Govt offers fin relief to realty cos

[Editor: This is expected to be a sort of boon for the established real estate players like DLF Ltd (Rs.149.90), Unitech Ltd (Rs.5.25), Parsvnath Developers Ltd (Rs.16.80), HCC Ltd (Rs.35.55), etc. who are reeling under high debt burden; with a squeeze on cash flow. I continue to maintain a buy on Unitech Ltd with short term targets of Rs.9-12] 

Sep 1, 2016:  The government on Wednesday announced a package to ease the financial stress on construction companies, including a possible loan restructuring package for the real estate sector — a move that could prompt property developers to resume work on stalled projects.

"The department of financial services and the RBI will try and prepare a policy on how to deal with those companies which have got a lot of stressed assets in the real estate sector. We hope that a series of these decisions would pump in a lot of liquidity in the sector, activate a lot of real estate and infrastructure projects which have been stranded for some time and support the entire process of dispute resolution in relation to construction and real estate," finance minister Arun Jaitley told reporters after the Union cabinet cleared the package.

As reported by TOI on August 26, the package prepared by the NITI Aayog seeks to ensure release of 75% of funds locked up in projects where an arbitration award has been made in favour of a construction company. In case where the award has been challenged, agencies such as National Highways Authority of India would transfer 75% of the award amount into an escrow account against margin free bank guarantee. This amount can be used to repay loans and generate liquidity besides easing the burden on companies.

"HCC will immediately be able to reduce its debt by almost half as a result and will be able to reduce it even further within 12 to 24 months. With this, HCC will be able to participate in country's infrastructure development in a much bigger way," said HCC chairman and managing director Ajit Gulabchand. The company which is under financial pressure has around Rs.3,000 crore caught in disputes with government agencies.

There is gain for individuals too as some of the real estate developers have delayed delivery of projects citing lack of funds.

"If the banks extend the repayment schedule, developers will use the cash flow in completing the projects instead of repaying the loan. This will help the sector and the economy," said ATS Infrastructure CMD Getamber Anand, who is also heads real estate lobby group Credai.

In case of construction companies the government has sought to speed up the arbitration process, Jaitley said. Public sector companies and the government would seek the consent of contractors to transfer cases initiated under the earlier law to the amended act.

And, to avoid a build-up of cases in future, the government also wants its arms to set up Conciliation Committees to ensure speedy disposal disputes.

Source: The Times of India 

Reliance Communications Ltd: Should We Buy...?

CMP: Rs.49.20

In a move seen as aggressive, Reliance Jio has announced free voice calls across network and data charges that are 30-50% lower than that charged by incumbents including Vodafone and Airtel. A number of brokerage houses cut the price targets of incumbent telecom players Bharti Airtel and Idea Cellular fering that Jio's launch would disrupt the $28-billion Indian telecom market.

Influential foreign brokerages Goldman Sachs, Credit Suisse and JP Morgan have cut their 12-month price targets for Airtel and Idea by as much as 19%. Jio's commercial launch will be on September 5, 2016, but it plans to offer unlimited data, voice, video and SMS until December, 2016 as part of its 'welcome offer'. The newest telecom entrant is targeting 100 million customers in 'shortest possible time'.

Therefore, while an entire spectrum of telecom-analysts are getting heebie-jeebies over Reliance Jio's 4G launch and its potential negative effects on the revenue/earnings on the top four operators -- Bharti Airtel Ltd, Idea Cellular Ltd, Vodafone Ltd and Reliance Communications Ltd,  let us focus our attention primarily on Reliance Communications Ltd Vis-a-Vis Reliance Jio's historical launch. It is pertinent to mention here that most investors are probably missing out on the other key developments that can offset the impact of slower industry revenue growth, following Jio's launch; at least partially.

(i) Jio offerings are restricted to 4G handset subscribers, therefore, the impact on existing telcos will be gradual while it would be interesting to see how they cope up with the new challenges. 

(ii) Reliance Communications has already started to move its five million CDMA customers to Jio's 4G LTE network from May 4, 2016. While the users will continue to be RCom subscribers, the network will be powered by Jio's all-IP based next generation network. 

The Anil Ambani-led RCom is leveraging the spectrum sharing pact it had signed with elder brother Mukesh Ambani-led Reliance Jio Infocomm for 4G services. The company will deploy its own 4G network and pre-dominantly use Reliance Jio infrastructure to deliver 4G services. The upgrade will happen in a phased manner.  RCom paid Rs.5,383 crore in January this year to DoT to liberalise spectrum in the 800 MHz band across 16 circles. 

(iii) If Reliance Jio (RJio) garners Rs.200-250 average revenue per user (ARPU) while switching offerings from voice to data, incumbents’ ARPU base could be protected given their current ARPU base of Rs sub-200, wrote Motilal Oswal in their recently published research report. 

(iv) In 2013, the Ambani brothers had entered into a comprehensive agreement for optimal utilisation of the existing and future (telecom) infrastructure of both companies on a reciprocal basis.

While the spectrum trading and sharing agreements will give older brother's Jio access to the much-needed spectrum in the 800 MHz band, Anil Ambani's RCom subscribers can now enjoy high-speed mobile broadband seamlessly on both the networks. The arrangement will be similar to intra-circle roaming arrangements that telcos currently have. The migration of RCom's customers to Jio's network will also be a good test case. Following the deal, both RCom and Jio will have over 10 MHz spectrum in the 800-MHz band in all 22 circles or service areas across India. Jio has acquired spectrum in this band in 10 circles and RCom has it in all 22 circles..

