Reforms making India real estate investments attractive

Picture: Unitech Ltd

Jun 15, 2016: The real estate sector that suffered much pain in the past two years is moving towards a more rational regime where developers, having learnt from their mistakes, now focus on project execution and delivery. This year is expected to gradually move towards better home sales and see a spurt in launches in some locations. The year will also see the sector moving from an investor-driven to an end-user driven cycle.

The recent reforms in the real estate sector have made investments into this sector even more lucrative. The recent passage of the real estate bill wherein the investors can look forward to far higher transparency and ease of doing business with developers, has led to a lot of warming up of NRIs and other FDI money towards Indian real estate. Also, now with the government permitting NRI investments into domestic AIF (Alternate Investment Funds), the availability of foreign capital will naturally increase. Coupled with the DTAA benefits available to the offshore investors, especially NRIs, it is a very lucrative time to invest in Indian real estate.

Last year India saw around $35 billion in private equity of which around $5 billion was into the real estate sector. This year, realty funds in India have already raised $470 million since January 2016 as compared to $520 million raised in the entire last year. It is possible that just real estate itself will see over $1 billion in inflows in the residential segment itself.

Affordable housing, for sure, will continue to remain at the center of these funds inflow activity.

There is a huge demand in affordable housing in most parts of the country and it’s the only option available for a common man to buy a house. This segment is backed by the initiatives announced by the government in this year’s union budget like additional exemption of Rs 50,000 for first time home buyers and 100% income and service tax exemption for construction of houses up to 30 sq meters in fourmetro cities and 60 sq meters for other cities have been allowed. Both these measures will spur affordable housing and help increasing supply in peripheral areas of cities. Real estate funds like ours will target on lending to developers with focus on affordable housing. Foreign financial institutions have also started investing into affordable housing projects as well as developers who are focused on this area, thus aiding the funding scenario as well.

Affordable housing will continue to get high traction in markets like Mumbai, Thane, Pune, NCR, Bangalore, Hyderabad, Chennai, Kolkata and Ahmedabad. While the launches and demand are going to be range bound, the product and positioning will be aligned to end users segment. The average sizes of units are going to reduce further; though marginally. Certain micro-markets within these cities are witnessing rapid infrastructural development, leading to higher influx of the educated middle class home seeker in these markets. These markets observe a more realistic capital rate assumption than the highly developed zones, and thus receive higher attention from home seekers. The developers will focus more towards bringing back the confidence of the consumer by being more transparent and focusing on constructing as per the commitments. While the long term story for residential market remains strong the short term turbulence is expected to remain.

This a right time to invest in affordable housing segment as the projects are available at attractive valuations and demand is expected to boost in 2-3 years. India is a shining economy and with the favorable investment climate and correct steps at policy level will make it more attractive not only to onshore investors but also for offshore investors.

Courtesy: ET Realty

Policy amendments on REITs beneficial

Jun 25, 2016: The latest policy announcements made by the government has positioned India as one of the most open economies. The various announcements convey the government’s commitment to reforms and to making India a lucrative investment destination for corporates across the globe. With these structural shifts, apart from generating new employment opportunities, the country is here to witness rapid infrastructure development in the near future.

The measures announced by the government regarding FDI as well as Real Estate Investment Trusts (REITs) will facilitate investments into the country. Higher investment volumes are likely to result in greater inflow of foreign investments and encourage domestic players in sectors such as manufacturing with cutting edge technology, civil and defence aviation, food processing and retail, says Anshuman Magazine, chairman and managing director, CBRE, South Asia Pvt Ltd. The growth of these sectors will directly benefit the real estate market in India, especially office, retail, logistics and warehousing segments, among others.

With regard to REITs, the changes proposed by the Securities and Exchange Board of India (SEBI) are clearly indicative of the eagerness to allow investments in REITs on a priority basis. The announcement to allow 20% investment in under-construction projects is likely to lead to an increase in potential yield returns, necessary for a successful REIT listing in the country, he says.

Overall, these announcements by the government are a much needed step in the direction of boosting the overall economy of the country

Courtesy: The Hindustan Times

The Brexit Quiver

The United Kingdom became the first independent nation to break away from the European Union, a 28-member block, in a referendum held yesterday. The said referendum was conducted on last Thursday, the 23 June, to decide whether the UK should leave or remain in the European Union. Leave won by 52% to 48%, dealing the biggest blow to European efforts at greater unity since the second world war. 

There are now fears the vote could set off a chain reaction of further breakaway bids by other EU members battling hostility to Brussels. There are also worries that the outcome could pave the way for the break-up of the UK itself after Scotland raised the prospect of another independence vote. 

Fortunately or unfortunately, highlighting the discord, a petition demanding a second EU referendum had gathered more than 550,000 signatures late on Friday.

The referendum turnout was 71.8%, with more than 30 million people voting. It was the highest turnout in a UK-wide vote since the 1992 general election. 

