Author: CP

Now small/retail Indian invetors can also ride the Indian realty boom. Highlights of Subrmanyams article as it appeared on Moneycontrol. SEBI has released gudieliness on Realty Mutual Funds.

Advantages to the investor
Reduction of Risk (single property vs. a portfolio of property)
Smaller amounts can be invested
Easy Redemption
Diversification

However for the savvy investor with good investible surplus, and a high risk appetite the returns from a direct investment in property could be higher. However such a savvy class is in the minority.

Disadvantages to the investor
1. Lack of transparency in deals.
2. Inadequate documentation of history of prices at which deals are struck.
3. Cash element.
4. Legal hassles.
5. Low professionalism.
6. Low regulation
7. Lesser liquidity especially as compared to equity markets
8. The industry could also be a victim of pricing manipulation or fraud
9. Lack of talent appropriate for this industry
10. High transaction costs.
11. Lack of uniformity of laws governing property across many States in India.

Also how will the NAV be calculated ? What are the basis for the same ? It is unclear until someone really hits the market.

NOTE: Till now HDFC & Kotak had realty funds which was only for the high networth individuals(Minimum Rs 5 crores investment was needed with a lockin period of 3 years or 7 years)

Indian market valuations which were fairly valued couple of weeks ago now seem to be overstretched. Indeed they are. Dr. Mark Mobius of Templeton investments is of the opinion that India is trading at a forward P/E of 20 while other emerging markets are at 13. Also note that their is no significant FII investment in the country. It is just Rs1418 crores for the month of June and Rs254 crores till date in July.

Indian Investors be carefull as their will be stock specific activity in the coming days. Book atleast 30% profits today if you have bought at 9000 levels. SELL now!!

In a recent report by Citigroup, they estimate that office and commercial property price may not melt down as their is still huge demand for the same. However, the returns are also not likely to be exuberant from current levels. Yields are liekly to be around 15% on development projects.

Trammell Crow Meghraj adds that, In the current scenario, it makes sense to go for long-term investing. Short-term investing is not advisable given the economy’s inflationary pressures.
In the contest of Indian Comemrical Real Estate, short-term means an investment horizon of 2 years. Medium-term means a period between 2 to 7 years. Long-term is more than 7 years.

I had an opportunity to participate in a conference call with HDFC funds manager, Tushar Pradhan. Excerpts from the call are as follows.

• Tushar feels that the larger extent of sell off in India compared to other emerging markets is not justified. Hedge funds are supposed to be the party spoilers with large sell offs after US interest rate hike. They are looking for short term gains just like GREEDY investors. They can’t hold the stock for years, for example, Hindustan Lever., took a while for the company to turn around. More on HLL later.
• HDFC fund conducted a review with 220 odd companies and none of the companies have changed their guidance or earnings estimate. (Courtesy: Milind Barve). Tushar also held the same view.
• Bear market ? What ? Are you crazy ? What is a bear market ? Falling corporate earnings, falling GDP, high inflation & double digit interest rate. Do you see them in India ? No. Loud and clear, we are not heading towards a bear market.
• Equity investments are for long term only. In the context of Indian economy, long term is a minimum of 3 years. In the context of American economy, long term is 7 years. For lumpsum investments, HDFC had launched a fund with 5 years lockin period, HDFC Long Term Equity fund. However, I advise you to go for SIP.
• HDFC hasn’t seen significant fund outflows.
• Corporate Profitability for 06-07 & 07-08: What has happened is, in 2001 the Indian markets bottomed out as corporate earnings hit a new low. From 2002, the situation started improving and was clearly visible in 2003. So that financial year, you might have seen a company grow 75% to 100%. In the next financial year they again grew by 50%. But that was only possible because their earnings had decelerated in 2001. From now on you won’t witness the same growth, but a modest growth of 20% is achievable.
• On HLL: It is an excellnt company with professional management. Worldclass products and highly efficient distribution and logistics channels. During weak economy, the company suffered a lot. Took a while for it to turnaround. But with retailing boom insight, the company is well poised to take advantage of its Brands and Distribution channels. HLL is a long term story. He didn’t specifically mention to BUY or SELL this stock, but quoted as an example how Hedge Fund managers were in a hurry to dump it.
• To a question by a MF sales person, Tushar asked them to look for a return of 12-15% over next 5 years, but I am confident they will outperform that. I expect atleast 20% compounded return. So once again, have long term view and INVEST, INVEST and INVEST on Dalal Street.
• The overall underlying tone of Tushar was very bullish and confident for any investor who is looking from long term perspective. Also Tushar holds the opinion that Equity is the only asset class that can give superior returns in long term.