(v) Analysts have raised questions on Jio's ability to offer voice services purely on LTE (VoLTE) as it would not have the conventional method of delivering voice through wireless networks. Jio intends to offer voice through its data networks, which is similar to making calls on Skype or WhatsApp. The partnership with RCom to offer the fallback on voice in select markets could be a game-changer for Jio.

(vi) A sector executive said with Jio finally announcing its commercial launch, the picture is much clearer and they could now frame a strategy to counter the competition. He said it would not be so easy for Jio to add customers, as data growth had already slowed and new customers would have to make a one-time investment of at least Rs.3,000 to avail its service.

(vii) A majority of data customers at existing operators are either using 2G or 3G; 4G is still gaining traction. Analysts expect Jio to expand the data market and data revenues would grow at a 22% compounded annual rate over the next few years. If the data market spikes, then this will invariably have a positive effect on the top and bottomlines of the incumbents (read, R-Com). 

(viii) Reliance Jio announced its tariff (rate) plans starting at Rs.149 for 28 days, offering unlimited voice - - this is higher than the voice average revenue per user (Arpu) of Bharti and Idea, at Rs.138 and Rs.130, respectively.

(ix) An analyst said for the incumbents, there would be an impact on the lower-tier segment, as the Rs.149 offer by Jio would appeal to voice-only customers, who will be able to make unlimited free voice calls.

(x) UBS in a report said RJio, being a 4G operator, would find the addressable market only around five percentage of India's mobile users. "Also, we do not expect high-end customers to switch to RJio overnight, abandoning their existing operator," it added.

(xi) Equinomics Research & Advisory wrote: "Post RIL AGM, Bharti Infratel stock price fell about 4% from its intra-day peak. We feel the fear is unwarranted. The aggressive launch of 3G and 4G services, and also pressure on the existing players to improve the transparency will lead to increase the demand for telecom towers. Ultimately Bharti Infratel would be a major beneficiary of expanding scope of mobile telecom services". Or in other words, the impact (if any) has either been factored in the prices of the shares of the incumbents or will play only for the short to to medium term (As RJio's unlimited offerings and free usage are valid only till December 2016). 

(xii) Ahead of the impending launch of Reliance Jio’s 4G services, telecom operator Reliance Communications recently announced app-to-app 4G calling dubbed as Calling Ka Naya Tareeka' for subscribers across India and worldwide at Re 1. The Anil Ambani-led firm will bundle 300 minutes of app- to-app talking, valid for 30 days at Re 1, translating into 10 minutes usage per day under the limited period offer. Users will get a daily data credit of 7 MB into their accounts that can be used to make these calls.

The service, according to it, will be available on 4G LTE network in the 850 MHz spectrum band which is recognized as the most optimal frequency for voice and data services.

The plan will allow RCOM's subscribers to make calls worldwide through various data-based apps that include WhatsApp, Facebook Messenger, Skype, Google Hangouts, Viber and JioChat.

India's fourth-largest telecom operator is eyeing data robust data growth, and has already entered into a strategic spectrum sharing deal with Mukesh Ambani-controlled Reliance Jio Infocomm which is making its 4G debut soon.

RCOM is also partnering with e-Commerce companies and device makers to drive the fast-evolving ecosystem and has set up demo zones at Reliance Mobile Stores across the country.

(xiii) In 2002 Mukesh Ambani said :

This is the largest infrastructure and services rolled out by any new entrant anywhere in the world. In terms of complexity, it spans voice, data, video, audio and value added services.With an ‘every time, every place, every device’ network ethos, a sweeping span of services and a new breed of entrepreneurs, Reliance Infocomm will prepare India to take on the mantle of leadership in the knowledge age. Sure. Sounds familiar right? These exact claims are being made today. 

Reliance Infocomm the birth child of this offer has since then converted to Reliance Communications, the launch was considered a total failure and set precedent that no payment plans could work in a country like India. Hence, we pay outright for iPhones and Galaxy S flagships, instead of a payment plan seen in most countries, Thanks Reliance!

(xiv) Reliance has always been big on promises but poor on deliveries. A company that lacks a general direction of customer service and rates extremely low on the customer satisfaction index. Reliance is operating the JIO offer without an actual go ahead from the Government, this offer in which you the user, are using the services which allow Reliance Industries to do business without really paying the government spectrum charges and other fees that a commercially launched network has to pay. So each of the 1.5 million users are accomplices in a scam of a colossal scale. Cellular Operators’ Association of India (COAI), the network industry body, accused Reliance of falsely claiming that it is in testing mode...... it seems that things are already sketchy before launch, fake promises of launch among  an already poor infrastructure of voice services.

(xv) The JIO network also requires VOLTE to communicate effectively, however, no other provider at the moment offers VOLTE, so that will only work between JIO to JIO calls. Also, VOLTE as a technology is not available on every 4G enabled phone, which could restrict usage to either no voice calls, or buying a new phone with your new service. 

Every one on JIO using the services is extremely impressed by the speeds of the 4G network, which will go down monumentally the minute millions of users jump on their network and start to use the services in busy cities. 

(xvi)  Most people are extremely happy with services of a provider that works for them. Some are loyal to Airtel and some to Vodafone, while Tata Docomo  (Indicom ) users swear by the good network strength (where it works ).

(xvii) Here are a few things that are already established,

• JIO is not yet operating within the rules set by the Government.
• There are already reports (acknowledged by JIO) of an extremely poor voice network.
• Too much hype and too little product.
• Poor customer service and Customer recall.
• Lowest levels of customer satisfaction.
• Past Failures in Mobile telephony.
• That being said, we should not judge people for their past mistakes, especially if they have paid heavily (or incurred heavy losses)

Reliance is once again trying to change the mobile industry in India exactly 14 years after its first failure. However, it seems that the approach is too similar to ignore. Cheaper than usual handsets (LYF smartphones), promise of high quality service, and free data offers. Reliance has always focused on making things cheap, for the masses, but has often disappointed.

