliance had accepted the proposal although the company spokesman declined comment. For the government,the proposed move would be a safeguard because if it is proved later that RIL was not hoarding gas; the company would demand payment of higher prices for gas already sold to customers. 

It will be difficult to recover the price difference from customers at a later stage, said a government official.Also,if it turns out that RIL was entitled to higher prices,the government would lose more than.5,000 crore in royalty and state share of profit from the field,the official said.

The oil ministry and RIL are already engaged in arbitration over the governments move to disallow $1 billion expenditure made by the company in developing the controversial gas fields because of sharp fall in output. Oil ministry officials say that the outcome of the arbitration would prove whether the contractor deliberately suppressed gas output or it was a genuine geological surprise.

RIL chairman Mukesh Ambani and BP CEO Bob Dudley had met top government officials including oil minister Veerappa Moily last month,protesting the proposal to disallow new gas price to old producing fields.They strongly contested the governments move to deny new price for gas produced from D1 and D3 fields citing contractual provisions.

Oil ministry officials say that it is important to notify the CCEA's June 27 decision to raise gas prices uniformly from April 1, 2014 so that it is in-line with the Rangarajan Panel formula at the earliest. Moilys team also wants to ensure it is a uniform policy across the sector,for all players and does not want to hamper investor sentiment in a sector that is on the brink of stagnation.

The senior government official also said,"We are awaiting comments from various ministries on the revised KG-D 6 gas pricing proposal;will take a final proposal to the CCEA post this." 

Proposing Truce 

If it is proved that RIL was not hoarding gas,the oil min will not ask for lower gas prices for existing fields If it turns out that RIL was entitled to higher prices,the govt would lose more than.5,000 crore in royalty Moily's team wants to ensure it is a uniform policy across the sector

Equity Play: Markets Rising,But Investors are Missing

The equity markets some parts of the markets are zooming up,but the Indian investor has disappeared. 

After five years,the large-cap indices the BSE Sensex and the NSE Nifty have touched new high points.In a manner of speaking. Why in a manner of speaking Because we live in a very different world since the Sensex previous high,which was 20,827 points on January 11,2008.

If one were to adjust the Sensex for inflation since that date and try to arrive upon its real value,it turns out that the index now stands at about 13,000 points.If one also takes into account the companies that were subsequently taken out of the Sensex (because their stock prices collapsed spectacularly),it turns out the Sensex is actually at about 11,500 points today.And if one were to further calculate a dollar-adjusted price for the Sensex (without the inflation adjustment,because that would not be fair),then it turns out that the Sensex is today at about 13,770. 

It gets even worse when you move outside the exalted sphere of the large-cap companies that the Sensex and the Nifty are composed of. The NSE mid-cap index is 22% lower than its high,even without any of its adjustments and the small-cap index is 58% lower! Using the same scale as the Sensex for comparison,an inflation adjusted small-cap index is now down from about 20,827 to 6,250. Thats a steep decline indeed. 

So,are you surprised then that despite the laboured efforts of the headline writers,there is absolutely no excitement about the equity markets that an all-time high should bring.

The business of getting people to trade in equities is actually dying.In the last couple of weeks,two major retail brokerages,HSBC Invest direct and IIFL have announced that they are getting out of the business. Back in January 2008,this business was in a very different situation,to say the least.The latter outfit is actually said to be the country's largest retail brokerage.The carnage is even worse for smaller stock brokers.According to Sebi data,almost 500 brokers have officially shut shop since the current financial year began. That's close to three brokerages shutting down on every working day.There are a number of reasons for this,but the main one is that retail equity investors lost way too much money and this has left them not just apathetic but actively hostile to equity investments.

The index levels that have quoted above are actually quite benign compared to the mount of money people have lost by following the advice of their brokerages.As has been clear for years from the aggregate data,brokerages were almost entirely in the business of guiding clients into leveraged derivative trading.The losses that investors suffered there have been completely out of proportion to the fall of the indices.Not just that,at some point after the equity markets collapsed,the same intermediaries moved investors to highly-leveraged commodity trading.While India never had any substantial number of individual investors who would buy for delivery and then hold equities for a while,trends in the last 6-7 years have seen such activity drop close to zero.And its quite clear that the prolonged stagnation of the equity markets is only one part of the cause,and the mutant investment culture fostered by the intermediaries should carry the bigger blame for investments not reviving even when the markets are showing signs of life again.

In the face of all this, Sebi longstanding crusade encourages retail investors appear even more quixotic.No matter where stock prices go from here on,its best to recognise that the old model of retail investing is dead for good and is not showing any signs of revival even as the markets are.The sensible way in which such investors should come back is probably through low-cost equity funds like index funds. That's the route which the regulator and financial intermediaries should look to encourage.

UP Cane Prices may be on their Way up,Sugar Mills Miffed

Reeling under decade-high cane arrears and delayed crushing,this might be just the beginning of a crisis with the commencement of the new sugar season for North indian sugar belt.

Caught amidst the tiff between cane farmers and private sugar mill owners over high cane price,UP authorities indicated that the governments favour might bend again towards the farmers,with a year-long rise in cane prices.

