Showing posts with label US. Show all posts
Showing posts with label US. Show all posts

Saturday, February 09, 2013

The market regarding the realty sector and companies

In the midst of the general concern and uncertainty in the market regarding the realty sector and companies like DLF, the company’s Group Executive Director Rajeev Talwar is optimistic of a more evolved market & consistent supply in the coming years. In this exclusive with virat bahri of B&E, Talwar talks about DLF’s downturn adjustments and future vision. Some excerpts

B&E: What potential does DLF see in middle income/affordable housing?
RT: Due to our legacy, it is high income, because our locations and plots are extremely valuable. We are taking projects and seeing to it that we launch at the most competitive levels in order to make them value for money housing. Revenue growth should come. Government talks about Rs.10 lakh and above as mid-income. In tier 1 and super metro cities, it should be probably above Rs.50 lakh. Land here is usually controlled by government or it becomes very valuable if it is in private hands too.

Therefore your cost of acquisition becomes high. It therefore becomes impossible to give you what is normally called affordable housing or middle income housing below Rs.20 lakh. But Rs.10-20 lakh homes, even below, will be available for the poor. If housing costs Rs.50-75 lakh as mid-income housing in the super metros; in a tier 1 city it will cost Rs.45-60 lakh and going down to a tier 3-4 cities, you will get good homes at even less than Rs.20 lakhs. Since we are not in those cities and towns, I don’t think it will be possible for DLF. Our value housing even below Rs.5 lakh and Rs.10 lakh will be adjunct to the service category of our mid-income and high income group housing in super metros & tier 1 towns. Due to our name, quality, & location in the heart of the town, we tend to be in the upper end, but certainly, we also provide housing for the economically weaker section. Those will also be coming & will be costing anywhere between Rs.5-20 lakh depending on their proximity to premium locations.

B&E: Downturn increased debt levels significantly. How have you managed them over the past year?
RT: Some time after 9/11 in the US, everyone thought there was no end to the upswing. When it did come, it caught everyone by surprise. They weren’t unmanageable levels of debt for us but the only concern was how do you reduce the rate and increase the tenure. There was so much commercial paper in the market prior to that. Anywhere from 120-180 days seemed to be a long cycle till the time we realized that a good long cycle commercial paper or debt is of a period from 3-5-7-9 years. The second lesson was to reduce the interest rate. Our debt from under 1 year has increased to 3-5 years in tenure and also has portions of 7-9 years. At the same time, from 11.98% interest level, we have already come down to 10.5%. In real estate, people ask whether your debt levels are high or going higher. The fact is that there is so much of embedded value in your assets that debt is not something that you are normally so worried about, till the time a company is so highly leveraged that it cannot meet its development requirements (front flow) or its overhead costs for its normal cash flow. For us, thanks to various policies before and therefore very far-sighted policies even to take care in a downturn where you have a steady rental inflow of income, we have been through that much more easily. It’s already established that whatever overhead developmental costs or interest costs we have are well met from our usual leasing and launch businesses; so DLF doesn’t face pressures that some other overleveraged companies may face.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles.
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Tuesday, January 22, 2013

Where's the money Mr. Ambani ?

Reliance Infrastructure's grand plans to expand massively seem to have forgotten a simple factor... Funding! Is this what was the nature of the beast? B&E's Ratan Lal Bhagat deeply questions the method in the madness

It would be foolhardy to imagine that the economic stimulus plans of a developing economy (India) and a developed economy (US) would have much in common, but then economic crises' can prove to be great levellers! One of US President Barack Obama's major bets on reviving the US economy is his proposed multi-billion dollar infrastructure plan (the largest since the 1950s, upward of $500 billion). India also recognises the criticality of fast-paced infrastructure development & has planned investments of about $410.61 billion ($1=Rs.48.76) in the 11th 5-year plan (again the largest since the 1950s, don't need to refer that!!!).

That's where the similarity ends, more or less. Obama's end game is that he has to generate millions of jobs from somewhere and has few options to do so. India needs to invest in infrastructure primarily because… errr… we need infrastructure… simple as that, and badly so! The infrastructural support systems like routes of transport (roads, railways & metro lines), power generation and its distribution, and development of Special Economic Zones (SEZs), are integral components in fuelling the growth of any economy. But Indian infrastructural development has been hinged by gross mismanagement of resources, superfluous project delays, and lethargic approach of public project contractors.