(xviii) It’s evident that no network is perfect, but the JIO launch is far from it, and as consumers Indians are much smarter than they were in 2002. But, as a community, our consumers are often temped by something that is cheap. Reliance JIO promises to be the cheapest Data and Voice carrier in the country and for now that sells, just like hot cakes.

People needs to be careful before signing on to a postpaid contract, read the document carefully, you may be charged for services that you may not need. JIO’s end aim is to monetise the millions of customers it can retain from its free campaign, which at the end is a full blown marketing stunt, categorised under modern advertising.

(xix) Telecom players Reliance Communications Ltd (R-Com) and Aircel Ltd are expected to sign an agreement for merger of their businesses by the first week of September.

“Term sheet between the two companies have been finalised. Definitive agreement for merger between the two companies is expected to be signed in a week or 10 days,” a person with direct knowledge of the matter said.

The R-Com and Aircel talks, if successful, would lead to formation of the third-largest telecom operator in the country with a subscriber base of over 196 million.

The new entity, which is in the works, will hold spectrum across all allocated bands—800 megahertz (MHz), 900 MHz, 1,800 MHz, 2,100 MHz and 2,300 MHz—for 2G, 3G and 4G services.

On the other hand, R-Com and Sistema (MTS) are in process of merger. Sistema will hold 10% stake in the new entity that will formed post its merger with R-Com.

The merged entity is expected to have Rs.25,000 crore business from the first day of its operation and is estimated have Ebitda (earnings before interest, taxes, depreciation and amortization) of Rs.7,000 crore and finance cost of about Rs.3,000 crore.

“R-Com and Aircel have had nil free cash flow for a long time but the resultant entity is being structured in a manner to have Rs.4,000 crore free cash flow which it can use for investments in network,” the person said.

(xx) Reliance Jio may have brought a large number of customers on its network even before the formal launch of its 4G LTE service by offering three-month free data but analysts are sceptical that this strategy would yield long-term financial returns.

According to some analysts, the disruptive pre-launch strategy, which has earned the ire of the incumbents in the sector making them to respond with similar offers, reveals the suppressed demand for data in the country. But, attracting customers with a free offer may not necessarily transform into financial gains.

(xxi) Garnering a large number of subscribers in a short span is clearly Jio’s ambition. The company intends to acquire 100 million subscribers in the first year of its launch.

There are fears that Jio may not be able to attract new subscribers as there are numerous issues that are currently preventing penetration.

Abhishek Gupta, a telecom analyst at IDFC Securities, said: “There are low-hanging fruits for Jio in the form of subscribers with fringe players. We believe the 100-million mark is more like an aspiration. Even if Jio has 40-50 million subscribers in the 12-month from its launch, it would be a reasonably successful.”

(xxii) Getting too many subscribers could also expose Jio to technological challenges.

Jio is currently using a combination of different types of spectrum — 1,800 Mhz, 850 Mhz and 2,300 Mhz.

Convergence Catalyst’s Kolla wrote in his report that the spectrum in the 850 Mhz band is not contiguous in many circles, which will impact delivering quality service in select circles.

(xxiii) According to a report by ICICI Securities, domestic telecom players are likely to gain from Norwegian telecom company Telenor's exit and winding up of CDMA services. 

"In our view, the top three operators would be major beneficiaries of Telenor's exit from the Indian market. The potential buyer will have an opportunity to retain entire subscribers, though all major incumbent operators will benefit from the exit," it said. 

At present, Telenor India operates in seven circles viz: Maharashtra, Gujarat, AP, UP (west and east), Bihar and Assam, contributing 36% to industry's adjusted gross revenue - - which when taken in simple terms means in the likely event of Telenor exiting India, it would throw Rs.3,400 crore adjusted gross revenue (AGR) up for grabs. However, Telenor exit is unlikely to bring in too much benefits for Reliance Communication Ltd. 

(xxiv) Reliance Communications aims to poach customers from top telcos with its latest Re 1 plan valid for 30 days under which users can chose to make app-to-app calls or browse the internet, but unlike competitors Bharti Airtel, Vodafone India and Idea Cellular, won't be cutting data tariffs.

"We have no intention of dropping data prices. We will stay focused on delivering quality," said Gurdeep Singh, chief executive officer, consumer business, Reliance Communications. "We will poach customers and better network will attract customers... It is our time to reverse market share and we're not looking at anything less than leadership in 4G."

The statement comes in the backdrop of data tariff cuts by the top three telcos over the past month or so in the wake of newcomer Reliance Jio Infocomm's three-month unlimited voice and data trial offer, completely free of charge.

(xxv) While RCom is focusing on taking more customers from rivals, it is evaluating options for buying spectrum in the upcoming auction, which may include the efficient yet pricier 700 MHz band. As mentioned earlier RCom has an almost country-wide spectrum-sharing agreement with Jio, which is yet to commercially launch services.

Faced with the impending commercial launch of RJio’s 4G services, telecom operators, including Bharti Airtel and Vodafone are also wooing users through higher data speeds, high definition quality and superior experience on their networks. Recently, Reliance Communications claimed that its 4G LTE network on 850 Mhz spectrum band will provide high-definition quality, instant connectivity and blazing data speeds.

(xxvi) In June, 2016, the rating agency ICRA upgraded its outlook for Reliance Communications Ltd to stable from negative on the long term rating 'BBB+' of the company.  

It has also reaffirmed rating of A2+ for short-term fund based/non fund based limits and commercial papers of the company, RCom said in a statement.

