Category: Economy, Markets and Macro Views

The co-relation between DalalStreet and Nariman Point is the latter has always followed the former. Whenever, the Sensex has risen, Realty prices in Mumbai also rise starting @ Nariman Point. However, both of them had risen too much and a correction was inevitable. Good for companies with retail ambitions.

HDFC, Chairman, Deepak Parekh had already warned earlier this year, that Real Estate market was not driven by people buying for self occupation,’’ he fumes. ‘‘It’s ridiculous and definitely unaffordable. Nowhere in the world do property rates go up on this scale. Prices are going up every day. It’s a fraud’’

Business Standard reports that in markets like Colaba, Worli and Cuffe Parade, their have been very few transactions since markets collapsed. Also residential prices are headed south in belapur, Navi Mumbai and Kandivali. Very soon the big real estate deals will begin to appear pricey.

Property and real estate stocks are no longer market favourites. Property and real estate counters have lost 20-70% since May 10, when the sensex was at its peak level at 12612. If that’s not enough, many counters such as Adani, Unitech, Patel Engineering, and others hit their lower circuit filters regularly during opening trades locking in investors who want to exit these counters.

Real estate prices will probably correct to an extent of atleast 25%. What worries and surprises the foreign investors is the large sum of Black Money involved in Real estate deals which is not common in the west. Real Estate Volumes have shrunk considerably, too. The word ‘land bank’ is fast becoming indicative of a bubble. “The biggest problem is perhaps how one values it — the land,” says Rasheesh Shah, CEO & MD, Edelweiss Capital. At this point in time, there is nothing clear on how land banks should be valued in India.

KG Krishnamurthy, MD & CEO, HDFC Venture Capital says, “Price levels of commercial buildings were clearly through the roof. Therefore, it definitely had to come down.” However, he says that a correction in land values will happen in the next 6-9 months. “What could bring down real estate prices is the correction in TDR rates, which the government will announce next week,” says Mr Krishnamurthy.

So if you are planning to BUY property in India, you must wait for atleast 3 months to grab your dream home at a bargain.

Since May-10th, the various indices are down as follows

BSE Sensex Down 22%
MidCap Index Down 28%
SmallCap Index Down 33%

With rising interest rates and uncertainity over oil supplies, markets might currect further but nobody knows where the bottom is. If the market keeps falling at this rate, then very soon India will be up for grabs for FREE, which is not going to happen. Nor will the markets make a “U” turn and rise sharply.

I totally dismiss the idea of BEAR MARKET as predicted by Morgan Stanley analyst quoting India’s current account deficit as a major problem. He should know that India has been growing with the same deficit for the past 15 years and will continue to do so. Was this analyst sleeping when the SENSEX was at 12500 ?

I had advised you to SELL on every rise only to buy back later at lower levels. Wait for few more sessions until the markets stabilizes. But if you still have positions in operator oriented & speculative stocks, not too late to unwind. Remember what happeend to HFCL, Global Tele,Silverline, Pentamedia, etc in 2001 ?

I had recommended BOB in my last post on recommendations of my fund manager. Now I see that it is a wider circle. BRICS has put a BUY on Bank Of Baroda.

Broking house, Brics PCG is bullish on Bank of Baroda, BOB. It has recommended a “BUY” rating on the stock with a target price of Rs 276.

The Brics PCG report on Bank of Baroda:

“Bank of Baroda is amongst the largest banks in India, with the biggest overseas presence after State Bank of India. Under the new management, BOB has successfully addressed its earlier concerns of slow credit growth, an unhedged investment portfolio, laggardly technology implementation and low growth in fee-based income.”

“Now, having tackled these issues head on, the bank is embarking on a robust growth path. We expect BOB to post strong business growth in FY07, armed with an adequate capital base to sustain growth. While the numbers do not reflect the improving performance of the bank as yet,
we believe this will definitely change in the coming quarters.

Investment rationale

Accelerated credit growth with improved asset quality, BOB has turned around in FY06, recording a 38% growth in advances. This was achieved via a greater focus on retail, agricultural and other priority sector lending, and was funded through liquidation of excess SLR securities. Credit growth in FY07 is expected to stand at around 25%. Net NPAs of the bank declined to 0.9% at the end of FY06 and the incremental slippage is expected to be around 1% for FY07.

Strong capital adequacy base

Of the total capital adequacy ratio, CAR, of 13.65%, Tier-I capital constitutes around 10%. With enough room to raise Tier-II capital and the option to raise Tier-I capital through hybrid instruments, CAR would not pose a constraint to business growth.

Credit growth coupled with improving yield to drive NII Increase in the PLR rate, the realignment of the interest rate of the sub-PLR credit portfolio, and a higher proportion of CASA deposits and retail assets will drive NII growth.

Investment portfolio protected against interest rate risk

After the recent transfer of securities to the HTM category, the AFS segment is cushioned against an interest rate movement of up to 8%.

Key concern – Poor return ratios

The lower return on equity is a major valuation constraint for BOB. The bank’s ROE of 12.3% at the end of FY06 is significantly lower than peers. However, this is expected to improve, going forward, on the back of improved operational performance. The management expects the
sustainable ROE to be around 15%.

Valuation

At the current P/ABV of 1x, BOB appears to be a cheap stock. Employing the dividend discount model, DDM, we arrive at a target price of Rs276. We have assumed a sustainable ROE of 15%, risk-free rate of 7.75% and premium rate of 6.75%. At the targeted price the P/ABV works out
to 1.1x, which appears to be reasonable. We thus recommend a Buy on the shares of BOB at this target of Rs 276, which is an appreciation of 21% over the current price.