DLF Business Model Suspect

Here is the news 

•  - http://business-standard.com/india/news/veritas-says-dlf-accounting-biz-model-suspect/466477/
• http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/dlf-shares-fall-after-negative-research-report-from-veritas/articleshow/12097092.cms 
• http://www.firstpost.com/business/is-dlf-on-the-ropes-stock-is-worth-only-rs-100-says-report-230946.html

Verbatim
"Canadian research firm Veritas has slammed realty major DLF Ltd, calling its accounting practices “conflicting” and pointing at gaps in its business model — charges the company termed “mischievous and presumptive”. Earlier, Veritas Investment Research had come out with damaging reports on other Indian firms, including Reliance Industries, Reliance Communications and Kingfisher Airlines.
Veritas has said DLF’s stock is at best worth Rs 100, and the company may have to recast its loan. DLF said “the company adhered to the highest standards of corporate governance and financial integrity”. “We do not generally comment on individual research reports. However, this report in question is presumptive and mischievous as the analysts have never contacted the company to seek any information or clarification,” a DLF spokesperson said . “The audited financials of the company are always in the public domain,” he added. Following the report, the DLF stock price dropped 5.5 per cent on Thursday, becoming the biggest loser on the Bombay Stock Exchange, closing at Rs 214 after an opening of Rs 224."

Source: Moneycontrol ticker

- Source Business Standard (link 1)

Stock price chart
http://www.google.com/finance?chdnp=1&chdd=1&chds=0&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1330634199048&chddm=391&chls=IntervalBasedLine&q=NSE:DLF&ntsp=0

Later Times of India trying to assuage market fears by claiming that DLF is crying foul
http://economictimes.indiatimes.com/markets/real-estate/news-/dlf-says-report-that-hit-its-shares-mischievous/articleshow/12100095.cms

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Decoupling, local demand driven economy, green shoots

Here we have the Sensex down another 300 points and it gets blamed on the Euro Zone problems.

Indian stock market brokers have taken the Indian investor for a long ride and articles like this in the Economic Times only vindicate my position that the media in India is very biased and will not report the full truth. They will hype up the good news and play down the bad stories.

There is no independent reporting anymore and everyone including the TV channels are biased. The media knows that if the market sentiment is not propped up, they will lose viewers/readers and hence their sources of advertising revenue.

Investors have to tread very treacherous waters in India so they better be very skeptical of these bozo's in the media.

Every article is written with the intent of enticing investors into the market. This is the Ekam-Sat (Ultimate Truth) of Indian markets. Be very careful with your hard earned money and if you have to invest go with diversified low cost mutual funds with minimal expense ratios. I hate to see people lose sleep and their life's savings and hand them over to these sharks

Economic times reports

MUMBAI: The Indian markets fell on Tuesday, halting its four-day rally as concerns about the European economies turned investors jittery again. During the day, the BSE sensex fell 373 points, or 2.2%, to close at 16,572 while on the NSE, nifty closed at 4,970, down 116 points or 2.3%.

The day's selling was again led by foreign funds while buying by domestic funds cushioned the fall to some extent. BSE data showed FIIs were net sellers at Rs 527 crore while DIIs were net buyers at Rs 211 crore. Dealers said other than global concerns, speculation that the RBI could soon hike interest rates to stem inflation also prompted Dalal Street investors to book profit. The day's slide left investors poorer by Rs 90,000 crore with BSE's market capitalisation now at Rs 59.7 lakh crore.

During the day, most global markets also ended in the red as euro slipped to a four-year low level against the US dollar. Reports on slow growth of Chinese manufacturing sector, and its after effects on the eurozone and the global economy in general, also made the investors jittery.

In the the Asian region, Shanghai fell by nearly 1%, while Nikkei in Japan was down 0.6% and Hang Seng in Hong-Kong closed 0.4% off. In Europe, FTSE in London recovered much of its earlier losses and ended 0.6% down, while in Germany, DAX ended marginally higher and CAC in France ended marginally lower. In early trade, Dow Jones was flat, having recovered most of its earlier losses of nearly 1%.

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Fantastic interview with Mohanish Pabrai

Steve Forbes does a very god job in interviewing Mohnish Pabrai of Pabrai funds. Mr Pabrai's views Chinese and Indian companies with a dose of skepticism as he doesn't trust the accounting balances sheets and the audit process in these countries. Great viewing for anyone who is swayed by the morons on CNBC TV, whether in the US or India. Greed is universal. Here is the full video.