“The reaffirmation in ratings and revision in outlook reflects the improving business profile of the Group with several initiatives being taken by the group to increase its spectrum holding, provide additional focus on data services including the foray into 4G services. These include the deal to acquire wireless operations of Sistema Shyam Teleservices Limited (SSTL), spectrum sharing and trading deal with Reliance Jio Infocomm Limited (RJIL) and proposed merger of wireless business with Aircel Limited,” ICRA said in a release.

Conclusion: Considering the above points, I maintain a CONTRARIAN BUY on the stock of Reliance Communications Ltd at the CMP of Rs.49.20, for short term targets of Rs.57-61. Please keep a SL of Rs.45, in case of any short term play. 

Note: I will be off the air for a few days due to shifting of my location in Bombay. However, my Premium Members, can call me on my mobile number, in case of any suggestion. 

So, during these day play safe using strict stop losses, for short term plays - - all the best and wish you a "Happy Ganesh Chathurthi", in advance. 

Winning Strokes: Think Different

Photo: The Hindu Business Line

If there is a Real Estate Push by the NDA government, then the beaten down stocks, like Unitech Ltd (Rs.5.20), DLF Ltd (Rs.150.20), Prestige Ltd (Rs.187.55), etc, will be one of the major beneficiaries. But Unitech Ltd will give multi-bagger returns in the short term. 

Reliance Communications Ltd is up today, after a subdued morning session. The scrip was recommended yesterday, in this blog and should give good returns to the investors in the short term, as there are media reports that the company is likely to announce the much anticipated merger news in the 1st week of September, 2016 and also due to ensuring launch of Reliance Jio Ltd's services. Moreover,Suresh Mahadevan, managing director and head of Asian telecom and media research at UBS says Reliance Jio entry will actually benefit Airtel, Idea.

IVRCL Ltd recommended some days back around Rs.4.80, today touched Rs.5.70, giving decent returns to the investors. Even Gammon Infra Ltd (Rs.5.14) is up more than 3% today. However, I feel the real estate stocks will be more benefited if the NDA government pumps life into Real Estate sector, through a series of measures. 

Reliance Communications Ltd: Buy

CMP: Rs.49.15

Telecom players Reliance Communications Ltd (R-Com) and Aircel Ltd are expected to sign an agreement for merger of their businesses by the first week of September, according to Live Mint, 26 August, 2016.

“Term sheet between the two companies have been finalised. Definitive agreement for merger between the two companies is expected to be signed in a week or 10 days,” a person with direct knowledge of the matter said.

The R-Com and Aircel talks, if successful, would form India's third-largest telecom operator with a subscriber base of over 196 million.

“At present no regulatory approvals are required. The process for regulatory approval will begin after R-Com and Aircel sign definitive agreement. It should take around 4-6 month time to complete merger and the combined entity will be rebranded,” the person said.

The new entity, which is in the works, will hold spectrum across all allocated bands—800 megahertz (MHz), 900 MHz, 1,800 MHz, 2,100 MHz and 2,300 MHz—for 2G, 3G and 4G services.

On the other hand, R-Com and Sistema (MTS) are in process of merger. Sistema will hold 10% stake in the new entity that will formed post its merger with R-Com.

In December last, the two firms announced entering into 90-day ‘exclusivity period’ for the merger deal that will exclude R-Com’s tower and optical fibre assets for which a separate sale process is ongoing. The talks were later extended twice.

The merged entity is expected to have Rs.25,000 crore business from the first day of its operation and is estimated have Ebitda (earnings before interest, taxes, depreciation and amortization) of Rs.7,000 crore and finance cost of about Rs.3,000 crore.

“R-Com and Aircel have had nil free cash flow for a long time but the resultant entity is being structured in a manner to have Rs.4,000 crore free cash flow which it can use for investments in network,” the person said.

The two mergers are set in a backdrop where the debt-ridden telecom sector is said to have a debt burden of Rs. 3,50,000 crore. Reliance Jio is expected to exert 4G tariff pressure on telecom majors Airtel, Vodafone and Idea.

Earlier, Idea had denied media reports on its merger with the second largest telecom firm Vodafone. According to Telecom Regulatory Authority's February 2016 data, Vodafone had a market share of 19.16 per cent while Idea was close behind with 17.01 per cent market share.

Reliance Communications aims to increase the volume of people using data to make calls on its network, having seen a spike in app-to-app calling by its users, a top official said. Gurdeep Singh, chief executive of RCom's consumer business, said around 6-8% of its users currently make calls using apps, up from around 2% a year ago, and the telco was hoping to convert more of its traditional voice callers to use data for making calls rather than simply using apps to chat.

And going forward, chipset technologies are converging and all future handsets will support multiple spectrum bands, with all new smartphones being multi-band devices, trends which will trigger more calls using data networks. .

Moreover, the launch of Reliance Jio Ltd is positive for the shareholders of Reliance Communications Ltd, due to technology (and tower) sharing agreement. 

Note: I will be off the air from 2nd half tomorrow, (approx) for a week due to shifting of my location in Bombay. However, my Premium Members, can call me on my mobile number, in case of any suggestion.

DO YOU KNOW?

Photo: Property Guru 

The NDA government on last Wednesday announced a clutch of measures that is dramatically expected to increase the liquidity of construction firms over the next few weeks -- let banks recover their outstanding dues and give a fillip to the real estate and infrastructure sectors by reactivating several stalled projects.

Prime Minister Narendra Modi-led Cabinet took several measures to revive the real estate and construction sector. Resurrecting life into stagnant sectors, the Cabinet gave nod to more liquidity in construction projects and faster redressal of disputes.

