Unitech-Real Estate Titanic
A closer look at Unitech's FY11 Annual Report under-scores the depths which this once Real Estate darling is now plumbing.
-Debtor situation deterioration is a concern with debtors rising 69 per cent yoy to Rs 21.5 bn. Pile-up has happened in Greater Noida properties and certian Commercial projects sold before FY09.
-Unitech's non property revenues declined 22 per cent yoy in FY11 to Rs 2.3 bn, as construction business declined. Key disappointment was a slow 12 per cent yoy rise in Realty Revenues to Rs 29.5 bn.
-Unitech's execution ramp-up was slower than expected here. Deliveries declined 38 per cent yoy to 4.3 mn sq feet.
-Unitech resorted to exotic accounting to show a lower working capital by reclassifying FY10's cash balance as an investment and writing off half of that during FY11.
-The cash balances of Rs 2.3 bn were shown as yield enhancement certificates and Rs 1.14 bn has been written off in FY11 which equals 14 per cent of PBT. Possibility of another Rs 1.16 bn to be written off in FY12 exists.
-Surprise surprise, the Bank Term loans have been replaced by Public Deposits which rose 4X FY10 numbers, worse the deposits carry the same coupon of 14 per cent just as bank loans did.
-So what was the Rs 6.8 bn raised through equity warrants utilised for? Another Rs 8 bn has been spent on land acquisitions which led the corporate to report a negative cash flow of Rs 6.3 bn against Rs 17 bn in FY10.
-Even though the markets have debunked the land bank theory the local realtors refuse to see the sharp change in market perceptions.
-This explains why a Rs 35000 stock drops to Rs 29 in a matter of 5 years, and there is more downside.
-EPS will work out to Rs 2.6 in FY12 and Rs 3.2 in FY13, tight conditions may even push the stock to sub Rs 20 levels.
WHAT IS LIC BUYING?
Apart from a few shrewd long term investors, know who else was buying aggressively when the markets took a tumble? Life Insurance Corporation or LIC. Having one of the most enviable portfolios in India, LIC bought stocks worth Rs.1000 crore on 5th and 8th August when the markets slipped badly. Imagine what the fall would have been if LIC had not been buying too?
With stocks at a discount of over 30%, while traders and FIIs were making a hasty retreat, LIC stepped in and bought into blue chip frontliners. And what has it been buying? Mainly FMCG, metals, engineering and taking a contrarian call, buying into IT too. So its shopping list consisted of HUL, ITC, Infosys, TCS, Hindalco, Tata Steel, JSW Steel, Voltas and BHEL. LIC is like any other institutional, buying and selling stocks but during the current downward spiral, remained only a buyer. And LIC which has traditionally been always buying into banking stocks, this time around avoided it completely.
LIC has been buying consistently over the past 15 days and its net buying during this fortnight has been pegged at Rs.1800-2000 crore. The giant behemoth institution has an investment target of Rs.60,000 crore for current fiscal, FY12.
Its not that LIC only buys all the time. LIC recently changed its practice of holding scrips indefinitely and following that, in June 2011, when the markets were relatively better, it got out of some 57 illiquid stocks. Prominent amongst them being Gokaldas Exports, Sundaram Finance, Cinemax India, JMT Auto, Crisil, Godfrey Phillips, FGP, Thana Electric, Simplex Mills, Shalimar Wires, High Energy Batteries and Oriental Hotels.
In FY11, LIC on net basis invested Rs.43,000 crore in the equity markets and booked profit of around Rs.17,000 crore as against Rs.400 crore profit it made in FY10. As on March 31, 2011, on a mark-to-market basis, LIC's equity portfolio grew 70% in FY11.
In July, LIC hiked its stake in Reliance Industries to 7.16%, having bought some 18.6 lakh shares during the Q1, at an average price of Rs.867.10/share.
Interestingly, LIC had earmarked Rs.15,000 crore for buying into the PSU IPOs. But with the Govt now planning to postpone a few issues, LIC plans to divert more money into the secondary markets.