The US Federal Reserve, which had earlier said a Brexit could have "significant repercussions" on the economic outlook, sought to calm markets on Friday by saying it was ready to provide dollar liquidity. In India too, Dr.Raghuram Rajan had an identical view to deal with this situation.

Amid the turmoil, sterling hit a 31-year low in its biggest intraday percentage fall on record and Prime Minister David Cameron said he would step down by October.

The fallout started immediately: the pound collapsed, prompting recession fears, and by the end of the day Brexit panic had wiped $2tn off the world economy.

European leaders reacted strongly to the vote by insisting that Britain should start negotiations to leave immediately. The UK has also been told that its access to the internal EU market would be restricted – the “price”, it was said, for leaving.

Ratings agency Moody's said Britain's creditworthiness was now at greater risk, as the country would face substantial challenges to successfully negotiate its exit from the bloc.

Many argued that the EU has burdened UK with regulations costing the British economy as much as 600 million pounds per week. After Brexit, the UK will now be able to amend some EU laws to make savings shrugging off the burden of EU regulations. The UK will now be able to have its own regulation for work going to the high number of migrants to the country. As EU citizens have the right to work in any member state, it had significantly pushed down wages for British workers.

Huge questions also face the large numbers of British expatriates who live and work freely elsewhere in the EU, as well the fate of EU citizens who live and work in Britain.

Political figures on both sides of the debate, however, insisted there was no need to rush through the process.

Once Article 50 is invoked, it could take Britain up to two years to actually leave the EU.

During the two-year negotiation period, EU laws would still apply to the UK. Moreover, once Article 50 is triggered, the terms of Brexit will be negotiated not by British politicians or diplomats, but by the other 27 nations of the EU.

Though, it is estimated that the official British divorce from Europe would take at least two years, but EU president Donald Tusk has warned that the whole process of negotiating trade and immigration deals with a non-EU Britain could take seven years in all.

The UK however, would continue to participate in other EU business as normal, but it would not participate in internal EU discussions or decisions about its own withdrawal. 

And, when the members are ready, they will present the British government with a departure agreement on a "take it or leave it" basis.

The British vote to leave the European Union has brought the British pound down to a 31-year low, meaning UK house prices are now cheaper for foreign investors, buying in foreign currency.

Property analysts in the UK, predict a slowdown in property price growth in the UK, and even a fall in nominal prices, with London to be affected the most. 

The foreign travel to the UK, might also become more cheap, boosting the bottomline of Tours and Travel companies.

A decline in the value of the sterling could also be a catalyst for increased foreign investment in the UK due to attractive returns.

Meanwhile, the Indian Real Estate sector in India will continue recovering on the back of a resilient economy and strong capital inflows. Brexit will not disturb that recovery much, since India’s office market leasing is dependent only by 5-7 per cent on UK-headquartered companies, and investments and activity of PE Funds from EU countries is more in India than in the UK.

Tour operators in India say they expect a sharp rise in the number of travellers to the UK because the pound's depreciation make these destinations cheaper in a post Brexit scenario. 

Investors in the UK looking to invest in residential properties outside UK will have to compare returns and risk assessments for real estate in India versus real estate in the EU. After exiting EU, locations like Greece, Spain and Portugal may not remain as attractive to UK investors, and India may benefit from that. 

Also, the Indian Real Estate sector, would continue do well backed by policy reforms like RERA, apart from other factors.

On the flip side, India could provide the much needed stability, given the ongoing reforms at a satisfactory pace and that its inflation has remained controlled over the last few months. Also, given a normal monsoon forecast for this year, even food inflation could be kept in control in the near-to-medium term while triggering a healthy growth of agriculture and rural economy.

Given that BREXIT has happened, it is now a no-brainer to foresee, a delayed rate hike by the US Federal Reserve, which is positive for the emerging world, including India.

India’s bilateral trade with Great Britain is export surplus, which is good for India. However, compliance cost for India’s exports will rise. At the same time, India can negotiate more favourable trade terms with Britain. After losing out to free trade with the EU, Britain will be under pressure to look for balanced trade with big emerging economies like India, which is the fastest-growing economy -- over-all India is on a slight advantageous pitch after the historical event. 

Apart from the real estate, infrastructure structure would also, do well. I have already recommended few stocks, like Unitech Ltd (Rs.5.43), Lanco Infratech Ltd (Rs.4.53), JSW Energy Ltd (Rs.79.95), etc sometime back. You can continue add the scrips on intra-day dips. 

However, avoid the shares of the real estate companies, who has bet big on London’s property market, like Indiabulls Real Estate Ltd (Rs.86.25), Sobha Ltd (Rs.303.25), etc, for any short term play.  These developers will now face multiple challenges including sluggish sales and a plunge in prices in the UK, say industry observers. 

Kalpesh Maroo, partner at BMR Advisors, said London’s real estate market thrives on investments from across the globe, especially from the EU. He said that one of the consequences of Brexit will be that the mobility of people within the region will go down and this will impact the property market. Also, Indian investors had been investing in London as it offered appreciation and stability and this, too, will be impacted, he added.