Having recently simplified the arbitration law to make dispute resolution easier and speedier, it has now opened a new facility under which even while an arbitral award is being challenged by a public body, 75% of the amount in question will be released by it to the contractor against a bank guarantee. Also, existing disputes between public bodies and contractors, it said, could be shifted to the new simplified Arbitration Act. Although direct beneficiaries of the move are construction giants like HCC, Gammon India, Gammon Infra and IVRCL, the gains from improved liquidity in construction would be felt across infrastructure industries.

Given contingent liabilities — that correspond to the amounts locked in arbitration/courts — of major public bodies and PSUs are seen to be over Rs.70,000 crore, with National Highways Authority of India (Rs.22,500 crore), DMRC (Rs.11,600 crore) and NHPC (Rs.9,000 crore) topping the list, the provision for release of funds to contractors would mean that some Rs.53,000 crore will be at their disposal.

These monies will be used by the contractors to discharge the liabilities towards banks and financial institutions (which, in turn will improve credit flows) and also to kick-start stalled projects.

However, analysts pointed out that in many sectors like roads, railways, ports and inland waterways, where government agencies themselves have turned major investors given the stagnation in private investment, the release of disputed funds to the contractors could impact their liquidity. But they added that given major government investors like the railways, NHAI and port trusts (apart from budget outlays, they can raise extra-budgetary resources) do not face a funds crunch, in the aggregate, Wednesday’s decisions would spur investments.

Finance minister Arun Jaitley said after a Cabinet meeting that in new contracts, there will be a provision for a conciliation board consisting of independent domain expert who will enter into contractual negotiations if there are changes in commercial circumstances around the project. Besides, item rate contracts would be replaced by turnkey contracts and a model draft turnkey contract would be circulated. The minister added that department of financial services and the Reserve Bank of India will soon prepare a policy to “deal with those companies which have lot of stressed assets in the construction sector”.

Gross value added (GVA) in the construction sector — which accounts for 8% of the country’s gross domestic product (GDP) and employs 4 crore people — has been growing at rates far lower than the overall GVA growth for the last few quarters. Apart from liquidity problems, which partly resulted from lenders’ wariness, tepid demand and overcapacity created in the real estate sector stunted the sector’s expansion. (GVA — construction grew 3.9% in 2016-16 against overall GVA growth of 7.2% and GDP expansion of 7.6% in the year; the sector’s growth was a measly 1.5% in April-June this year, compared with overall GVA growth of expansion of 7.3%.)

“Over 85% of the claims raised against government bodies are still pending, of which 11% is pending with the government agencies, 64% with arbitrators and 8.5% with courts. The average settlement time for claims is estimated at more than seven years. A majority of arbitration awards have gone against the government agencies,” said a government statement.

In the case of NHAI, of a total of 347 arbitral awards, 38 went in favour of the authority and 309 in favour of the contractor/concessionaire. Of the arbitral awards in NHAI cases, more than 90% were unanimous awards in which all arbitrators including the one appointed by NHAI had concurred in the decision. In many cases, arbitration awards are contested in the courts, even though a large majority of arbitration decisions are upheld by the courts.

A turnkey contract, which allows transfer of an entire project to the client after completion at pre-decided rates, is more handy for large contractors unlike the rate contract that requires contractors to quote a rate for each item of work. These measures will pump in liquidity as well as activate the stranded projects, the Finance Minister, Mr.Arun Jaitley said. 

Source: The Financial Express and other media inputs..

Winning Strokes: Think Different

Photo: Concarto.com

(i) Those who are holding the shares of JSW Energy Ltd (Rs.77) should exit, if the time horizon is for the short term, as the scrip is not going anywhere and could fall to Rs.74-75 once Rs.76 is broken, which is looks more probably than the scrip moving up.

(ii) Take Fresh Positions in Reliance Communications Ltd (Rs.49.20) on the twin news: (a) the announcement of the merger with Aircel could be announced soon (ii) Launch of Reliance Jio is positive for Reliance Communications, while it is negative for Idea Cellular Ltd (Rs.84) and Bharti Airtel Ltd (Rs.309).

(iii) Accumulate the shares of Unitech Ltd (Rs.5.25) in the dips before the AGM on 12th September, 2016, when the annual report could be presented. Also, the news that the shares of Hindustan Construction Ltd (HCC Ltd) has hit the Upper Circuits today at Rs.33, is positive for the company. 

(iv) Those who are holding the shares of Reliance Defence Ltd (Rs.64) can increase their holdings as the launch of Reliance Jio Ltd could trigger a price rise in the shares of Anil Ambani group companies. Already, the shares of Reliance Infrastructure Ltd (Rs.597) and Reliance Capital Ltd (Rs.530) are doing well.

(v) The shares of Shrenuj and Co Ltd (Rs.2.15) are trading very LOW as compared to their intrinsic prices. The market cap of the company at the CMP of Rs.2.15 is only Rs.42.05 crore,  which ridiculous and points how rumours can massacre to the shareholders' wealth. In the same sector, you can also accumulate Gitanjali Gems Ltd at Rs.45.50, as the festive season kicks in from this month. 

(vi) The shares of IVRCL Ltd (Rs.5.20) today touched Rs.5.65, the scrip was recommended some days back around Rs.4.80. 

Indian Real Estate Market: Some Thoughts

Photo: Don R. Campbell

The Indian real estate market has seen a huge boom in the past decade thanks to a growing urban middle class population. Major real estate companies are targeting developable areas and turning them into construction marvels.

Real estate in India has been severely impacted by the global economic meltdown, leading to stressed assets that have affected buyers as well as developers. Incomplete or delayed projects, depleted financial resources and unutilised land parcels point towards the urgent need for innovative solutions to break the logjam. The solution lies in tackling the ‘stressed assets’ and reviving the real estate sector.