LIC typically prefers bulk deals as incremental purchases lead to a spike in share prices. And that is the reason why it remained the biggest investor or should we the 'saviour' for PSU IPOs/FPOs which otherwise would have sunk. LIC literally bailed out REC, NHAI and NMDC. But LIC views these rescue acts as a great opportunity as in smaller companies, being fenced by the limit of 10% of the company's capital, LIC does not get to hold large chunks, given the amount of money it wields. So in IPO/PSU FPO, LIC gets to invest crores of rupees, with no worry about limits.
And unlike FIIs and mutual funds, LIC is not in the markets for short term gains. It breeds no ambition to be the market mover and shaker. It is in for the long haul and its investments are usually long term.
Take a look at the top 40 stocks in LIC's portfolio which accounts for 82% of its portfolio. And you will understand why LIC is juiciest of all the institutions, hoping that this giant gets listed too!
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Brokers to be Fined for Not Collecting Margin Money
Sebi on Wednesday asked stock exchanges to impose heavy penalty on brokers allowing their clients to trade in derivative market without sufficient margin money and said that fines could be as high as the shortfall of funds. While the minimum penalty is 0.5% of the shortfall of margin money, the penalty could be as high as 100%, the Sebi said in a circular. The stock exchanges will have to impose the penalties from September 1, Sebi said.
This is more of a threat than an analysis. But if a wrong downgrade can make a difference to US markets and interest rates, so can it for India's. The real difficulty is one that emerges from an analysis by Cornell economist Easwar Prasad in the Financial Times. That analysis suggests that though India's gross public debt to GDP ratio declined from 75.8 per cent to 66.2 per cent between 2007 and 2011, it still is among the highest in the region. India's 66.2 per cent level compares with Malaysia's 55.1, Pakistan's 54.1, Philippines' 47, Thailand's 43.7, Indonesia's 25.4 and China's 16.5.
So if S&P needs a target to declare that some governments in the Asia-Pacific are excessively indebted, then India is in the firing line. It is no doubt true that a number of factors make Indian public debt less of a problem than in many other contexts. To start with, much of public debt in India is denominated in Indian rupees and is owed to resident agents and therefore is unlikely to be adversely affected by uncertainty in international debt and currency markets. Secondly, within the country public debt is largely held by the banking system dominated by public sector banks. They are subject to government influence and are unlikely to respond to developments in ways that make bond prices and yields extremely volatile. Given these circumstances, public debt is not a potential trigger for a crisis and in any case should not worry private financial interests.
While there is speculation whether today's historic announcement by the Fed in which it dated the beginning of the end of ZIRP, and in reality just the beginning of the beginning, is some form of shadow QE3, what is certain is that there is no Large Scale Asset Purchasing component to it yet. As such while the market immediately discounted the impact of 2 years of duration risk elimination (roughly 70 ES point equivalent), this has now been priced in, and the market must now look to mechanisms by which the it will have to absorb ~ $2.0 trillion in debt issuance over the next year without Fed help (and to those sticking to some modified version of MMT, keep in mind there is only $1.6 trillion in excess reserves so even a full recycling thereof would be insufficient to match demand of funds). Enter Goldman Sachs which puts the argument to bed: "We now see a greater-than-even chance that the FOMC will resume quantitative easing later this year or in early 2012." Why? Because what was lost in the noise today is that the US economy is contracting and the unemployment rate is rising: i.e., we are reentering a recession. And what the Fed did today is absolutely powerless to change this even from the Fed's point of view. Quote Hatzius: "This would probably mean more QE if their forecast converged to our own modal view of a flat-to-higher unemployment rate through the end of 2012, let alone our downside risk case of a renewed recession." But what about the historic dissent? Ah, therein lies the rub: "We view Chairman Bernanke's willingness to live with the dissents as a strong signal that he and the rest of the Fed leadership view the need for renewed easing as more important than the institutional norm of consensus decisionmaking." So there you go. The market will wake up tomorrow with a hangover, and say the one word it always does: "More." Absent that, the slide will, as predicted, resume, and it is none other than Goldman Sachs who has once again, just like back in 2010, set the strawman up for the Fed doing simply more of the same which does nothing to actually fix the economy, but bring us all closer to that epic meltdown discussed by Andy Lees earlier, and by Zero Hedge over the past two and a half years.