The Global Research House, Nomura says: "Immediate priority for policymakers is to ensure sufficient USD and INR liquidity to keep markets well-oiled. We believe that the RBI would step up its open market operations and provide dollar liquidity through its FX reserves, if necessary".

I personally feel that it is the best time to accumulate beaten down stocks, from sectors, which have less exposure to the EU and UK (avoid Information Technology or IT stocks). 

The dirty secret about the Brexit vote: It's all Sham

Either way the U K votes, skeptical Britain will remain as part of Europe

LONDON, 21 June, 2016 — The eyes of Europe and the world are fixed this week on Britain and its referendum on whether or not to stay in the European Union.

Poll numbers have caused violent swings up and down in financial markets around the world. Trillions of dollars ride on the outcome. Political leaders and financiers say the outcome will be momentous either way. A vote for Brexit could plunge the world into recession and crisis, some warn. It could cause the breakup of the European Union, say others. Or it could mark a heroic return to national independence and freedom for Britain, say still others.

But here’s something that everyone in power here knows, but no one is saying in public.

The whole thing is a bit of a sham.

The referendum result won’t change anything legally by itself. And the consequences will be far less momentous than anyone on either side wants to admit.

Even if Britain votes on Thursday to leave the EU, it’s dollars to donuts — or, more accurately, pounds to peanuts — that the government will instead craft a face-saving formula that gives the illusion of Brexit without much substance. Britain will end up striking deals with Brussels to stay within the single market. In return it will have to keep making contributions for access, just as it does now.

A highly placed political insider joked to me recently that Britain could end up retaining even the same voting powers in Brussels it has already.

There might be a few symbolic changes in order to placate the public and maintain a big show of Brexit. But in reality little would change.

Why should we be surprised? The British government and political classes are overwhelmingly in favor of the European Union. So, crucially, is the country’s powerful civil service. British businesses are closely intertwined with the European single market. Attempts to disentangle them could lead to chaos. And the British economy is propped up by huge inflows of foreign capital, buoying everything from industry to London house prices.

Furthermore, Thursday’s referendum has no constitutional standing whatsoever.

Great Britain has no written constitution. By convention, theory and practice, sovereignty actually lies in the parliamentary House of Commons. Britain could only leave the EU by an act of Parliament. And it would be entirely up to Parliament to craft the terms of Brexit, and the shape of whatever followed.

A strongly pro-EU Parliament would surely find a way to minimize the impact of a Brexit vote.

But pro-EU Remain voters shouldn’t be too smug either.

Even if Britain votes to stay inside the EU, the doubts that led to this referendum in the first place will still continue. Thursday is very unlikely to deliver a resounding victory or moral mandate for the European Union. Instead it will probably reveal the British are evenly divided. A majority of Prime Minister David Cameron’s ruling Conservative party is almost certain to vote to leave. A majority of England may do so as well.

The bottom line: The referendum is likely to result in a heavily euroskeptic Great Britain remaining inside Europe — no matter which side wins.

Courtesy: MarketWatch

Adani Enterprises Ltd: Buy

CMP: Rs.77

T: Rs.87

SL: Rs.74 (no need to keep but still giving)

Triggers: 

• Adani Enterprises is in the process of setting up a copper smelter project with a capacity of one million tonnes per annum at an investment of Rs.10,000 crore at Adani Port Special Economic Zone (APSEZ) in Gujarat. The project includes copper smelter, sulphuric acid plant, copper refinery, continuous cast copper wire rod plant, precious metal recovery plant, phosphoric acid plant, aluminium fluoride plant among others.
• Maharashtra, has lost 500 big and small industrial consumers due to high power tariffs over the past few years. The figures were released in a report submitted by the Maharashtra State Electricity Distribution Company Limited (MahaDiscom) to the Maharashtra Electricity Regulatory Commission (MERC). The report proposes from 19% to 27% increases in power tariff for industrial, residential, farming consumers in the next four years, ending 2019-2020. An independent analysis of the proposal shows that consumers such as Raymonds, Bharat Forge and the Railways have, along with 500 industrial users, shifted to an ‘open grid’ access beginning 2012. Such a grid allows consumers with a large use of power — 1 megawatt (1 MW) and above — to buy cheaper power from other companies or suppliers in the market. This came after the Central government amended the Electricity Act, 2003 to allow a smooth transition for industrial users. Major players in the open grid are Mittal Processor Limited, Global Energy Private Limited and Adani Enterprises Limited. A positive development for the company. 