The government cannot reduce the cane price over last years.Its not even a point of consideration while we go for deciding the cane price for this sugar season, said Rahul Bhatnagar, principal secretary of UP governments sugar and cane department.Current cane price in UP is.280 per quintal. Private sugar mills have been requesting the government to either reduce it to.225 per quintal or adopt the R angarajan formula.

Going with the Rangarajan formula would mean base cane price of.170 per quintal, over and above of which we decide the revenue sharing formula. But this base rate is too low for the UP farmers under the current scenario, said a senior official at the UP Sugarcane Development Department.

The first meeting of this sugar season over cane price decision on Friday witnessed farmers demanding cane price of.350 per quintal. The mills are adamant to implement the Rangarajan formula or fix the cane price at.225 per quintal. 

State authorities have made it clear that cane price this season would depend hugely on the escalation of the input cost for farmers over the years.Cost of agriculture inputs,fertilizers and fuel has shot up substantially and the farmer needs to be compensated for it, said Bhatnagar. Requesting anonymity,a senior official at the cane development department calculated the price and told ET that on this basis,the cane price is likely to go beyond. 300 per quintal this sugar season.Sugar mills arecl early miffed.

What about our input cost going up Raw material cost for us has gone up by 70% in a year while sugar prices have increased only by 6%, said a member of the UP Sugar Mills Association (UPSMA ).

Things will get better as worst behind us: Prashant Jain

Are you surprised by this rally that has taken indices to all-time highs? Most people were expecting stocks to be affected by corporate performance, which surprisingly, was good.

The Sensex is actually where it was in January 2008 and broader markets are, in fact, 10% lower. In this period, profits have grown by roughly 50%; P/Es have thus moderated significantly. Going by prevailing low P/Es markets had to move up at some point of time. Exact timing in markets is futile and markets are known to move up and down when it is least expected. Thought the recent rally has taken many by surprise, it was waiting to happen for a while, given the support of valuations. We have been positive on the markets for more than a year and had recommended increasing exposure to equities when the Sensex was near 15,000 in May 2012. P/Es are still below average and there is meaningful room for them to move up as economic conditions improve and interest rates come down.

In this rally, technology, FMCG have lagged behind while others such as cyclicals have done well. Is this justified by fundamentals?

In my opinion, this is justifiable based on valuations and with a long-term view. As economic conditions deteriorated over the past few years, a large number of projects got stuck. As interest rates moved higher, the main casualty was capital spending in the economy whereas consumption continued to grow supported by high fiscal deficit, high subsidies and falling household savings. As a result, consumer and pharma companies continued to do well while other sectors suffered and money continued to shift to them. As this process continued for a few years, premiums for these sectors have reached unsustainable levels. Besides, the FMCG sector is now experiencing the lag effect of economic slowdown and earnings have been below expectations.

Do you then think that we have the makings of a broad-based rally? Is the upmove in cyclicals a precursor to a possible economic rebound?

The economy is not in great shape, but the direction is now right and the worst is behind us. Moving into the second half of the current year and the next financial year, economic growth should improve, interest rates should head lower, capital formation should revive, led by roads and power distribution and transmission sectors. Markets are beginning to appreciate the improving economic conditions, risk appetite is coming back and that's why the role of leaders and laggards is getting interchanged.

What about continuing economic headwinds? Fiscal deficit, high oil prices etc?

I am not an economist, still in my limited understanding, the worst is behind and things should continue to improve on most fronts as we go along. Fiscal deficit is still high and more steps are needed to bring it down in a sustained manner, most important being elimination of diesel subsidy. Oil prices are a key variable (though not in our control) and can hasten or slow the recovery process depending on whether they move lower or higher respectively. The recent widening of gap between Nymex and Brent is indicating lower oil prices. Rising Iraq and US shale oil/ gas production and the rising possibility of Iran sanctions being lifted are also supportive of lower oil prices. However, a spike in oil prices is a key risk .Higher oil prices will slow down the progress in the economy. On the other hand, a fall in oil prices, will hasten the recovery process. Internal policy direction is now right and does not pose a serious risk. The growth drivers of Indian economy are structural and sustainable. Thus, despite a trend of rising decadal growth rates, there are a few years every now and then when we become complacent, take growth for granted, follow wrong policies leading to slow growth and then after corrective actions that are often forced upon us, the economy resumes growth. In my opinion, we are at the juncture presently where a lot of pain has been absorbed, where a lot of corrective actions have been taken and the results will show over the next few quarters.

Retail investors don't seem to be buying this. Redemptions have been very high for more than a year in equity funds.

Retail behaviour is a very contrarian reliable indicator of market movements. In my working career with mutual funds, never have I seen meaningful retail participation in low P/E markets. Rather retail has invested large amounts in high P/E markets. Take for instance, 1992, after the markets had moved up 10 times in the previous four years and P/Es were at a record 45 times, a single scheme collected nearly Rs 4,500 crore (Rs 20,000 crore at today's prices). In 1999, IT funds and IT stocks attracted very large sums of money at three-digit P/E multiples. In 2003, at record low P/Es of less than 10 times, the net flows in all equity funds in the country were around Rs 100 crore in one year. In 2008, at high P/E multiples again of 20-25x, inflows in equity funds were 50,000 crore in a year. Since April last year till date, nearly Rs 20,000 crore have been withdrawn from equity funds at P/Es of nearly 14 times. This behaviour of buying equities only when they are expensive and not buying or in fact selling when they are cheap is puzzling, unfortunate and inconsistent with human behaviour in other asset classes.