From Jan Hatzius: QE3 Now Our Base Case
Summary
We now see a greater-than-even chance that the FOMC will resume quantitative easing later this year or in early 2012. We have changed our call because today's statement suggests that the committee's reaction function to incoming economic news is more dovish than we had previously thought. Although Fed officials still expect a gradual decline in the unemployment rate, they made a conditional commitment to keep the funds rate unchanged "at least through mid-2013″ and implied that they would employ additional policy tools in case their economic forecast deteriorated further. This would probably mean more QE if their forecast converged to our own modal view of a flat-to-higher unemployment rate through the end of 2012, let alone our downside risk case of a renewed recession.
Full note:
It's official: the federal funds rate is highly likely to stay at its current near-0% level until 2013 (or later). Although this has been our forecast all along, today's FOMC statement was nevertheless more dovish than we had anticipated in two respects:
1. The policy commitment to keep the funds rate at "…exceptionally low levels…at least through mid-2013″ was more aggressive than we had anticipated. Some commentators today expressed disappointment that this is still a conditional commitment, i.e., Fed officials kept an "out" if growth is much stronger and/or inflation much higher than expected. But that was not a surprise. The surprise was the fact that there is a date at all (for the first time ever in the history of Fed communications) and even more so the fact that the date is almost two years in the future.
2. The easing bias in the last paragraph of the statement was more explicit than we had anticipated: "The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate." The phrasing somewhat echoed the promise in the September 2010 statement "…to provide additional accommodation if needed…", which sealed the deal for QE2. In our view, the committee's explicit easing bias suggests that the threshold for additional easing in terms of downward revisions to the committee's forecast is relatively low.
The implication is that the committee would probably ease policy further if its economic forecast converged to our own, more downbeat view. While the committee still expects a gradual decline in the unemployment rate, our own modal forecast is a flat-to-higher rate through the end of 2012. In addition, we see a recession risk of about one in three, and if there was indeed a recession the committee would of course ease further.
If there is additional easing, it would likely take the form of QE. After all, "these tools" mentioned in the statement presumably need to be more powerful–or at least not much less powerful–than the action taken today in order to avoid a sense of anti-climax. This means that they are unlikely to consist of small incremental steps such as a commitment to keep the balance sheet large, a gradual shift of the securities portfolio into longer maturities, or a cut in the interest rate on excess reserves from 25 basis points (bp) to zero. This leaves the stronger options, which include QE as well as even more aggressive forms of easing such as rate caps (a form of QE in which the Fed promises to buy as many securities as needed to hit a longer-term yield target), a price level or nominal GDP target, or interventions in non-government securities markets (for which funding from Congress would be needed). Of these, "conventional" QE is very likely the option with the lowest hurdle, and the first one to be deployed.
Although QE3 is now our base case, it is not a certainty. We see three main ways in which our revised call could turn out to be incorrect. First, of course, the economy may turn out to be stronger than our forecast. In this case, Fed officials would not need to revise down their forecast, and would probably not ease further.
Second, inflation might pose a higher hurdle to additional easing than we have allowed. There are only tentative signs of deceleration in core inflation, and inflation expectations show few signs of breaking lower despite the recent weakness in the economic data and risk asset prices. This is a risk to our view, although the stickiness of inflation expectations might already reflect an assumption by the market that the Fed will ease, in which case inflation expectations would fall sharply if the Fed failed to deliver.
Third, the anti-Fed backlash late last year might argue against further QE. That is possible, but the problem might be reduced via a slight tweak in the policy's design. That is, Fed officials might choose to specify the policy not as a large-and-scary upfront number but a smaller monthly flow of purchases. Although the substantive differences are small–e.g. a $600bn purchase over eight months is basically the same as a $75bn-per-month purchase that is expected to last eight months–the cosmetics of the flow approach might be more appealing. Moreover, it would also be more flexible because the committee would revisit the program from meeting to meeting.
While these points could pose problems for our call, we disagree strongly with one argument against further QE that we heard frequently today–namely that the three dissents from Presidents Fisher, Kocherlakota, and Plosser indicate "the end of the line" for further Fed easing and difficulty for the chairman to get his way. On the contrary, we view Chairman Bernanke's willingness to live with the dissents as a strong signal that he and the rest of the Fed leadership view the need for renewed easing as more important than the institutional norm of consensus decisionmaking. There is no question that Bernanke will always have enough votes, and we fully expect him to use these votes to provide further support to the economy if he views it as necessary.