  

  Photo: Business Standard

• Giving much relief to the debt-laden companies, especially those form the infrastructure, power and metals and PSU banking sectors, the Reserve Bank of India (RBI) has announced a scheme for sustainable structuring of stressed assets (S4A) for resolution of bad loans of large projects.  This development would not only strengthen the lenders' ability to deal with stressed assets, but would also put real assets back on track, benefitting both banks and the promoters of troubled entities. RBI said under the scheme, a portion of the debt will be converted into equity or other instruments under the supervision of IBA's overseeing committee. Basically, the scheme will cover those projects which have started commercial operations and have outstanding loans of over Rs 500 crore. This time RBI wants banks to segregate stressed loans into 'sustainable' and 'unsustainable' segments. Companies such as Jaypee Infratech, Adani Enterprises Ltd, etc, may get the benefit of RBI's sustainable structuring of stressed assets scheme.
• Analysts said the new scheme was better than previous such attempts at tackling bad loans. “On the one hand, RBI has allowed leveraged companies to have a comfortable capital position to service debt and on the other, banks do not have to necessarily take significant provisions to effect this change. We still need to see how many projects meet the conditions but this appears to be a major positive step for banks to reduce their gross non-performing loans,” said analysts at Kotak Institutional Equities.Experts said the schemes will particularly be beneficial for companies with operating assets and a high portion of sustainable loans.
• Adani Enterprises Ltd (AEL), flagship company of the $10 billion conglomerate Adani Group, registered a net profit of Rs.65 crore for the quarter ended March 31, 2016 where as the same was at Rs.72.80 crore for the quarter ended March 31, 2015, AEL said in its filing on BSE.
  The company's total standalone income for Q4 of fiscal 2015-16 was Rs.2,249.82 crore whereas the same was at Rs.3,597.23 crore for the quarter ended March 31, 2015.
  According to AEL, in view of the Gujarat High Court sanctioning the de-merger on May 07, 2015 of its port undertaking, power undertaking and transmission undertaking comprising the undertaking, businesses, activities, operations, assets (movable and immovable) and liabilities of AEL and transfer of the same to APSEZL, APL and ATL, respectively, the results of the fourth quarter and fiscal ending March 31, 2016 were not comparable with the previous period or year numbers.
  Commenting on the results, Gautam Adani, Chairman Adani Group, said: "Our portfolio of businesses across Mining, Renewable energy and Agro vertical benefits from vastly improved macro-economic and regulatory environment. Encouraging policy initiatives particularly in renewable space, enables us to explore new business opportunities in the sector."
• Among its various businesses, AEL's mine development and operations (MDO) business at Parsa Kente saw the company extracting and supplying washed coal of 5.5 MMT to RRVUNL in FY'16 as compared to 3 MMT in FY'15.
• Under its city gas distribution business, the project implementation work at seven cities under joint venture with Indian Oil Corporation Limited is progressing as per the schedule, the company stated.
• AEL recently launched India's first Diabetic care oil under brand "VIVO" for specific target segment under its agro business.

Axis Bank Ltd: Buy

CMP: Rs.517

Triggers: 

• Axis Bank has increased its stake in Max Life Insurance to 5.99 per cent. Max Financial Services recently informed the exchanges that it sold 3.99% stake for Rs.76.56 crore to the bank. The deal values the insurance insurance company at around Rs.1,918 crore approximately.
• Axis Bank Ltd holds the key for the success of the HDFC Life and Max Life merger. With sales through Axis accounting for more than half of Max Life's revenue, the entire valuation is dependent on Axis continuing with the distribution deal. 
• Recently, HDFC Life and Max Life declared their intention to merge their businesses to create the country's biggest private sector insurer amid 'challenges' which the two companies look to overcome with a three-decade old relationship between Deepak Parekh and Max Group founder Analjit Singh behind them. A challenge before Max would be to get Axis Bank on board which is the corporate agent for Max Life and generates close to 60% policy premium income.
• Kesoram Industries Ltd has informed on 17 June, 2016 that Brickwork Ratings has assigned A+ rating for its Rs. 2,200 crore long-term loan with Axis Bank.

JSW Energy Ltd: Buy

CMP: Rs.81.50

JSW Energy Ltd’s net profit for the March, 2016 quarter remained almost flat at Rs.305 crore against Rs 325 crore during the corresponding quarter of the previous year. The results were a little timid due to higher interest and depreciation expense incurred after the acquisition of hydro assets in Himachal Pradesh.

The total income from operations rose by 22% to Rs.2,681 crore, against Rs.2,190 crore, driven largely by increased generation from the thermal plants and was supplemented by additional generation from the hydro plants. 

JSW energy is an India based private power generation company. The company’s business segment includes power generation, power trading, power transmission, mining and equipment manufacturing. 

Recently there were media reports that, the company is shortlisted to supply electricity to a Karnataka utility through a power purchase agreement (PPA). However, in a filing to BSE, the firm clarified that the bid requires several approvals for it to be finally clinched.

The stock was first recommended in this blog at around Rs.67-68. You can still take fresh positions in the counter, for short term targets of Rs.87-91. SL: Rs.75.

JSW Energy Ltd: Buy

CMP: Rs.81.50

JSW Energy Ltd’s net profit for the March, 2016 quarter remained almost flat at Rs.305 crore against Rs 325 crore during the corresponding quarter of the previous year. The results were a little timid due to higher interest and depreciation expense incurred after the acquisition of hydro assets in Himachal Pradesh.