Thanks (but no thanks) to them, there is a massive opportunity in this sector for India Inc. now. Consistent underperformance has compelled the government to opt for a more fruitful public-private partnership (PPP) model. This brings into picture private players like Anil Dhirubhai Ambani Group's (ADAG) Reliance Infrastructure Limited (R-Infra). As expected, the company's aggressive business expansions in infrastructure have all the trappings of an ADAG group company, as the group has shown a considerable risk appetite for sunrise sectors.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles.
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Tuesday, November 27, 2012

I know what you thought last year

Beyond everyone’s forecast, European economies are now the biggest sufferers of the US subprime crisis

Exactly one year back The Economist in an article titled ‘At risk of infection’ had written “Economists are most nervous about who or what might sink into America’s property swamp.” While reading that article the Europeans must not have thought that it will be them, who will sink because of an American fault. And that’s where things went wrong. As a result, today all the economic indicators are overwhelmingly pointing to the fact that the European economy is now sinking and shrinking under the spill over effects of the US subprime crisis.

What began as a problem in a single sector, in a single economy (US housing market) has today metastasized into severe dislocations in broader credit and funding market. The crisis has moved beyond the US and subprime market to prime real estates markets, consumer credits and corporate credit markets. Amid such a milieu the spill over of the man made crisis in the global financial market is being governed by the trio comprising – weakening balance sheet, continuing de-leveraging process and the burgeoning challenges of the macroeconomic environment. Says Tine Olsen, Economist, Moody’s Economy, “A year after the subprime shock, the global economy is still suffering, and the end of the credit crisis is nowhere in sight.”

In fact a year after the genesis of the subprime shock, similar features are beginning to emerge in Europe. Be it losses in terms of subprime, ABS (asset backed securities), ABS CDOs (credit default obligation) or Conduits/SIV (special investment vehicle), Europe is only next to US. Signs of a downturn are becoming all the more evident in European housing market. Market prices of property derivatives today are suggestive of an outright home price decline in the UK with a time lag of around two years (wrt US). At a time when the lenders are tightening standards, many borrowers of fixed rates in UK are set to witness a rate increase of 100 to 200 basis points (bps). This will in all certainty add to yet another source of stress in the already stressed market. It is but obvious that with an increased stress (result of the spill over) write offs and repossessions are set to increase.


Source : IIPM Editorial, 2012.

For More IIPM Info, Visit below mentioned IIPM articles.
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Tuesday, November 20, 2012

MONETARY: CRISIS

Slowdown and crisis together

This decision will eventually affect the FDI flows in India and China. Moreover, with slashing of interest rates in US, the FDI flow and the Indian currency (as well as the Chinese currency) will get negatively affected.

The Fed Rate cut did spark some relief, but the poor performance of top US investment banks like Goldman Sachs and Lehman Brothers did neutralise the positive effect. However, China’s renminbi gained some ground against the Japanese yen and the Hong Kong dollar to stand at 6.4564 yuan against 100 Japanese yen and 0.96189 yuan against one Hong Kong dollar! seems shocking.. Huh.. 


Source : IIPM Editorial, 2012.

For More IIPM Info, Visit below mentioned IIPM articles.
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Wednesday, October 10, 2012

Growing, growing, gone...

Over-expansionary policy is responsible for Starbucks predicament

Recession is casting its depressive effects on stress buster lattes and cappuccinos too! Yes, at least the American born, world’s largest coffee-chain Starbucks, is proving the same. The coffee chain is passing through a lean tunnel and has further decided to cut on further fat, errr... Starbucks outlets. It announced to follow the slimdown policy over the forthcoming quarter, on a worldwide scale on January 29, 2009. Here is where the question arises: why the reduction, for isn’t coffee retailing recession-proof?

Starbucks has announced a closure of 300 stores (200 stores in US) and a further reduction of 7,000 names from their employee base. Add this to store closures announced in July, and we would stand witness to 991 outlets doing the disappearing act! Further analysis of this problem makes clear the fact that the issue at hand is clearly self-inflicted; a problem that worsened at the onset of recession as even Howard Schultz, CEO, Starbucks confessed.


Source : IIPM Editorial, 2012.

For More IIPM Info, Visit below mentioned IIPM articles.
 
