US heads into another real estate mess

Walk the streets of midtown Manhattan, listen to the jackhammers, look at the cranes on so many blocks and you might conclude: these people are in the midst

US mortgage crisis: A subprimer
of a big commercial real estate boom.

You might be right, but not for long.

Non-residential property investment in the United States, which usually tracks economic growth with a delay, has stayed unusually strong unusually long into what is looking like an increasingly ugly and protracted recession.

And that is pretty bad news, both for the economy and the banks. The economy is about to suffer the latest dropping of other shoes when non-residential construction, which includes everything from hotels to office buildings to manufacturing plants, turns sharply south and removes one of its few supports.

There simply won't be enough demand for all of these new office buildings, malls and hotels, even in places that aren't banking centres. And manufacturing and power construction, which have been very strong, may be hit by dropping demand, both at home and overseas, as a global downturn takes hold.

Development will slow or contract, jobs will be lost and economic activity diminish.

And the banks themselves, which are already such basket cases they require government support, are about to see the value of the commercial real estate loans they own get whacked, prompting yet another self-reinforcing cycle of loan writedowns, tightening credit and loss of confidence. "It takes a lot of time until projects are finished and there were a lot of things in the pipeline. But developers are probably not very happy about it," said Harm Bandholz, an economist at Unicredit in New York.

Because it takes time to plan, finance and build a building, it is not unusual for development to carry on after gross domestic product growth begins to weaken, but this time it has defied gravity. "Usually you have a tight correlation between GDP and construction, with a lag of two quarters. This is unprecedented," he said.

Private investment in structures grew by 14.3 per cent in the second quarter as compared with the quarter before and though it is a fairly small sector actually contributed almost a half a percentage point to GDP growth.

The growth was concentrated in the manufacturing, power, lodging and office sectors, all of which face considerable headwinds now. Manufacturing is sensitive to domestic and global growth, which is falling. Power plants may be less profitable with oil now in double rather than triple digits. Hotels would seem to be a natural to lose out during a recession, and offices need businesses and workers, of which there will be fewer.

Source: EconomicTimes

Punj Lloyd: Buy

Punj Lloyd’s financial performance over the last two quarters amply demonstrates its ability to weather tough macro-economic conditions. The current trend of softening commodity prices and clear signals on interest rates softening from here on may further support the company’s earnings growth.

Investors with a 2-3-year investment perspective can consider adding the stock of Punj Lloyd. At the current market price, the stock trades at a modest valuation of about 9.5 times its estimated consolidated earnings for FY09. The current valuations provide a good entry point into the stock. The company’s earnings grew at 48 per cent compounded annually over the past three years.

The consolidated sales for the quarter ended September 2008 rose 53 per cent while net profit was higher by 61 per cent over a year ago. Net profit growth, excluding profit on sale of its ISP division (pending approval), was at 45 per cent. The company’s strong performance comes on the back of diversified business operations across several nations, a strategy that has enabled it to beat threats of a slowdown.

For instance, while revenue contribution from pipeline and process plant segment continues to remain significant in the latest quarter, its proportion to total sales has declined. Instead, the company’s infrastructure segment, further strengthened by its Singapore-based acquisition, has made a higher contribution. This segment’s increased contribution is visible in the order book as well.

Punj Lloyd has also made headway in geographic diversification, having significantly ramped up presence in South-East Asian and Asia-Pacific regions.

Over the past few quarters, infrastructure stocks have been beaten down on fears of higher raw material and borrowing costs hurting earnings. A mild slowdown in order book in the June quarter also sent the earnings estimates spiralling downwards for the company. Punj Lloyd has done well to cross these hurdles.

In the latest quarter, the proportion of raw material to sales witnessed a decline, improving operating profit margins by 50 basis points to 9.3 per cent. Interest cost too was comfortably covered by higher profits. Order inflows during the quarter, at Rs 5,600 crore, were more than double September 2007 levels.

The company’s current order book of Rs 21,700 crore (2.8 times FY08 sales) from cash-rich clients is likely to provide revenue visibility over the next 18 to 24 months. Beyond this period, new ventures such as defence equipment, onshore drilling and strategic stake in a shipyard are likely to expand the revenue stream. While a subsidiary has bagged its first onshore drilling contract, a further decline in crude oil prices may pose a threat to the rental income

Source: TheHinduBusinessLine

Day Trading Guide - November 3, 2008

The analysis and opinion expressed in these columns are based on the technical analysis of the past price behaviour. The stop-loss level provided with the recommendation is important. The original view would stand negated if the stop-loss level is breached. There is a risk of loss in trading.

Source: TheHinduBusinessLine

India Cements (Rs 87.05): Buy

We recommend a buy in India Cements from a short-term perspective. It is clearly visible from the charts of India Cements that it has been on a long-term downtrend from its December peak of Rs 333 (52-week high), forming lower troughs and lower peaks. However, the stock recently found support at Rs 70 levels, which is a significant long-term support level and bounced up. On October 31, the stock penetrated the medium-term down trendline by jumping up almost 16 percent acco mpanied by high volume.

This reversal was triggered by the positive divergence in the daily relative strength index (RSI), which has entered in to the neutral region from the bearish zone. The weekly RSI is recovering from the deep oversold area. Moreover, we notice a weekly bullish piercing candlestick pattern that indicates short-term trend reversal.

We are bullish on the stock from a short-term perspective. We anticipate the stock to rally until it hits our price target of Rs 98 in the forthcoming trading sessions. Traders with short-term perspective can buy the stock while maintaining a stop-loss at Rs 82.