The total income from operations rose by 22% to Rs.2,681 crore, against Rs.2,190 crore, driven largely by increased generation from the thermal plants and was supplemented by additional generation from the hydro plants. 

JSW energy is an India based private power generation company. The company’s business segment includes power generation, power trading, power transmission, mining and equipment manufacturing. 

Recently there were media reports that, the company is shortlisted to supply electricity to a Karnataka utility through a power purchase agreement (PPA). However, in a filing to BSE, the firm clarified that the bid requires several approvals for it to be finally clinched.

The stock was first recommended in this blog at around Rs.67-68. You can still take fresh positions in the counter, for short term targets of Rs.87-91. SL: Rs.75.

DO YOU KNOW?

1. Merger talks between Reliance Communications (R-Com) and

Photo: Slide Share

Aircel will be extended by a couple of weeks, as both parties are thrashing out the final contours of the deal with their bankers, reported Business Standard. On 22 May, both had decided to extend exclusive merger talks with each other by a month, a deadline that will expire on Wednesday. Lenders are putting their weight behind the merger and the State Bank of India is leading this consortium of lenders. Read more .

On 8 June, Mint had reported that Reliance Communications Ltd (R-Com) and Aircel Ltd are likely to complete their merger by the end of June. The merged entity, which will be India’s third-largest telecom firm by subscribers, will save about Rs.2,500 crore a year  through synergies between the two operations. The combined entity is expected to have Ebitda (earnings before interest, tax, depreciation and amortization) of Rs.5,000-6,000 crore in the next financial year with a revenue of Rs.25,000 crore.

The scrip of Reliance Communications Ltd, ended the day at Rs.48.50 in the BSE after touching an intra-day high of Rs.49.80.

2. BREXIT: The whole thing is a bit of a sham, said the financial portal, Market Watch on 21 June, 2016..

The British government and political classes are overwhelmingly in favor of the European Union. So, crucially, is the country’s powerful civil service. British businesses are closely intertwined with the European single market. Attempts to disentangle them could lead to chaos. And the British economy is propped up by huge inflows of foreign capital, buoying everything from industry to London house prices.

Furthermore, Thursday’s referendum has no constitutional standing whatsoever.

Great Britain has no written constitution. By convention, theory and practice, sovereignty actually lies in the parliamentary House of Commons. Britain could only leave the EU by an act of Parliament. And it would be entirely up to Parliament to craft the terms of Brexit, and the shape of whatever followed. 

Therefore, for the time being you can stop fearing thinking about the possible negative outcomes from the BREXIT. 

3. The Economic Times reported on 13 June, 2016 that Raos, the promoter family of large infrastructure company Lanco, will have to become minority shareholders and the company will have to go through extensive restructuring if it has to stay afloat. This is part of a reorganisation plan that the Lanco management discussed with banks on Friday evening. 

Photo: Infogr.am

The promoters holding in the company stood at 70.55 % while Institutions and Non-Institutions held 4.97 % and 24.48 % respectively.

Lanco group, saddled with debt of a little over Rs 41,000 crore, may receive fresh loans of Rs 4,000 crore if it executes the new restructuring proposal. According to the terms laid down by lenders, Lanco InfratechBSE 0.00 % will remain as the listed holding company, while two new entities will be formed — which will house power projects, EPC — while remaining businesses like gas and roads projects will remain as its subsidiaries.

Reports indicated that Tata Power Company, JSW Energy and Piramal Enterprises are among those who are interested in buying Lanco Group's power assets. A meeting of the joint lenders forum is scheduled to meet in the next few days to take a decision on the sale of the power business of Lanco Group. As per reports, Lanco Group, has power assets of about 8,000 megawatts (MW), and is seeking about Rs.4.50 crore per MW while buyers are bidding at about Rs 3 crore per MW. Lanco Group's power business' enterprise value is pegged at Rs.45000 crore inclusive of debt, reports suggested.

Lanco Infratech reported consolidated net loss of Rs.200.71 crore in Q4 March 2016, as compared to the net loss of Rs.586.29 crore in Q4 March 2015. Net sales fell marginally by 7.4% to Rs.2044.74 crore in Q4 March 2016 over Q4 March 2015.

Lanco Infratech is one of the India's largest integrated infrastructure developers in India. The company has subsidiaries and divisions across a synergistic span of 5 business verticals viz. engineering, procurement and construction (EPC), power, natural resources, solar and infrastructure.

This along with the new RBI rules, will  again help investors gravitate towards the scrip of Lanco Infratech Ltd (Rs.4.87). 

4. Fixit: The First Post wrote on 21 June, 2016: 

Photo: EDBUS

When faced with the prospect of a loss of external confidence in India’s growth story, governments tend to become reformist: this happened in 1991, it happened in the Vajpayee’s government after the dotcom bust and US sanctions post-Pokharan 2, and it is happening now. External triggers help focus governments on the need for change.