India’s real estate sector witnessed a boom in 2004-08 leading to a proliferation of commercial office space and retail mall space when companies and investors were lapping up every announcement/launch.

Faced with a long time-gap cycle between purchase of land and delivery of product, companies entered in frenzied land parcel purchases to cope up with the rush. But this crashed with the economic slowdown.

Anyway, the Indian Real Estate sector is not only the biggest contributor to Gross Domestic Product (GDP) of the country but is also one of the largest sectors in terms of Foreign Direct Investment (FDI) inflows in the country. 

The two main reasons responsible for an upcoming boom in the real estate industry in India include liberalization of Government policies, which has decreased the need for permissions and licenses before taking up mega construction projects and the expanding industrial sector. Urbanization and increasing household income are some of the major factors that influence demand for residential /commercial property which results in India's economic growth.

India is expected to gain back its growth momentum in the medium term owing to higher savings and easing inflationary pressures which would lead to capital formation and fresh investments.

The NDA government has taken several initiatives to encourage the development in the sector, the key ones being:

• Relaxation in the norms to allow foreign direct investment (FDI) in the construction development sector. This move is expected to boost affordable housing projects and smart cities across the country.
• Clearance of model real estate bill by the Union Cabinet.

The Securities and Exchange Board of India (SEBI) has notified final regulations that will govern real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). This move will enable easier access to funds for developers and create a new investment avenue for institutions and high net worth individuals and eventually ordinary investors. 

Tax efficiency can be critical to the success of REITs. While the basic framework for one-level taxation has been laid down by the Finance (No. 2) Act, 2014 and supplemented by the Finance Bill, 2015, certain challenges persist in structuring a REIT.

Demand for residential/commercial property is being driven by India's economic growth. One of the core sub-sectors of residential, commercial, retail and housing, the first category offers maximum promise, while the balance three sectors are also growing well and have a bright future. Residential segments are nowadays hero of the moment due to continues demand.

But all is not lost for the real estate sector. Green shoots are visible. The Indian realty market, which has been in a slump for the last five to six quarters, is on a recovery path, believe analysts. 

True, the sector has been plagued by issues of finances as well as incomplete or delayed projects in recent years. But that is about to change, they contend. 

A joint survey by Frank Knight India and FICCI titled 'Real Estate Sentiment Index ’ reveals that a large chunk (about 95 percent) of people now believe sales volumes in the residential [market] are already on a path of recovery. 

The survey was conducted during the April-June period this year. “After a lull that lasted six quarters, the future sentiment scores are strengthening and witnessing a similar trend as [seen] during the first quarter (Q1) of 2016,” said Knight Frank India's chief economist and national director, Research, Dr Samantak Das in a press statement. 

While sales are expected to improve, investors feel that the prices will remain muted in 2016. Residential prices are expected to stay at the same level or worsen further as per the survey. On the other hand, the commercial office market segment is expected to improve in the next six months. A previous report by the Frank Knight (India) revealed that housing prices in the country’s top eight cities have been stagnant for the last eight quarters. 

Housing demand, too, has been muted. The report further states that unsold inventory in the second half of 2015 were about 691,000 housing units in different stages of construction. Consumer sentiment has also been down due to delay in delivery by real estate companies. 

Real estate dealers also expect the upcoming festive season to boost residential sales across the country. Already stressed margins as well as expectations of a rise in demand will prevent developers from lowering prices from current levels. 

Besides, successful implimentation of government initiatives like Housing for All, Start Up India and Smart City projects are bound to benefit the realty sector.   Real Estate Investment Trusts -- (REIT is a company that owns or finances income-producing real estate) -- will be a big boost for investors in the real estate market. 

With a move to remove hurdles for investors in real estate, the government announced in the Union Budget that it would do away with Dividend Distribution Tax (DDT). This had been a bottleneck in REITs getting listed in India. Soon after, REIT norms were relaxed in June, allowing these trusts to invest in under-construction projects. 

 In the light of positive sentiment, the sector could heave a sigh of relief. But questions still remain over the unfinished and undelivered projects. Recently, states have begun cracking the whip on errant developers. In Maharashtra home buyers can now file an FIR with the police and have the errant developers arrested. With such harsh measures being introduced, developers will think twice before delaying possession.

Real estate dealers are banking on festive season for a surge in property market. Property purchases are expected to rise during Ganesh Chaturthi and Navratri as the period is considered auspicious for locking new deals.

Property sales are likely to jump by 10-15 per cent this season as compared to last year due to prospects of better crop production on bountiful rains and conducive weather, according to industry experts.

Property prices are unlikely to drop from the current levels despite huge unsold properties due to squeezing margins and anticipation of demand from upcoming companies.Property dealers said September to November is the peak period for sales and purchase of properties.

The landscape changes:
Consequently, malls began closing and commercial office space faced excessive ‘over-supply’. Sales halted and lease rentals went down drastically. To continue business, real estate companies shifted to residential projects, hoping that the shortage of homes in India would fuel adequate demand.

However, those expectations were belied and today, even the completed residential projects have suffered from delays, fall in prices and unsold inventories.

These stressful conditions have precipitated judicial and buyer activism, burgeoning complaints by buyers and investors and a surfeit of stressed assets with real estate companies.

In this backdrop there are a series of measures that can be adopted. First, land parcels are the first of the stressed assets which can be salvaged by the Government and urban development authorities/public sector corporations.

These were auctioned or leased and here, projects were unable to mushroom. The issue is that they cannot be launched in the near future as the existing excess supplies still have to be absorbed.

So the solution lies in returning the land and money/funds paid by the developers. Not only would the Government benefit from increased land prices but the developers would also get ready-made cash to pump into viable projects.