Source: TheHinduBusinessLine

It is ‘recession’ for one in seven of NSE-listed cos

The economy as a whole may still be growing, although at a reduced pace; but for many listed corporate entities, ‘recession’ is here and now.

An analysis of the quarterly financial performance shows that one in seven companies listed on the National Stock Exchange saw a decline in the quantum of ‘value added’ in their operations for two successive quarters (ended September 30, 2008) – the commonly accepted definition of recession.

As many as 116 companies out of a sample of 814 companies analysed have seen a decline in the ‘value added’ (measured as the sum of ‘net sales’, ‘other incomes’ and net addition to inventory minus the value of raw material and stores consumption) during June and September 2008 quarters compared to their immediate previous quarters.

Maruti Suzuki instance
Take for instance, Maruti Suzuki. The company added Rs 1,428.49 crore in the quarter ended March 2008.

However, this came down to Rs 1,392.29 crore and further to Rs 1,279.63 crore respectively, in the two subsequent quarters.

The decline in value addition during these two quarters relative to that generated in March 2008 for these 116 companies has ranged between half a percentage point and close to 100 per cent (the entire surplus being wiped out).

However on an average (median value), the decline stood at close to 30 per cent (see Table).

That, more than normal cyclicality is at work here is evident from another piece of statistic: There were only 79 companies which posted two successive quarters of de-growth as of June 2008, a good 40 per cent lower than the latest number.

Companies usually see a sharp deceleration in output in the first quarter of a fiscal year before the momentum of economic activity sees output catching up in the second quarter number. Even in September 07, there were only 82 companies that witnessed a decline in ‘value added’ for two successive quarters.

Viewed from either perspective, the latest number represents a significant shift in the underlying business fundamentals.

Competitive pressures at work
Anecdotal evidence points to a combination of competitive pressures forcing companies to keep their output prices in check even as the input cost increases pare surplus value added by them.

Bharat Petroleum is a case in point.

The former has seen crude petroleum prices skyrocket and regulatory pressures preventing it from marking up the refined, end-product prices.

Grasim too found itself in a similar predicament with regard to viscose staple fibre and cement businesses in its portfolio that saw sequential declines in value added in two successive quarters.

Financial services, construction, hospitality, mineral ore extraction are some of the industries that are prominently featured in the list of companies with negative growth in value addition.

Source: TheHinduBusinessLine

IDBI Bank cuts home, education loan rates by 0.5 per cent

Shortly after Reserve Bank cut its key rates, IDBI Bank on Saturday reduced its home and educational loan rates by 0.5 per cent with immed

iate effect.

The rate cut will be applicable to both the existing and new customers, the bank said in a press stetment here.
Following the revision, the home loans will be now available to customers for an interest rate of 11 per cent as against 11.5 per cent earlier, the bank said.

Simultaneously, the margin on housing loans has been enhanced from 15 per cent to 20 per cent for loans up to Rs 30 lakh and to 25 per cent for loans over Rs 30 lakh, the bank said.

Country's second largest public-sector bank, Punjab National Bank, had recently cut its prime lending rate by 0.5 per cent effective from November one and deposit rates from December one.

Source: EconomicTimes

Home, car loans to get cheaper

Interest rates could fall soon, making loans cheaper and saving less attractive, following a slew of measures by the RBI on Saturday.

The central bank cut the rate at which it lends short-term funds to banks by half a percentage point and infusing an extra Rs 1,20,000 crore into the banking system.

Pressure on banks to cut rates has risen sharply in the past few days with the RBI making clear the crisis could only be resolved if banks followed up with measures to boost demand and sustain spending.

This would mean home, car and other consumer loans becoming cheaper by half a percentage point. Companies too can look forward to similarly lower lending rates. But, for depositors, the flipside of a rate cut is lower interest rates on savings.

Senior officials of public sector banks unanimously told STOI that rate cuts would follow very soon, perhaps within the week. They said they would follow through on the RBI's move to contain the slowdown, even though they face a severe liquidity crunch because the central bank continues to suck cash worth $500 million every day in order to support the rupee. Punjab National Bank chairman KC Chakrabarty said that banks are likely to take their cue from RBI's decision to cut rates.

On Saturday, the RBI in its mid-term review of policy announced that the repo rate — the rate at which banks can borrow short-term funds from RBI — will fall from 8% to 7.5% from November 3. This would make it easier for banks to cut interest rates for consumers.

Simultaneously, there will be a two-stage cut by November 8 of the cash reserve ratio (CRR) — the proportion of deposits banks have to maintain in cash with the RBI. It will fall from 6.5% to 5.5%.This will give banks access to an additional Rs 40,000 crore to lend.

In another liquidity infusing measure, RBI in effect brought down the statutory liquidity ratio — the proportion of deposit money that banks mandatorily have to invest in government securities — by two percentage points.

While the SLR is formally currently at 25%, various temporary relaxations that allowed banks to borrow from RBI against their holdings of government securities meant that it is effectively at 23.5%. Further relaxations announced on Saturday brought down the effective SLR to 21.5%, though the formal rate has been reduced only to 24%.

The effective two percentage point cut means an addition of Rs 80,000 crore to the kitty available to banks for lending. With the CRR cut, that makes a total of Rs 120,000 crore in extra liquidity. One of the key relaxations was that banks can now borrow up to 1.5% of their deposit base from RBI to lend to mutual funds and non-banking finance companies (NBFCs) facing shortage of funds to repay their investors.

Source: EconomicTimes