IIPM : The B-School with a Human Face
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Tuesday, October 09, 2012

The claims return to haunt a failing Europe

Europe gloated during the meltdown, claiming it would be left untouched. The claims return to haunt a failing Europe

European politicians will find this meltdown an even tougher challenge to manage than Barack Obama in the United States. For decades, European nations have boasted that their version of capitalism takes much better care of average citizens than the American model. There is no doubt that most European nations have more welfare schemes that benefit more citizens than in the US. Besides, state intervention has also resulted in European workers earning more per hour and working less number of hours. Then again, farmers in Europe are pampered and mollycoddled with hundreds of billions of dollars of subsidies (America also gives similar farm subsidies but most of it goes to ‘farm’ corporations!). Now, as the bad times come crashing down on Europe, this welfare state model will face an unprecedented challenge. From where will the European governments get the money to pay unemployment benefits, massive subsidies and artificially high wages to citizens? Once citizens realise that the jar of goodies is almost empty and freebies may be stopped, cities across the continent will erupt in protests and strikes. The only saving grace for Europe as compared to China: there is no danger of army tanks firing on the unarmed. Perhaps Europeans should console themselves with that!


Source : IIPM Editorial, 2012.

For More IIPM Info, Visit below mentioned IIPM articles.
 
IIPM : The B-School with a Human Face



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Tuesday, July 24, 2012

Why Big Mac Should not Worry about Subway

Despite Losing out to Rival Subway on The Number Global Outlets, McDonald’s still Scores on Key Business Metrics and is Easily Winning The Palate game in key Emerging markets. B&E gets through to Subway and Global Analysts for an Insider into The Famed Rivalry.

In February the Milford, Connecticut-based sandwich maker Subway sprinted past its famed burger-flipping rival McDonald’s to become the head honcho in the world of quick eats. With 34,410 restaurants in 97 countries, the Fred DeLuca-led Subway is now the largest restaurant chain globally in terms of number of units. The Oak Brook, Illinois-based McDonald’s has some 33,737 restaurants in 117 countries. In the race for fast-food world domination, the ‘health oriented’ Subway is having a great run, spicing up the competition with its aggressive expansion worldwide, thanks to its successful franchised business model emphasising small, low-cost outlets.

While the face-off between the two fast food giants has aroused great interest – and media and analysts alike have gone over each other in announcing that this latest Subway benchmark marks the beginning of the end of McDonald’s CEO James Skinner’s global dominance – the truth of the matter is that Subway isn’t bigger or better than Ronald (the McDonald) in terms of profits or even sales. McDonald’s continues to be the industry champ, reporting $24 billion in revenue and close to $5 billion in net profits in CY 2010. Subway generated roughly $15.2 billion in sales during the same period. Despite facing stiff competition from Subway, Yum! Brands, Starbucks, Wendy’s and Burger Kings – all wanting to nibble away market share – McDonald’s still commands a mind numbing 19% market share of the global QSR (quick service restaurants) industry.

In other words, neither does the Subway record signify anything more than, well, a record (well, Subway had already beaten McDonald’s in the total number of US outlets way back in 2002), nor does it signify that McDonald’s is going to fall over itself trying to analyse what went wrong. Even the Subway representative, while talking to B&E from the US for this article, at least on the face of it was clear that the McDonald’s business model was and would remain critically different from Subway’s. And the reasons are quite explicit. Although McDonald’s is still growing at home and in a big way overseas, it has made a concerted effort over the past few years on getting “better, rather than bigger,” as their spokespersons have been careful to overemphasize recently – and hidden in that one statement lies the one strategy that has ensured McDonald’s superlative profitability. One has to understand that McDonald’s for years had been the “bigger – and don’t care about better” visioning giant, attempting to position the behemoth as reaching the largest chunk of humanity – in lbs too. Thus, the move to a “better, not bigger” strategy was a mammoth shift – perhaps their biggest ever – from the traditional decades’-old strategic think. The genesis of this can perhaps be found in the year 2002, when the company was facing problems from all quarters: lawsuits and criticism for its fried, fatty food. As a result of these headwinds, the firm posted its first ever quarterly loss ($344 million) in 2002. But the company moved with decisiveness. Jim Cantalupo took over as the new CEO, and started the biggest restructuring in the company’s history. He closed more than 100 under-performing restaurants, changed the traditional growth strategy of opening more outlets to focusing on increasing the turnover from existing units. The menu was refurbished and expanded with the introduction of more fresh and healthy eating options like entree salads, McGriddles breakfast sandwiches, et al. Creative drinks came to be seen as the product du jour at the chain, with everything from fruit smoothies and specialty coffee drinks becoming the order of the day.