However, the more important reason is revival of growth or Fixit - fixing the broken investment engine. FDI is the one investment engine available to revive the growth cycle, which has been ruined by the UPA that gave crony loans and saddled banks with impossible burdens of bad loans. With both India Inc and banks reeling under the pressure of bad loans, FDI is the obvious pick-me-up.

Of the four engines available to push up growth – government spending, private consumption, private investment and exports – only two are firing (the first two). Corporate investment is comatose, and exports are in steep decline as the external environment is weak.

FDI liberalisation will come as a booster dose to basic push being given by government spending to revive the investment cycle.

Meanwhile, in an ambitious drive to step up infrastructure investment and speed up execution, Prime Minister Narendra Modi has set targets for key ministries that have to be delivered by end of the financial year to effect visible change on ground. "Targets for infrastructure sectors have been approved by the Prime Minister and communicated to ministries. These will now be regularly monitored by NITI Aayog and reviewed by the Prime Minister himself on a quarterly basis," a government official told ET. 

Therefore, sit back and enjoy the rally in the infrastructure stocks as it unfurls, in the coming days; since the government is likely to pursue a loose monetary policy following the Rexit. 

The RBI Shakes the Corporate Tree to Make it Debt Free

Photo: The Economic Times

Mergers and acquisitions are one of the sexiest things in business world, but it has a soft underbelly which is always fraught with risks.

After years of furious expansions including leveraged buyouts of cheap foreign assets, India Inc is now not only slowing down but is also in a debt spiral; displaying leveraged balance sheets which showed a quantum surge in threat - ratio, in their own books and businesses.  

A whole catalogue of reasons played havoc with corporate blueprints: Business and commodity cycle downturn, prolonged up cycle in interest rates, export markets drying up, expansion plans derailed due to environmental and forest clearances, consumption slowdown, judicial activism, witch hunt by the 5Cs — CVC, CAG, CBI, CIC and courts, policy paralysis et al.

Very recently, India Ratings said in a report that almost half of the top 500 corporate borrowers in the country will find it difficult to refinance some of their loans. These borrowers have taken loans amounting to Rs.11.8 lakh crore, of which Rs.5.1 lakh crore is already stressed while another Rs.6.7 lakh crore faces elevated risk of refinancing.

However, Reserve Bank of India recently came out with a proposal (at par with international standards), which gave high flexibility to banks to bail out companies with high debt. The RBI decided to shake the "Debt Tree", to give the ailing companies of India Inc, one more chance to become debt free..

This innovative scheme, for debt-ridden companies, will spell relief in terms of ease of loan repayment period. The scheme will cover operational projects with loans of Rs.500 crore. 

The revised norms are in line with the measures being announced by RBI and the government to reduce the NPA problem. The new guidelines are more beneficial for resolution of those cases where a lot of debt has already been provided for...

Under the scheme, (lending) banks can split the loans of struggling firms into sustainable and unsustainable debt. 

Sustainable debt refers to loans that can be serviced with a firm's existing cash flow. Banks have been given the option of converting the unsustainable debt, which cannot be serviced with cash flow, into equity. 

Apart from most of the PSBs, the biggest gainers will be the companies like Jaiprakash Associates Ltd (Rs.8), Reliance Communications Ltd (Rs.48.50), Vedanta Ltd (Rs.125.50), GMR Infrastructure Ltd (Rs.12.79), Lanco Infratech Ltd (4.87), and so on...

Meanwhile, there were some media reports a couple of months back, that the asset sales along with reorganization efforts have yielded some relief for the Jaypee Group, as the Reserve Bank of India (RBI) has allowed banks with exposure to the (Jaypee) Group to classify the loans as standard assets for the January-March quarter. 

It is pertinent to mention here that both Jaiprakash Associates Ltd and Jaypee Infratech Ltd were set to be classified as non-performing assets (NPAs) during the March quarter, after the RBI’s stringent asset quality review in December. However, the Economic Times, reported that the banking regulator had reduced the burden of provisioning on banks by removing some names from the list of stressed accounts, including Jaiprakash Associates Ltd. “The group has made some additional efforts to ensure that repayment happens as per schedule. This allows us to give them some more time as a standard account,” said a senior official at a public sector bank that has exposure to at least two of the group’s companies.

In March 31, in one of the biggest deals in the domestic cement industry, Jaypee Group announced part sale of its cement business to Kumarmangalam Birla-led Ultratech for Rs.15,900 crore. It is encouraging to note that in FY16, the group managed to pare down debt by a whooping, Rs.25,100 crore. Jaiprakash Associates Ltd sold the Jaypee Group headquarters, commercial space and 250 acres of land in its Noida township project for Rs.2,700 crore to Axis Bank.

Moreover, better-than-expected earnings, strong economic data and lesser obstacles on the global front, will continue to trigger healthy domestic inflows, fueling more retail participation in the coming days with Small-cap and Mid-cap Indices outshining the Sensex/Nifty.

