Deepak Shenoy

Why the U.S. Credit Crunch Will Not Affect India

I live in Navi Mumbai and travel a lot to Gurgaon and Bangalore, and keep tabs on real estate in both places (relatives and friends are investors here). Prices are coming down and supply is at phenomenal levels. Ghost buildings (complete but zero occupancy) are the norm here in Navi Mumbai and gurgaon and outer bangalore head that way. CBD in Bangalore is starting to crap out - deals are just not happening.

Even in Mumbai deals have fallen though, auctions have failed and prices are dropping fast despite builder cartels vowing to keep them stable.

Gurgaon and Dwarka have a massive oversupply coming up and you can see this happening as builders delay possession (lack of final payments because investors aren't finding buyers).

Real estate loans are comign down - growth slowed to 20% last quarter, and with a CRR hike, rates stay high, andloan offtake slows.

We have our own version of subprime - if people default here, banks have a long long foreclosure process, and recovery can take years.

It may not be US Subprime that affects India - it was never that, we had our own bubble - but the bust will typically take 5 years before growth starts again. Cycles in India have been 10 years long - the last highs were 1985-87, then 1994-96, and then 2005-07. I expect the bubble to have bust completely by 2011.

But it's a non transparent market, so we will only know much after the fact.

India's Selloff: How Bad Can It Get?

I'd written about this at:

blog.investraction.com...

As of Feb 7, the Nifty EPS grew only 13%. Dividend yield in India has always been of the order of 2% or so so let's leave that out. The P/E then was 22 trailing.

The Nifty was at 5133 at the time, down a staggering 1000 points from the Jan highs.

As of today we're at 4600 on the Nifty, a further 500 point drop from when I wrote the article - another 10%. Though to be honest this 10% has happened in the last one week.

I'm still confident we'll recover after a few years, but bottom fishing should happen at the 3500 levels on the Nifty (corresponds to 12000 on the Sensex). My first buy point is 4000 (14,000 Sensex).

Disclosure: Short the index. (Was not short when I wrote the article)

India is Thirsty for Energy: Will the Bulls Take Notice?

Power stocks have had their runups recently, with P/Es going over the roof. Two big recent IPOs have whetted demand - Rural Electrification Corporation (which is a utility financier of sorts) and Reliance Power (which has projects for 28,000 MW production by 2015) RPower isn't doing all that great on the bourses, with all the drama around it, but at current prices it's still quite expensive.

Other listed stocks are Reliance Energy, Cairn Energy, Tata Power, GVK Power, JP Hydro, Suzlon Energy, Areva T&D, and NTPC. NTPC is the biggest player - 27,000 MW of power today - and is at a reasonable P/E of 23, most of hte rest are 30+.

There are power finance and trading companies like PTC and PFC, equipment manufacturers like BHEL, BEML, Siemens, Ing Rand, Bharat Forge etc.

Suzlon, Areva and JP Hydro are clean energy vehicles, and wind energy already gets a 150% depreciation benefit in tax (A huge number of windmills, owned by private parties and operated by Suzlon, have come up to take advantage of this law)

Apart from this there's Moser Baer who are getting into solar cell manufacturing. That's another huge business, and has tax and other benefits attached (homes with solar get a discount on their regular electricity bill etc)

With India's large local gas finds there isn't too much of a problem with supply, and in the next few years there is likely to be a huge surge in power production.

Now for the power plants, there are PPAs in place but given the populist politics there is also significant counterparty risk. (Remember in the Enron plant, the Maharashtra govt. just refused to honour the PPA) This should change with more home grown players who know how to work the government.

India will soon get a regulated energy trading exchange (restricted to only producers and utilities). That will alter the landscape but will take time.

This field is overpopulated and is prone to oversupply (a very good thing for consumers). Unless the grid stretches out to those that need it, reduce T&D losses (there is nearly NO research in India, and no player is funding research either) and contain theft, the supply may only benefit urban consumers. That means huge competition for cities and no benefit to the rural folks who really need it. I hope the coming recession will draw focus to such issues.

Seeking Alpha in Indian Real Estate

Prices are already going down in India (though urban real estate and condos are hugely valued and people tend to pay huge premiums as compared to the US, even in a slump). Specifically, in Bangalore panic pricing is setting in. Even in Delhi and Mumbai prices have slowed down and there aren't too many transactions happening - both in commercial and residential real estate.

I'm in India and I can short them all - but I just don't think it's right to do it now. The national budget, usually a big important thing here, is up on the 29th and could contain sops for the sagging real estate sector, or for real estate investments in general. 29h is also the first day after the current month's futures expiry so if I had to short, I'd choose the end-of-day of the 29th to start.

Are Indian Stocks Getting Too Far Ahead of the Pack?

The Sensex has a trailing 12 month PE of 23.5. Earnings season is just starting so at current levels PE will come down. Why will earnings increase? Most of the non-IT pack based Sensex companies (Reliance, Bharti, Tata Steel) have foreign loans (either as ECBs or FCCBs) which are rupee adjusted every quarter, and the dollar is down about 2-3% from last quarter (Note: in Q1 - Apr-Jun - the dollar was down 5-7% adn resulted in humongous forex gains as other income) Top level IT companies are hedged (at least for hte last quarter) and will probably squeeze their earnings through.

Natural growth, hedged and other forex gains look like they will override the lackluster performance by auto, and the losses incurred by the public sector oil marketing companies.

With the rapid increase in oil prices, refineries are bound to make a killing if they (like the larger ones in India) process heavy crude. Estimates are that margins will be higher than $15 a barrel for hte quarter.

Yet, this is all going irrational, because looking one year ahead or two isn't quite that great. IT companies hedge themselves for like one or two quarters, that's it. Forex gains are other income, but there is a slowdown in the growth of operating income, evident last quarter. High interest rates are affecting interest rate sensitives, though we're easily ignoring that for all the banks.

Furthermore everyone thinks there's no "subprime" problem in India. But hear this piece: Since there's no credit quality checking method in India, all home loans are granted on the basis of paychecks and bank statements. A large part of these loans are taken by people who buy from builders before the house is constructed, a phase that can take three-four years. (Most such houses have been delayed, in my knowledge)

Indian tax laws do not allow tax deductions for principal repaid BEFORE the house is complete, so what do the banks do? Offer "pre-EMI" - meaning pay only interest until the house is complete and when you get possession, start paying back the principal.

These are ARMs but what resets in general is the tenure of the loan, not the payment, so everyone is happy. Until the tenure becomes unmanageably huge, so they have to raise the monthly payment.

Interest only loans, with a potential spike in payments required, and high interest rates prevailing...sound familiar?

If the dollar keeps going downwards, IT employees aren't going to get the huge increments they're used to. Asset prices here (which are typically 5-10x annual salaries) are already slowing down and flippers are starting to find their shoes. Some of the top banks have indicated higher default rates on housing loans; and rates are currently 12% or higher.

I think we'll be hit, except we'll only know after the event. But for now, enjoy the run - nothing better than to watch as your portfolio multiplies itself.