Today, much of McDonald’s success in beverages has come from specialty coffees such as lattes, which are sold at relatively higher prices. And to top it all, the company introduced the “I’m lovin’ it” campaign – its largest global campaign ever, launched in over 100 countries. But leave aside the outside positioning, McDonald’s has been careful to not let go of the old guard. One example; according to Ad Age, Subway spent about $400 million from January to November 2010 in advertising, of which about $58 million went to support its new breakfast line. McDonald’s US advertising has been estimated at about $1.2 billion annually. Wonder of wonders, its biggest campaigns continue to focus on the old ‘unhealthy’ guard – for example, the new “Made Just for You” TV commercials promote its Big Mac and Quarter Pounder with Cheese core-menu items. But who’s complaining? The results speak for themselves. Since 2003, McDonald’s has remained Wall Street’s darling, posting rising same-store sales for 30 consecutive quarters. Even during the depths of the recession in 2008, its same-store sales rose by more than 6%. McDonald’s stock has risen nearly 40% over the past three years.

Despite the Subway franchise model being widely successful, returns are greater for McDonald’s. A Subway franchise cost about $150,000, while it’s $1-2 million for a McDonald’s franchise. But if a Subway franchise makes roughly $450,000 per restaurant, McDonald’s franchise revenue is over $2 million per store. The choice of location of Subway restaurants has also raised a few eyebrows. Often, Subway restaurants are found in locations that even the most gumption driven competitor might not touch. Outlets have sprung up in the unlikeliest of places: on a riverboat, inside a church, at car dealers, bowling alleys and casinos. “We are proud of the fact that we have more convenient locations available to offer variety and choice to consumers,” says Les Winograd, Subway to B&E. On the process front, owing to its small restaurants, Subway emphasises on the take-away format. On the contrary, McDonald’s is all about (well, almost) providing the best dine-in QSR experience to its customers – and in profitable locations. Its stores are found in upscale locations, are big in size, draw larger crowds and create better brand recall. For Subway franchisees, it’s not uncommon to directly compete with one another by having multiple outlets in an area that effectively cannibalises business. Winograd counters: “Our growth is a result of our ability to offer franchisees the opportunity to own and operate their own businesses that follow a proven and simple operational model, coupled with all the hard work, dedication and support provided by our team members around the world.”



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Wednesday, July 18, 2012

Hire us Please, Pranabda

A Blanket Interest rate Hike will have The Worst Economic Impact in order to Curb Supply-side Inflation. It’s time The Finance Ministry took Micro and Macro Economics Revision Lessons from us

Honest! Perhaps there’s no other leader we appreciate more for energy filled speeches and excitement laden activities than Pranabda. From spunky bridge-building exercises with opposition parties to spinning off cocky rib-tickling humour at just the right moment, the dada from the Sabha has more energy jam-packed in him than a man doing triple doses of the thirty-plus concoction. But given that Pranabda has been excruciatingly busy fire-fighting all the ills that his party had conveniently refused to acknowledge for such a long time – from the telecom tangle to the Commonwealth calumny – his focus has clearly reduced on what the RBI is conjuring up quarter after quarter as an alleged solution for solving and resolving the inflation issue! Dada, it’s time you hired us, as what the RBI is peddling as the solution for inflation could surely be the final nail in the coffin for the party.

But more of that later; first, the facts. The overall inflation rate has fluctuated wildly in the last three months of 2010 at rates of 8.58%, 7.48% and 8.43% respectively. Food inflation reached 18.32% in December and 18.91% during the first week of January, 2011. While inflation in the manufacturing sector came down from 4.56% to 4.46% in December, prices of vegetables rose by 22.90% in December over the previous month. Onions became more expensive by 34.86% and potatoes became dearer by 16.29%. Fuel and power inflation, in turn, rose by 11.19%. And how has the RBI handled such stubborn price increases? Through an evidently contractionary monetary policy – RBI raised the interest rates (the repo – rate at which banks borrow from RBI – being key; currently at 6.25%) by six times last year. It plans to hike the rates further on January 25, 2011 (possibly by 25 basis points).