Reserve Bank of India Governor Raghuram Rajan’s remark that, in the land of the blind, the one-eyed man is king, has underlined the reality that the Indian economy is recovering fast, and is robust in the midst of a global downturn.

Bibliography: The Economic Times, Live Mint, The Daily Pioneer and The Hindu Business Line. 

Scheme for Sustainable Structuring of Stressed Assets

Photo: Buzz

Very Recently, the RBI has allowed lenders to carve out the "unsustainable" portion of their loans to troubled corporates and convert them into equity. The new restructuring scheme will help public sector banks in cleaning up large chunks of their bad loans, which amount to Rs 4.76 lakh crore. The extent of loans which cannot be supported by cash flows are termed unsustainable. This move will also aid the companies, which are reeling with large debts. 

What separates this scheme from earlier steps is that instead of leaving it to banks, an overseeing committee of eminent persons will be constituted by the Indian Banks Association in consultation with the RBI to identify loans eligible for restructuring. Banks will be able to upgrade bad loans through this exercise. But they may have to take a haircut as the market value of the stressed company may be less than the value of debt that is converted.

Photo: Live Mint

Once the unsustainable debt is converted to equity, banks can sell this stake to a new owner who will have the advantage of getting to run the business with a more manageable debt. Also, there has been talk of the government helping to set up a fund to pick up equity in stressed companies. It is not clear whether there are any plans for the equity created following the conversion to be sold to such a fund.

Thus, the RBI adopted international best practices in distinguishing between maleficent promoters and a business that has gone bad and can be brought back on track. The biggest beneficiaries of these would be banks which can now clean up their books quickly and move forward.

"Resolution of large accounts facing financial difficulties may require coordinated restructuring which often involves a substantial write-down of debt or large provisions. Often, such high write-downs act as a disincentive to lenders," the RBI said in a statement.

"After due consultation with lenders, RBI has formulated the 'Scheme for Sustainable Structuring of Stressed Assets' (S4A) as an optional framework for the resolution of large stressed accounts. The S4A envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around," said RBI.

The Reserve Bank of India (RBI) allowing banks to conduct deep restructuring of large accounts to revive projects that can be saved, effectively has thrown a lifeline to promoters who risked losing their companies.

This very tactical move by the RBI came at a time when Banks are struggling to dispose of many stressed assets they have already acquired and have no clue what to do next. 

According to this scheme, titled 'Scheme for Sustainable Structuring of Stressed Assets', accounts that are worth Rs.500 crore or more and have already started commercial operations will be eligible for the new recast scheme. Only those promoters who have shown no malfeasance in their actions while running the show can ask for the permission to continue with the management, even if they get reduced to minority shareholders in the process.

Some of the completed projects in these sectors were hit by external factors. Deep restructuring is done to ensure long-term sustenance. The strategic debt restructuring (SDR) scheme was of limited use in such cases. Under it, banks could convert debt into equity and take control of a company and sell off the assets. However, if they were not able to dispose of the assets within 18 months, the lenders had to incur heavy provisions.

In about a dozen companies where banks invoked SDR, they have not found a single buyer, defeating the entire purpose of loan recovery and at the cost of running down the company, which often times could be just victims of economic downturn.

Stating the 18-month timeframe of SDR was not enough for making full provisions on large loans, banks had asked for more time, necessitating the new scheme, RBI said. The new scheme gives a second chance to the existing promoters, and helps banks restructure loans at a faster pace to protect the value of the assets.

Under the new scheme proposed by the regulator, lenders will first segregate the existing debt of a company into "sustainable" (the share which can be serviced by the company even if cash flow remains the same as now) and "unsustainable".

The restructuring exercise involves the unsustainable portion of the debt, which at the time of such recast should not be more than 50 per cent of the total debt.

As part of the resolution mechanism of the new plan, the unsustainable portion of the debt should be converted into equity/redeemable cumulative optionally convertible preference shares. Banks should not grant any fresh moratorium on interest or principal repayment, or reduction of interest rate for servicing of the sustainable debt portion.

Both the promoters and the banks will have to take equal haircut in the process.

If there is no change in the existing management, the banks can also convert a portion of the unsustainable debt into coupon yielding debt instrument.

Equity shares thus acquired should be marked to market on a daily, or at least on a weekly basis for listed firms. In case the company is not listed, banks should take the lowest value after working out a prescribed rule the central bank outlined.

The upside for the banks would be primarily their equity holdings if the restructured entity turns around.

This scheme, will help the debt ridden companies not only to improve their cash flows, but it will also give them a cushion against, distress selling of assets. 

Just imagine what will happen, if a company instead of selling an asset at a distress price, goes for churning money out of, albeit with the aid of the banks (or the lenders). Will it not be a GAME - CHANGER for those debt laden companies? It is precisely one of the main reasons, due to which the stocks of debt-ridden companies are moving-up, since the last few days; apart from other factors. 