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Murthy to be venture capitalist and I wonder why now

Economic Times reports that NRN Murthy has sold 180 crore of Infosys shares to start a VC firm in India which will invest in startups focussed on basic healthcare, education and nutrition.

The cynic in me says that this is a cooked up headline to justify the selling of Infosys shares which I believe is poised to plummet to depths not seen before.

There are two fallacies to this story propagated by NRN. Firstly the goal of VC is to generate returns in the excess of those which could be possible by the stock or bond markets, at the expense of taking a higher risk then normal. Any Silicon Valley VC will tell you that 99% of all startups fail but the 1% which succeed generate 1000% returns to compensate for all the failures. In the period 1999-2009 a VC study showed that more funds went bust then which made a profit for their investors.

Now given the risk profile for a VC, is NRN trying to become a silicon valley type VC or is he trying to become a "philanthropic venture capitalist". These three words are put together sound more ironic then "Sweet Tata Namak". The goals of each of these professions is different and do not intersect even on elliptical curve on a infinite plane.

Is NRN trying to downplay the share sales since he doesn't want investors to think that an insider is bailing out without attracting attention. As an investment decision NRN has made the right decision by slowly selling all his shares and hopefully diversifying his assets into index funds. As per the article he has now jus 0.4% shares of Infosys remaining so that speaks about the confidence he has in the company he has founded.

There was an article in Reuters the other day which spoke about how Accenture, HP and IBM consulting services have expanded in India to cut their overheads and now each employ more then three quarters of the workforce of Infosys or Wipro or TCS. Infosys trades at 20 times forward earnings versus 14 for IBM and similar disparities exist for Wipro and TCS. What more opportune time to sell the stock then when the Indian market has hit its cyclical bear market high!!

Good job NRN but sorry that you cannot pull the wool over our eyes. Full article here

BANGALORE: One of India's most successful entrepreneurs is turning into a venture capitalist (VC). Infosys Technologies' co-founder and chief mentor N R Narayana Murthy, on Thursday, sold shares worth Rs 180 crore to start a venture capital firm that would fund start-ups mainly in India. The idea is to encourage young entrepreneurs with brilliant ideas. The VC will invest in start-ups operating in the areas of basic healthcare, education and nutrition.

In a reversal of roles, in deciding to become a VC, Murthy is following in the footsteps of his daughter Akshata who was until recently a VC based out of Bay Area in Silicon Valley operating in the clean tech space. Until her marriage to Rishi Sunak in August, she was a senior associate at Siderian Ventures.

Murthy on Wednesday and Thursday sold a combined eight lakh shares of Infy to raise money to fund VC firm. The number of shares owned by him in the company now stands reduced to 23.8 lakh valued at Rs 526 crore at Thursday's closing price of Rs 2,211. The Murthy family's combined holding is around 5% with his wife Sudha owning the largest chunk. Murthy's individual holding in Infy which has been less than 1% for a while now stands reduced to 0.4%.

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Sensex and real estate in India

With the sharp rally in the market, people have been questioning the impact of the recent uptrend to real estate prices in India. Some projections put the Sensex at 15000, some others say that this is a bear market rally and will fizzle out as the results get announced. There is another article I read which said almost more then half billion dollars of FII money went into the market in the past few weeks. This must have wiped out bunch of shorts, most local businessmen who shorted the sensex between 9k and 10.5k thinking the sensex will go back to 7.5k, the lowest level seen in the past 4 years. However the FII swooped upon the sensex in huge numbers and have wiped the bears out of the system. Goes to show the perils of investing in futures and options. 

If you read the first post in this blog it was made in Dec 2005, when the sensex was at 9057 and India was shining brightly. Now it is 3.5 years and the Sensex is 13,000 having visited 21,000 on the upside and 7500 on the downside. 

If one has to co-relate the market, even though any co-relation can be atmost be deemed co-incidental,  prices today are down 25-50% of the peak made in Jan 2008. Loan rates were lowest in 2003, when I remember Standard Chartered offering 8 % rates when I was in Bangalore. At that time, I could get a 3 bed for 30L the same today is at 80L. However in Bangalore one can easily find a 3 bed for 35-50L in some tech areas, same is case for Pune, Chennai, Hyderabad.

In Mumbai it is impossible to find any such deals except in far flung suburbs where one can break his back in the train commute. 

