November 28, 2007
Take the top three automotive companies by market cap (Tata Motors, Maruti Suzuki and Bajaj Auto) and pit them against the top three real estate companies, DLF, Unitech, and Housing Development and Infrastructure. What do you get? A situation where the combined market cap (average for April-September, 2007) of the former group, at Rs 74,099 crore, is less than half that of the latter (Rs 1,59,378 crore).
Now, let’s look at their financials: The top three real estate players had combined revenues of Rs 3,323 crore and profits of Rs 1,933 crore, compared to a collective topline of Rs 47,366 crore and profits of Rs 4,713 crore. In terms of price earning (P-E) multiple, the real estate players are getting valued at 82 times their earnings (historical, albeit) versus 16 for the auto giants.
There was a time, long ago, when what was good for General Motors was said to be good for America. In India, we’ve never had a time when what was good for, say, Tata Motors was good for India, simply because the economy had largely been agrarian and private enterprise not a large employer, besides which it was considered “evil”.
When you are an investor, you love cash flows; you want to see the asset you are investing in spew as much cash as possible and as often as possible. By that measure, the stock markets are right to value the real estate majors so highly. After all, property prices have soared to dizzying heights in most cities in the country; in fact, they are three or four times of what they were even six years ago.
Then, foreign money has been pouring into real estate, just like it has been in the stock markets. Of the $10 billion (Rs 40,000 crore) that came into the country by way of private equity investment this year, more than a quarter went into real estate. As a result, real estate firms have been busy listing themselves on the stock markets. The 2007 listing of BT 500 companies has 46 new entrants, six of whom are from real estate. Why are investors rushing into real estate? Blame it on demand.
The economy is growing at 9 per cent plus, and the demand for quality real estate—both from middleclass consumers who have more disposable incomes, and business—is growing.
Typically, experts say, real estate grows two-to-three times the GDP growth of a country, so it’s not surprising that JP Morgan forecasts the industry size to balloon from $50 billion (Rs 2,00,000 crore) to $90 billion (Rs 3,60,000 crore) by 2010-11. Therefore, what the financial investors seem to be thinking is this: even if the real estate prices correct, they are unlikely to crash.
Telecom service providers are adding about eight million new subscribers every month. Result: operators are projecting a doubling of India’s subscriber base from 213 million now to more than 400 million by 2010. Some, like Bharti Airtel, feel the number will be closer to 500 million than 400 million.
But there’s a small hitch. There isn’t enough spectrum available to support this growth (see What is Spectrum? on page 44). Correction; there is spectrum, but the Ministry of Defence is squatting on a huge swathe of it; so, there’s very little left over for private operators. The government has been making noises about making more of this finite and expensive resource available to telecom operators, but the issue has got bogged down over questions such as: who will get spectrum? How much? And at what price?
As of now, there is no clarity on any of these issues. At last count, more than 570 applications seeking spectrum were pending with the government. Several of these are from companies in fields as diverse as real estate, financial services and other industries. There is a legitimate fear that these applicants are in the fray only for the arbitrage opportunity. These players, if successful in winning licences, then sell out at huge premiums.
The government, therefore, has to ensure that nonserious applications and arbitrage seekers are kept at bay. It must ensure strict milestone goals for all new licence winners. This will mean that companies must mandatorily be obliged to set up pre-defined infrastructure within certain periods, failing which they will become liable to stiff penalties and even, in extreme cases, to forfeiture of their licences and the amount they had paid for the same.
Then, the licence must also stipulate a (long enough) lock-in period during which the licensee will not be allowed to sell his licence. These two clauses are absolutely necessary to ensure that spectrum allocation does not make available a new commodity for speculators to trade in.
And finally, the guidelines must ensure a level playing field between existing operators and those seeking to enter the field for the first time. Loading the dice in favour of either party will be to cheat the consumer, who will ultimately have to pay.
Delays will only exacerbate the controversies and hurt consumers. The government should immediately frame rational and transparent guidelines and get down to the job at once.
These are not good times to be in West Bengal Chief Minister Buddhadeb Bhattacharjee's shoes. The flare-up in Nandigram, and before that, in Singur, the ration riots across the state, the allegations of police complicity in graphic designer Rizwanur Rehman's death and reports of rifts within the till now monolithic Left Front have all combined to sully his squeaky clean and suave image.
Already, the doomsayers are predicting the withering away of the Front. But that?fs not why Business Today is writing this editorial. Bhattacharjee has been at the forefront of efforts to reinvent the Marxist movement in India.
He has gone on record saying that he doesn't have time for "dogmatic Marxism" and would rather practice a more "pragmatic" version of the ideology. That includes inviting private capital.and even foreign investors like Indonesia's Salim Group.to invest in West Bengal. He has even declared that the state's economic salvation lies, not in socialism but, in enlightened capitalism.
His initiative is bearing fruit. The prestigious Tata small car project is coming up in Singur; the Jindals and the Jai Balaji Group are setting up multi-thousandcrore steel plants in the state and IT majors of all hues have set up large campuses in Kolkata. In doing all this, he has had to fight stiff opposition from hardliners in his own party who have still not read the writing on the wall.
But the events of the last few months.particularly the "capture" of Nandigram by CPI(M)'s storm troopers and the subsequent rioting in Kolkata.have pushed him into a corner. Then, his utter helplessness in combating the two events has also exposed the lie of West Bengal being an oasis of calm. A Chief Minister (he is also the state's Home Minister) who cannot guarantee law and order does not inspire confidence.
India Inc. is making all the right noises so far, but images of rioters running, well, riot while the state administration stands aside and watches. beamed across the nation, and, indeed, the world.are not exactly conducive to winning a vote of confidence from potential investors.
Being a Marxist Chief Minister means Bhattacharjee faces no immediate threat to his chair. But it will definitely pare the independence and autonomy he currently enjoys and push him to depend more on so-called "collective leadership".
Leftspeak for backseat driving by unelected commissars. It is an irony of Indian politics that Bhattacharjee, more than any other Chief Minister, has earned the "poster boy of reforms" sobriquet. The events of the immediate past threaten that image.and with it, his efforts to reindustrialise his state. Unless he quickly comes to grips with the situation, all his good work will be undone. And that will be a loss for the entire country.