Therefore, the companies like Lanco Infratech Ltd (Rs.4.80), Gammon Infrastructure Ltd (Rs.6), Jaiprakash Associates Ltd (Rs.7.60), Reliance Communications Ltd (Rs.49), etc, will. be one of the biggest beneficiaries.

Source: Edited excerpts from The Times of India and Business Standard

Asset sales help Jaypee to bring down debt

June 20, 2016: Some of India's top business houses were termed "House of Debt" last year as they went on a massive expansion and diversification spree fuelled mainly by debt. As the economy slowed down, some of these groups failed to repay loans and were forced by banks to sell assets. We look at how these groups performed during the fiscal ending March this year and whether they managed to save themselves or sunk deeper into crisis.

For the promoters of Jaypee group, the aggressive expansion during the last decade across the infrastructure vertical has come with a steep price. The Delhi-based group had to sell profitable assets to remain afloat even as banks, alarmed by its defaults, are pressurising the group to put more assets on the block.

A senior banker with Mumbai-based public sector lender said the intent of Jaypee group to reduce debt level is genuine as evident from the sale of operating key operating assets like power plants and cement business. "But still more has to be done to bring down debt level to sustainable level. For this, the group is looking to monetize or swap its real estate along the Delhi-Agra expressway. While it is a feasible, the valuation of such assets holds key for effective deal making, " the official said asking not to be quoted. Bankers also say when compared to other "house of debt" groups, Jaypee is sincere in bringing down its debt levels.

But that sincerity is due to a reason. During fiscal 2016 results statement, flagship Jaiprakash Associates revealed that it has defaulted to bank loans, interest and statutory payments of Rs.4,539 crore. The defaults were mainly due to a massive loss of Rs.3,200 crore on revenues of Rs.17,181 crore in the fiscal 2016 and analysts said it's the Rs.7,500 crore odd finance costs, or almost Rs 21 crore a day, which is draining company's funds. The stock markets also punished the group as the market value of the group declined 72 per cent as on March 2015 to Rs.1,670 crore as on June this year.

Photo: The Times of India

Analysts said the group wanted to grow too fast with diversification in real estate and infrastructure sector without worrying about any slowdown. Two of its marquee projects - the Delhi-Agra expressway and Formula 1 stadium turned out to be white elephants with zero visibility of earnings. To make matters worse, Axis Bank took over the group's headquarters in Delhi as the group failed to repay loans.

For bankers the biggest worry is that the company's revenues and profits are falling faster than the debt obligations despite recent asset sell-off. For example, in FY16 Jaypee consolidated revenue was down 14 per cent year-on-year while operating profit was down 32.4 per cent. In comparison, company's consolidated debt declined by only 5 per cent last fiscal while interest obligations were up 4 per cent in the same period. The result, Jaypee's net debt to equity on consolidated basis inched-up to 4.4 from 4.0 a year ago and its interest coverage ratio declined to 0.6, making it virtually impossible to service debt with its internal accruals.

Analysts are not surprised. "This is what happens in a fire sale. You are forced to sell the most liquid and cash-rich assets and you are left assets with few buyers. This is what is happening with Jaiprakash Associates pushing the company even deeper into a debt trap," says G Chokkalingam, founder & CEO Equinomics Research & Advisory.

Jaypee is forced to divest its cash cement and hydro-power assets and there are few takers for its cash guzzling real estate, infrastructure projects or hospitality projects. The salvation for Jaypee lies in a secular growth revival in economy lifting the demand and valuation of its struggling infrastructure, power, hospitality and real estate business, analysts said.

Future after asset sales

Analysts say Jaypee has taken multiple steps to improve its financial metrics. In February this year, Jaypee sold its cement unit with a capacity of 17.2 mtpa to Aditya Birla group's Ultratech at an enterprise value of Rs.15,900 crore. The deal is not closed yet. Its subsidiary, Jaiprakash Power sold its hydro power projects to JSW Energy for Rs.9,300 crore. In September last year, the company sold its Bina power project to JSW for Rs.3,500 crore. It had sold its 74 per cent stake in Bokaro Cement to Dalmia for Rs.668 crore in November 2014 and its cement grinding unit in Haryana to Shree Cement in April 2015 for Rs.358 crore. These asset sales will help the group to bring down debt significantly and an investor could see the improvement in its financials by this fiscal end, said a Mumbai analyst.

Post the cement sale, Jaypee will have 10.6 mtpa of cement capacity in Madhya Pradesh, Uttar Pradesh, Andhra Pradesh and Karnataka, a hotel division with five luxury hotels, real estate division with land around Yamuna Expressway. 

"We have time and again shown our will to take proactive steps to tide over these turbulent times caused by the economic slowdown," Jaypee Chairman Manoj Gaur said on April 1 this year soon after signing the deal with the Birlas. 

Jaypee had blamed worsening performance of core sectors and a shaky economy for the fall in financial metrics. But despite assets sales, it has a long road ahead to return to black.

Courtesy: The Business Standard