The question to ask is why should real estate be dependent on the stock market ? Real estate can be more co-related to the economic well being of a society, job security and availability of cheap loans. Expecting stock market profits to end up in real estate is at best fool hardy. I had several friends who bought 2nd houses on  loans in 2008 with the hope of paying them down with their stock market investments. With the wipeout in the markets, they are remorseful and regretting the whole episode of short term loss making trades. Now they live hand to mouth paying off their montly EMI's with their current salaries. With prices being down, they are in negative equity and bleeding every month. They are cut twice, once by the drop of their real estate values, 2nd by the interest they pay the banks and the biggest cut is the slicing of their portfolios by 70%. 

Please don't trade short term with the aim of investing in real estate. If you are investing in the market, it should be for a period of 4-5 years. If you buy real estate, buy the primary residence at minimum 30% discounts to the current price with a 40% downpayment. The cost of good night's sleep is priceless. Never compromise on this ever.

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RBI verifying solvency of 10 realty firms

Click on the image for a better view of the crash in housing construction companies stock prices. Once the RBI report is out, we will get a better picture of the construction industry.

Business Standard reports
Anindita Dey / Mumbai March 14, 2009, 0:25 IST

Internal assessment follows banks’ worries over systemic risks.

The Reserve Bank of India (RBI) is examining the books of ten real estate companies to verify their solvency and assess the systemic risks arising from possible defaults by these companies on various loans and public deposits.

Sources close to the development said the exercise followed concerns expressed by bankers over possible large-scale defaults in loans and deposits, which may have implications for the entire system.

The companies identified for assessment are DLF, Indiabulls Real Estate, Unitech, HDIL, Mahindra Lifespace, Peninsular Land, Ansal Properties, Phoenix Mills, Anantraj Industries and Akruti Citi Ltd.

The exercise is currently an internal assessment based on available information in the public domain. RBI has also sourced data on loans, cash deposits and other fixed deposits held by these companies from all banks and mutual funds. Most of these companies have also borrowed through non banking financial companies (NBFCs) that they have floated, and the central bank is verifying the books of these related NBFCs independently.

The exercise, said these sources, aims at a comprehensive analysis of the data relating to these companies for determining the correct debt-equity ratio, solvency, state of liquidity to avert defaults, cash flows and profit margin in the current operations.

After the review, the companies or their NBFC arms may be advised to check exposure in line with cash flows, and banks may also be asked to cut exposure.

Sources said these real estate companies had raised long-term loans from banks and had placed commercial paper amounting to thousand of crores to raise short-term financing from the mutual funds.

The mutual funds, in turn, got a major part of the subscription to their schemes from the banks who held public deposits. This means a default on even a single commercial paper will impact the mutual funds, the banks and ultimately public deposits.

Large-scale borrowing has distorted the normal debt equity ratio for most of the companies and made them highly leveraged. RBI is of the view that the debt is being camouflaged in cases where the ratio meets standard norms.

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Satyam land scam

Leverage gone bad. As I had said, black money operators have been "sub-primed". Expect more of the same as the unwinding continues.

Economic Times reports.
Thanks to Observer for the link

Politics-property combo may have trapped Raju

MUMBAI/BANGALORE: An audacious real estate play is seen as the backdrop for the 54-year-old B Ramalinga Raju’s sudden exit from Satyam Computer
Services, India’s fourth-largest IT company.

The Raju family, said real estate industry sources, might figure among India’s top 10 landlords as it had embarked on a massive land-buying strategy to cash in on the real estate boom in recent years. While the family holds over 6,500 acres through Maytas Properties, the individual members in their personal capacity have significant holdings of agricultural land across south and western India, industry officials said.

Industry and banking sources said the Rajus leveraged their ownership of Satyam, both in terms of shareholding and management control, to fuel other businesses. In fact, one banking source surmised that a key reason for cooking the books could have been to leverage the bull run in the Satyam stock before the market meltdown in the second half of 2008.

The promoters may have needed cash for land acquisitions, particularly around their infrastructure projects that were won on the back of ‘goodwill’, according to these sources.

So how did the Rajus land up with a severe liquidity crunch? One of the theories doing the rounds suggests they were trapped by a murky cocktail of political developments and a real estate crash. In the recent past, Maytas Properties and Maytas Infrastructure had won a number of prestigious projects.

These include the Hyderabad Metro Rail project, Machilipatnam port project and airport projects in Andhra Pradesh and Karnataka. In return, prime land near some of these projects had to be ‘offered’ to the supportive establishment. Several real estate sources claimed there were some instances of Maytas being awarded road projects even without proper bidding. However, ET could not confirm all this independently at the time of going to press.

With the real estate story turning sour, political circles were said to have demanded funds from the family instead of land. “Upcoming elections may have also forced members of the establishment to change their preference from land to money which put them in a fix,” said a Hyderabad-based developer.