It’s clear that RBI, in its love for capitalist theory and ways American, continues toeing the exact line that drove US into an economic disaster. US has gone through inflation many times. Excessive government expenditure, oil price shock, and a contractionary monetary policy followed by Bernanke in the mid 2000s pushed the world into recession.

Coming back to India, the problem starts with the RBI data itself. Our country still considers the Wholesale Price Index (WPI) instead of the Consumer Price Index (CPI) to calculate the overall inflation rate. This means that inflation doesn’t reflect the consumer price of commodities at market rates. In essence, the general use of WPI is to measure the impact of price on businesses; yet, India uses the same to calculate the impact of prices on consumers. Also, WPI incorporates about 435 commodities with different individual weights, out of which many (like coarse grains) are not of much daily use today. Consider this: while general inflation rate was around 8%, food inflation touched 18% in December.


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Last time it was Tequila! What now?

So far, so good. The Mexican Policy Makers now need to get back to The Drawing Board if they want to Convert The Recent Rebound in Economic Activity into a long-term Sustainable Recovery.

For once, it seems that the most populous Hispanophone nation on Earth (and of course the 11th largest economy in the world with GDP worth $1.7 trillion in 2009 at PPP basis) is coming over its bloody gang wars (which have killed 22,700 people since President Felipe Calderón took office in 2006) and an economic curse called drug trafficking (creating black money worth over $40 billion annually). After all, Mexico’s GDP has just reported a stunning growth of 7.6% in Q2 2010 (4.3% in Q1 2010) overcoming the worst GDP contraction (-6.5% in 2009) in the Latin American region since the global financial crisis began in 2008.

Even at the sectoral level, production has advanced in both industry and services. While industry has expanded by 7.8% (manufacturing reported growth of 13.4%, electricity 2.9%, and mining 4.1%), services have grown by 7.4% (commerce 18.9%, transportation 10.9%, financial 5.7%). Agriculture too has reported a growth of 4.8%. Sounds astonishing for a nation whose drug gangs now boast of numbers (an estimated 100,000 armed gang members) at par with its military.

But then, there is more than what meets the eye! Though the Latin America’s second-biggest economy (after Brazil) is recovering from its worst contraction since 1932 (and one of the few that was at least not triggered by the country’s bad economic policies) as a surge in demand for Mexican exports in the US, this so-called great performance looks more like a rebound than a sustainable recovery. Reason: The economy lacks one of the most important components of all if growth is expected to be sustainable – the gross fixed investment, which grew by a meagre 0.7% during H1 2010 after falling 10.1% during 2009 (see chart). This is way below the 16.6% growth that gross fixed investments had reported in 1996 (21% in 1997 & 10.2% in 1998) even after witnessing a deep fall of 29% during the devastating Mexican peso crisis in 1995 (famously known as the Tequila Crisis) when the economy went into a tailspin due to unsustainable economic policies.

In fact, if we compare the Mexican economy’s rebound to the Brazilian recovery after last year’s recession, the current state of the 5th largest nation in the Americas (by area) looks frightening and the future bleak. As against Mexican economy’s frustrating performance on the fixed investments front, Brazil’s gross fixed investment surged 40.2% during the H1 2010 after plunging 20.5% during the whole of 2009. This indicates that the Mexican economy is certainly losing its charm among investors, which in turn questions the long-term sustainability of this so-called economic surge. What’s more? While total foreign investment in Latin America in 2009 was about $126 billion, only $12.2 billion were invested in Mexico witnessing a pathetic fall of 42.5%, from $24.3 billion in 2008. Interestingly, the number is even way below $17.2 billion, the estimated value of black money generated through cocaine, marijuana and other drugs that cross the Mexican border into just US annually (US Department of Justice).

Even the existing firms in Mexico are not increasing their capacities to produce higher output in the years to come and are just utilising the spare capacity (thanks to the recent recession) to fuel the current rebound. This, in fact, is the most concerning characteristic of this presumed recovery. Alfredo Coutino, the US based Director at Moody’s Analytics agrees as he tells B&E, “Though GDP will report growth close to 5% this year, it will decelerate to 3.5% next year. The economy’s performance will be limited by its low production capacity in coming years.”


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