Building them up:
The second set of stressed assets comprise delayed projects where cash outflow is less than the expected inflows. These are the projects where a substantial part of the structure is ready, but they need ‘top-up’ funds for completion and delivery.

So where would these funds be sourced from? Obviously, they can be taken from funds received by surrender of leased/auctioned land parcels by the Government/public sector corporations.

Even a construction-linked commitment from buyers, with a marginal funding from financial institutions to kick-start the largely-completed structure, can be another source.

This is again a win-win situation because the developer would revive stalled projects and buyers would benefit from assets purchased at old prices.

The third set of stressed assets are those projects that have not begun construction but have hugely over-leveraged, either through excess collections from buyers or due to huge debts to financial institutions. These are projects and companies in distress.

The first option would be to look for internal funds from the companies itself. It could be funds returned by the Government or authorities for land parcels returned to the agency concerned, but to be kept in Escrow Accounts to be used for completing distressed projects primarily.

The second option could be to permit Rules of Escrow accounts for existing projects to allow funded projects to pay for over-leveraged projects and projects which can be completed.

To begin with, banks and State authorities can draw up lists and examine the magnitude of the problem. These can be used by the new real estate regulatory authorities to be set up in each State.

Also, the authorities could act as a bridge between companies in distress and banking institutions to give finance at reasonable rates and for short-term duration to complete distressed projects.

The quantum of funds required can be worked out by the figures collected by banks and State authorities. While dealing with the situation, we must factor in the reality that many are in trouble only because of economic realities they cannot control.

So, in a situation where it is critical to restore the faith of buyers, the Government, banks and the real estate industry should collaborate for innovative solutions.

Good initiatives:
Some such steps have been taken by the surface transport ministry. They include:

To give 10 per cent of the project cost as advance to private developers, which could be deducted along with interest from the pre-scheduled payments due to the Real Estate companies.

Raw materials can be collectively bargained at discounted rates, due to large requirements of the sector.

The Government and public sector undertakings could plan to buy housing in bulk, fulfiling the requirements of housing among government/PSU employees and at the same time get the same in prized locations. They could be provided on an immediate availability basis. Also, the prices will be lower than the Government/PSU costs, specially if interest rates will be added, to the cost of money being deployed if the same were to be constructed by the Government/PSUs.

In sum, the real estate logjam can be tackled with the right approach, ideas and implementation.

JSW Energy Ltd: Buy

CMP: Rs.77.90

The stock of JSW Energy Ltd after correcting significantly from Rs.126 in a year, is trying to consolidate and look up now. Though major concerns due to subdued demand and realisations, and increasing debt led by acquisitions, still remains. 

JSW Energy sells power through combination of long-term and short-term Power Purchase Agreements (PPAs). JSW Energy Ltd's management in June, 2016 said: “For sale of its power, the company participates in bids sought by power procurers and has participated in a recent tender floated by Power Company of Karnataka Limited (PCKL) in which bids were opened yesterday and thereafter the bids are to be evaluated, processed and approved by various authorities prior to placement of any order/contract”. 

The company further made the clarification with reference to the news flashed on CNBC TV 18: "JSW Energy is second lowest bidder in Karnataka SEB PPA and may get 750MW PPA contract. Rate can be around 4.38/unit.

Photo: Live Mint

The bid involves the 860 megawatts Vijayanagar power plant in Karnataka, which right now is operating on short-term power contracts. Thanks to the plant’s location advantage—situated in high power deficit southern India—JSW Energy had managed to get sufficient buyers, and that too at a good price, till now.

Whenever any proposal results into execution of binding documents, the company will comply with the provisions of the Securities and Exchange Board of India, it added.

Meanwhile, the hydro power assets’ acquisitions, saw the company’s generation rise 12 per cent year-on-year to 6,052 million units, excluding it volumes were flat. Good monsoon, has already increased the optimism, in the hydro-power units. 

It concluded the acquisition of Himachal Baspa Power Company Limited (HBPCL) adding 1,391 MW of hydroelectric capacity consisting of two hydro power projects - 300 MW Baspa-II and 1,091 MW Karcham Wangtoo in Himachal Pradesh. This acquisition helped the company in diversifying the power generation portfolio with high quality hydro power assets, besides increasing the share of long-term power purchase agreement in its basket.

JSW Energy Ltd has also agreed to acquire the 1,000MW (4X250) thermal power plant located at Tamnar, Chhattisgarh from Jindal Steel & Power Limited (JSPL). JSW Energy has also got fair trade regulator CCI's approval to acquire this 1,000 MW power plant in Chhattisgarh from Jindal Steel and Power Ltd (JSPL).

Under the deal announced in May, the Sajjan Jindal-led firm was to purchase the power plant in Raigarh for Rs.6,500 crore with certain conditions.

JSW Energy Ltd has been evaluating interesting opportunities for inorganic growth. With significant assets in the sector being stressed, a meaningful engagement with lenders will be essential to evaluate and conclude deals in the space. 

The ever-growing power demand in the country, large capacity addition plans, rising availability of fuel resources and falling prices of the same, portrays a positive outlook for the sector. Progressive policylevel changes and effective implementation of directives promise enormous opportunities for various stakeholders and market players. Improvement in the financial health of State Electricity Boards and the gamut of Government’s initiative will also boost demand.

As base load deficits narrow down, the company's strategic intent is to transform the business model to that of a utility company with stable cash flows, by tying up a substantial part (85%-90%) of its power capacity under medium/long-term PPAs.

But as transmission congestion in the region eased and stranded gas capacities came back on stream, short-term or merchant power prices began to fall. This impacted JSW Energy’s realizations, which fell 8% in 2014-15 and 3% in the last fiscal year. With merchant power rates remaining depressed and the Union government encouraging state utilities to purchase short-term electricity contracts through competitive bidding or reverse auction system, the firm’s realizations are expected to remain under pressure. The concerns have made analysts cautious, with some even paring their earnings estimates for the current and next fiscal years.