Thanks & Happy Investing!

Hello:

Now I would like to discuss something related to valuation of stocks.

Jay’s model for analyzing a scrip:
He follows DCF(Discount cash Flow) model for analyzing a scrip. He also asked investors to look at Return over capital Employed(ROE). Rising interest rate will eat into the bottom line of the company. Jay if you are reading this, kindly tell us what impact rising interest rate will have on debt free companies 😉

• Do not believe in what a fund manager or broker says. Jay further adds that gone are those of doubling your money in a month. Anybody who directly talks about BUYING or SELLING a particular stock has vested interest in it.
• Kotak Mahindra has researched 1300 companies’ annual results available till 18-05-2006 and has found that those companies have grown by 23.5% YoY and expect to grow atleast 17.7% next year.
• Forward P/Es of emerging markets are China – 25.4% , BSE Sensex 18.2%, Russia 14.7%, Nifty 16.2%, Hong Kong 12.3%, Korea – 11.2% and Brazil 10.7% at the end of May-2006.
• Currently June 14th, 2006 forward P/E of Sensex is 15.5 for 06-07 and this makes India look attractive again.
• Jay wants all the investors to follow some disciplined investment, like SIP or STPs by mutual funds or research on your own and hold those stocks for long term. He specifically asked investors as to why they were chasing Unitech constructions and why they are now dumping it as if their is no tomorrow ?

Finally, Jay concluded by saying in his research of Real Estate, Gold & Stock Market over a period of 10 years, Stocks have always yielded the best and will continue to outperform the rest of the investable instruments. Invest, Invest, Invest on Dalal Street. Now or Never.

Thanks Jay!

Hello:

I happened to attend an inevstor meet headed by Jay Sinha, Research Analyst @ Kotak AMC. This meeting has helped me change a lot of my own practices. Here is a brief summary of Jay’s persentation.

Why did the Markets fall ?
Evereybody knew that the correction was long overdue, but why such a drastic fall ? Is it the beginning of a bear market ?
Jay has dismissed in the past and still is of the same opinion,

India is NOT heading towards a Bear Market. Loud and Clear 🙂

The correction was more than expected because of the following reasons.

• India is no more a secluded economy, it is globalizing and hence dependant on global factors.
• Indian economy is now driven to a considerable extent by FIIs. If FII pulls out money of our system, then our markets collapse. FIIs pulled out around USD 2 Billion and that action eroded the wealth on Dalal Street close to USD 65 Bilion.
• Why did the FIIs pull money out of India ? Mainly emerging markets valuations were overstretched. Then the US raised interest rates by 25 basis points. Jays explaination of this helped me clear lot of doubts as to why the inverse co-relation exists between rising interest rates and falling stock markets. Say you manage a fund. 10% is your money and 90% is borrowed money. We all know that Debt funds or Deposits are risk free. When the yield for such instruments rise, then managers and investors look at those instruments and hence some sell off was triggered.
• Indian short terms rates were also raised by 25 basis points to fight inflation. 1 of 3 CEOs were of the opinion that their CAPEX is now a bumpy ride and has to be managed very carefully. Check out my earlier post, I had told that all the companies will now go for CAPEX and only the sound ones will execute rest will die. This will make borroing of funds little bit difficult and also eat into corporate profits thus bringging the EPS down. All though to a minor extent.
• Then the retail investor started selling in panic (no where near to the extent that FIIs have sold). All these factors had a ripple effect and the markets corrected further.
• All of a sudden India’s current account deficit begin to bother FIIs. This is around 2.8% and has always been over 2%. Jay’s thoughts were this contributed to larger fall for SENSEX.

NOTE: Jay is extremely bullish on India. The growth story is intact. Jay spoke about two factors, Indian economic growth and Indian economic flexibility (Political and other Policy matters). Both are sound enough to attract foreign investment. Have a long term view and stay invested. He also spoke that no matter how much the manufacturing & services sector strive and grow, it is actually the Agriculture growth which is mere 3% which requiers thrust and Government of India is all determiend to provide the same.

To be continued …