What do you think retail investors should do now? Put money into equities?

In my opinion, equities are a great compounding vehicle (Sensex is roughly doubling every 5-6 years in line with nominal GDP growth rates since inception in 1979) and investors should simply practise low P/E investing. Past data suggests that investments in equity mutual funds made in low P/E markets (say a P/E below 15) have done well over 3-5 years; on the other hand in high P/E markets (say a P/E of more than 20), investors should be cautious.

QE tapering will probably happen some time next year by March or so. Will Indian markets see another round of chaos and FII sales?

In my opinion, this issue has been blown out of proportion. One, the main impact of this should be on external debt flows and we have seen the impact of that already. Two, in my experience, the same issue has seldom impacted capital markets twice and the fall in rupee and equity markets a few months back have significantly discounted this issue.

Modi Forces Goldman to Take Lotus Position

Influential global brokerage upgrades India rating to marketweight from underweight citing optimism over political change 

Goldman Sachs upgraded Indias rating to marketweight from underweight on the perception that BJP-led National Democratic Alliance could prevail in the 2014 elections while adding that better corporate profitability and signs of an early pickup in cyclical sectors have also played a part.Currently,the macro challenges that India faces in terms of external and fiscal imbalances,high inflation and tight monetary policy are being dominated by expectations of political change, Goldman said in its 18-page report,Modi-fying our View: Raise India to Marketweight.Narendra Modi is BJPs PM candidate.

The report said the earnings outlook was stabilising and FY14 EPS (earnings per share) forecast was being increased to 11% from 8%.The firm has revised the Nifty 2014 target to 6,900,about 10% higher than its close on Tuesday.Goldman is the first major brokerage to upgrade Nifty forecasts based on investor perception of a strong BJP showing in the May 2014 polls.Indian stocks have surged 22% from the August low of 17,448 to a record of 21,321,helped by.31,200 crore of purchases by foreign funds that have returned following the postponement of a decision on the Fed taper,having exited on talk in May of the bond-buying coming to an end.On Tuesday,the Nifty ended 1% down at 6,253 while the Sensex ended 1.25% down at 20,975.

Wilmar eyes stake in Shree Renuka Sugars

Wilmar International, a Singapore-based agro-business group, has initiated talks to buy stake in top sugar refiner Shree Renuka Sugars. Sources familiar with the matter said Wilmar is keen on buying a majority stake in the Indian company, which is looking at various options to ease its debt burden of about Rs 8400 crore.

Shree Renuka had borrowed to part-finance the acquisitions of two loss-making sugar companies in Brazil in 2009-2010. The company bought Equipav S A Acucar e Alcool for $329 million (Rs 1,500 crore based on rupee-dollar value then) in 2010 and Vale Do Ivai S A Acucar E Alcool for $82 million in 2009 (Rs 380 crore based on rupee-dollar value then).

Talks are still preliminary and may not fructify into a deal as it is not clear whether Shree Renuka’s promoters, led by the company’s vice chairman Narendra Murkumbi, are interested in selling a majority stake. The talk was that Shree Renuka was interested in selling stakes in the Brazilian subsidiaries.

If Wilmar, known as the world’s leading producer of palm oil, buys a majority stake in Shree Renuka, it would pave the group’s entry into important sugar markets such as Brazil and India.

The value that Wilmar would pay for the stake in Shree Renuka could not be ascertained. On Friday’s closing price, Shree Renuka was valued at a little over Rs 1,500 crore. Shree Renuka shares, which fell 1.1% to close at Rs 22.40 on Friday, have gained 20% in the last two weeks.

“There would be a premium in valuations if the deal moves in the direction of a majority stake sale because Wilmar will gain access to two markets,” said a person in the know. Brazil is the world’s largest sugar exporter.
In response to a Business Standard query on the matter, a Shree Renuka spokesman said, “We deny your queries listed in the email”.

A Wilmar spokeswoman said, “We do not comment on market speculation.” Asked if the company if looking at the acquisition route to grow, she said, “We are constantly looking at opportunities to grow our various businesses, both organically and inorganically.”

Wilmar set its foot in the sugar sector with the buyout of Australia’s Sucrogen. Since then, the company has purchased mills and refiners in countries including Indonesia.

Shree Renuka is under pressure to cut debt as the company has turned loss-making after the acquisitions. The company, which posted a net profit of Rs 703.41 crore and sales of Rs7 669.44 crore in 2010-11, reported a loss of Rs 31.02 crore in 2011-12 and Rs 374.03 crore in 2012-13

Analysts said the volatility in Brazilian real's decline against the dollar recently had made it difficult for the company to service debt.