JSW Energy Ltd in July, 2016 said that its subsidiary has sold 26% stake in South African Coal Mining Holdings Ltd (SACMH) to meet regulatory norms.

“JSW Energy Natural Resources South Africa (PTY), a step down subsidiary of the company in South Africa has disposed of 26% stake in its subsidiary, South African Coal Mining Holdings (SACMH),” JSW Energy Ltd informed the BSE.

While its acquisition-led strategy is positive given the time and effort required to establish new capacities, increased debt at a time when industry’s generation is exceeding demand and merchant power realisations are subdued, has highlighted the Street’s concerns.

Caution also prevails on average realisations looking at grid synchronisation by end-2016. JSW Energy has one of the highest shares of short-term (less than a year) electricity sales among the listed power utilities. In the  last fiscal year, 47% of its sales came from short-term contracts. 

Factoring all these concerns and the share price correction, some analysts feels that an upside potential of 15-20% from the CMP of Rs.77.90 is possible. JSW Energy is engaged in the business of power generation, power trading and transmission, and mining and equipment manufacturing. 

Bibliography: (i) The Business Standard
                      (ii) Live Mint, etc

DLF Q1 profit jumps over 2-fold to Rs 261.42 cr

[Editor: The real estate sector started with a bang, as the realty major DLF Ltd came out with a reasonably good Q1FY17 result. This is expected to bring more optimism in the space, and attest to the fact that after a long time, perhaps the real estate sector is looking up, albeit with hiccups on the way. The real estate sector is one of the most globally recognised sectors. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 per cent over the next decade.

The Indian real estate market has become one of the most preferred destinations in the Asia Pacific# as overseas funds accounted for more than 50 per cent of all investment activity in India in 2014, compared with just 26 per cent in 2013. The Indian real estate market is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 per cent to the country's Gross Domestic Product (GDP). 

Those who are holding the shares of Unitech Ltd (Rs.5.20) should now increase their holdings, for extended targets of Rs.12-14]

Photo: IBEF

Aug 30, 2016: India's largest realty firm DLF   today reported more than two-fold jump in consolidated net profit to Rs 261.42 crore for the quarter ended June 30, helped by sale of its cinema business to PVR. 

Its net profit had stood at Rs 125.87 crore in the April- June quarter of last financial year. Income from operations fell by 22 percent to Rs 1,867.46 crore during the first quarter of the current fiscal, from Rs 2,388.72 crore in the year-ago period. 

DLF's total income declined however to Rs 2,025.58 crore for the quarter ended June, 2016-17, from Rs 2,520.02 crore in the year-ago period. 

The company's finance cost increased to Rs 747.84 crore from Rs 621.82 crore during the period under review. DLF has booked a profit before tax of Rs 372 crore under exceptional item from sale of its cinema business. 

In May, it had entered into an amended agreement to sell its 32 screens of DT cinemas to multiplex operator PVR at a revised consideration of Rs 433 crore. The company has a land bank of 281 million sq ft, of which 37 million sq ft is under construction. 

DLF promoters are likely to sell 40 percent stake in a rental arm DLF Cyber City Developers Ltd (DCCDL) by September, a deal estimated to fetch around Rs 12,000 crore. It would continue to own 60 percent stake in the DCCDL. 

The promoters - billionaire K P Singh and family - would reinvest a significant part of the amount realised from this sale into DLF Ltd, helping the realty giant to reduce its debt substantially. Three global institutional investors -- Blackstone, GIC and Abu Dhabi Investment Authority -- have been shortlisted as potential buyers. 

Due diligence process is on and agreement is likely to be signed by September. DCCDL has about 25-26 million sq ft of leased commercial space with an annual rental income of about Rs 2,250 crore. The subsidiary also has 20 million sq ft of future development potential.

Source: Money Control

Important

Photo: Financial Express

(i) After a long time Reliance Communications Ltd moved above Rs.54 today; following news in a Business Channel. This kind of news keeps on popping up but at the end nothing happens. Therefore, the short term traders are suggested to book profits at around Rs.54.50. However, long term traders can keep holding the scrip with  a SL of Rs.46.

(ii) You can keep on adding the shares of JSW Energy Ltd for a short term target of Rs.84-85. Three years ago, JSW Energy’s market capitalization was a third that of Tata Power Co. Ltd and three-fifths that of Adani Power Ltd. Tata Power’s and Adani Power’s installed power generating capacities then were 2.7 times and 1.7 times bigger, respectively, than JSW Energy’s. With its latest 500 megawatt (MW) power plant purchase, JSW Energy’s capacities have almost doubled from back then. Tracking the rise, the company’s market value has jumped 90% during the period to Rs.13,333 crore. Capacities at Tata Power and Adani Power also rose. But unlike JSW Energy, market caps of these companies fell in the range of 13-18%.

JSW Energy’s market cap is now greater than that of Adani Power, despite the latter having higher generation assets. Similarly, Tata Power market cap is now only 42% higher than JSW Energy. The changes reflect the hurdles these companies hit, while JSW Energy was lucky to avoid non-remunerative power purchase agreements (PPAs).

(iii) Shrenuj & Co Ltd hit the buyer freeze in the opening trade. The stock should move higher in the coming days, as the promoters will manage Rs.300 crore from somewhere to refinance the loans.

(iv) Investors can continue to buy the shares of IVRCL Ltd for short term target of Rs.7-8. The company is operating in 5-sectors therefore the chance of a turnaround looks bright  once a strategic investor chips in....