Observers said Raju’s sudden admission of fraud had compelling reasons, and was probably done under external pressure to thwart bigger revelations.

In this context, it must be mentioned that Delhi Metro managing director E Sreedharan had called Hyderabad Metro Rail project a “future political scam”. He had objected to the way the government allowed the private consortium to develop land commercially.
Some other rumours floating in Hyderabad claim Satyam’s promoters raised huge funds from tobacco traders in Rayalseema district by pledging Satyam shares. The promoters may have assumed that they would be able to raise funds to recover the pledged shares through an IPO of Maytas Properties. But the downturn in the real estate market derailed Maytas’ IPO plans leading to the promoters being unable to meet margin calls on Satyam shares.

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Funny Reliance email

Found this funny email doing the rounds on the internet. It truly refects the state of the Bombay shock market.

Dear Shareholders,

Through self RELIANCE, you will have the POWER & ENERGY to bear all your losses. This COMMUNICATION is directly from our boss who is making CAPITAL on your behalf. Remember, you foolish investors are our NATURAL RESOURCES.

Yours Truly,

Aadhi Duniya Apna Group (ADAG)

Roz India Looto (RIL)

"The broker is not your friend. He is more like a doctor who charges patients on how frequently they change their medicine."

Forthcoming IPO from Reliance Group

RELIANCE NURSING HOME

RELIANCE SCHOOL

RELIANCE COLLEGE

RELIANCE JOB PLACEMENT

RELIANCE MALL

RELIANCE BANK

JEENA RELIANCE MARNA RELIANCE

THE HOT FAVOURITE STOCKS:

RPL (Raha Paisa to Lenge)

RNRL (Rona Nahi Fir Bhi Ro Lenge)

RIL (Risk in Life)

REL (Roz Ek Lafda)

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Don't buy unfinished homes

The news is coming thick and fast. DNAIndia is finally doing some realistic reporting. The game is simple. Its a buyers market and the buyer can demand a 40% reduction of a completed property. A deal will only happen if both parties agree and today there are no deals since there is a disconnect. Greed is good but only for a limited time. Now it is the buyers time to get greedy. As the article rightly points out, going for an under construction property is a disaster waiting to happen. There are thousands of new projects which are launched in 2008 and most of them will be delayed by 2-3 years beyond their projected dates. Already Raj Thackrey's campaign is having an effect on mumbai's and Pune's construction market where builders are attributing him to delays. They are also invoking the Force majeure clause which allows them to disown responsibility for building delays. 99acres.com and magicbrics.com have thousands of properties for sale and half of them are ready to occupy. It is a buyers market like never before. So if you have cash, you are king.

Liquidity crunch delaying projects, only 30% price cut can help: Experts

MUMBAI: Want to buy a home this festive season? Then don’t go for a one that is still under construction, warn experts in the realty sector. The global slowdown and crash of financial markets has left builders with little money and they are struggling to wrap up even the half-finished projects, let alone going for new ones, according to industry analysts. Experts warn that the financial strain on realtors is causing indefinite delays in the completion of many projects.

“Those who intend to buy property should go for only completed flats. It’ll be too risky to buy properties under construction,” said an analyst with a foreign brokerage who did not wish to be named.

Real estate is an end-user sector where the money mainly comes from home buyers and development happens in phases.

“But developers across the board raked in money from initial public offerings and invested them in buying land parcels paying huge premiums. Now, banks have stopped lending, money from private equity is very costly and unorganised lenders are charging interest rates as high as 30%. So how can developers complete projects profitably,” asked the analyst.

He cited the example of a Mumbai-based realtor whose high-end residential project in Lower Parel, one of the city’s commercial hubs, was to be completed in 2006 but has now been delayed till 2009. Uncertainty looms large over whether even this deadline will be met, he said.

An official of the realtor in question had earlier told DNA that the project would be rolled out before Diwali this year. An email sent seeking clarification on the new deadline remains unanswered.

This isn’t an isolated case. Analysts say delays of three to four years are likely in under-construction projects.

Despite the headwinds, developers have stubbornly stuck to their pricing. This could be one of the reasons why sales have failed to pick up, even though builders are offering freebies such as free stamp duty registration and parking space, modular kitchens and interiors, and interest-free EMIs till the buyer gets possession of the flat.

“A price correction of a minimum of 30% is required for sales to pick up. If this correction does not come in six months then some listed developers will end up being negative cash companies. Even if buyers are desperately looking for houses, they should wait for a minimum of three months before taking the plunge. Also, they should look only for properties that are ready and available for possession,” said an analyst of a domestic brokerage.

Vikas Oberoi, managing director of Mumbai-based developer Oberoi Constructions, agrees. “Buyers should be wary of under-construction projects because developers who are overleveraged will not be able to complete their projects. So a buyer should look at a developer’s past projects. At these times, it’s all the more important for people to be careful about where they invest,” he said.

And though the slump is pinching, consolidation in the industry is not seen coming. An analyst said, “Even if a developer gets land at a discount of 35-45%, he will not buy it to save money for construction. Those who haven’t seen free cash flows in the last 6-8 months will halt their launches and sit tight till the tides turn in next 18-24 months.”

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Revisiting the first post of this blog

Rewiding almost 3 years into the past, I found my original post. Most of the observations made then have been vindicated by the turn of events. Three years later, the stock market is up 10% and looks very likely to go below 9k in the following weeks, thereby wiping gains for 3 years. The FII's have taken the Indian investor for a ride down a a tunnel of hell. As everyone reads the bad news, I'm thinking of what could be good prices to pay for apts in the year ahead ? Anything over 3000 is steep by any standards. Black money can chase other black money, however loans are in short supply so they cannot chase other loans. If a black money operator buys an apt paying 1cr, immediately the Income Tax folks will get alerted and will be on his case. The only place where they can hide money is to buy land/plots where there is a substantial portion in black. As state governments keep raising gudiance value, this avenue is closing as well. In Chennai the guidance of OMR road is up 10 times over the past 3 years. Hence speculation here attracts the Income tax bugs. The only avenue black money folks have is to fund builders, however given the state of the loan market, they will be unwilling to do so. The goal of every black money operator is to convert the black to white, but as avenues for the conversion evaporate due to increasing risk, storing black money under the matteress or in hidden cabinets seems to the only way. Any builder who is looking for money is paying 30% interest, this used to be the case in 2003. So the market is dull, people have lost money in the market upto 80% in many cases. How long can 10000 per sq/ft hold ?
and I just got this in the mail and couldn't come at a better time. A drop of 40% from the existing rates, However to take the risk of execution during a time of financial crisis is foolhardy. We will see these prices for ready to occupy apts soon.

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Friday, December 09, 2005
Asset Bubble or not ?
As the Indian economy grew by 8% as stated by the finance minster(12/9/2005), the sensex hit an all time high of 9057 and housing prices have continued to skyrocket in major metro areas.

One of the worrisome aspects of this growth is that low interest rates have helped companies in BIFR(chapter 11 for India) to come back with healthy balance sheets specifically due to debt-refinancing. (18% to 11%). The productivity growth or job growth is not wholly responsible for the growth. Also many of these restructured companies might pay themselves dividends or buy back shares thereby increasing the wealth of the directors, and owners and thus balloning the stock market beyond fundamental basis.

The white collar worker has to deal with the consequences of this semi-illusionary growth in the form of increasing property prices (10-20% year-over-year) and is borrowing heavily thanks to low interest rates.

As property prices push higher, the risk of default of these small apt buyers increases as global interest rates rise, energy prices push higher , inflation increases and the rupee devalues as the external debt mounts rapidly

Most Indians in the market for a apartment now have never experienced a downturn in the economy so they might find themselves highly shafted if they over-leverage themselves on the loans as well as the floating interest rates.

Unfortunately unlike the developed west , India has no reliable source of data available for real estate prices and transactions and most prices are rigged by a cartel of builders. I'm also skeptical of the media in reporting the truth since they too dont have any reliable data to go from and finally real estate agents, the less said about them the better.

This blog attempts to understand area development and price movements and if people contribute uncover hidden unsold inventory. I'll post information about Mumbai/Pune/Bangalore over which I can get anecdotal evidence or as I browse the news papers and talk to real-estate agents and builders. All articles and comments are welcome. I'll be the moderator of the comments so that the spammers dont take over.

This blog is inspired from a similar blog http://thehousingbubbleblog.com/ which is now a reliable source of data for various US housing markets.

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Equity Funds attacked by bears

I was curious to see what the year to date performance could be on mutual funds on 10/15/2008 and here is the snapshot of the query. Not one diversified equity fund has shown any gains over the past 1 year. Attached is the picture which says it all. You can run other queries on the Mutual fund screener tool and find out the top losers over the past year or two but the amount of money lost this year is over 30% so all the gains made over the 3 year horizon are wiped out in half. If someone had put the same amount of money in a fixed deposit, they wouldn't have done too bad. The FII's have scooted with the gains and the brokerages have to be squarely blamed for deceiving the common Indian investor of their life savings.

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