Could politics topple the proverbial applecart? It is not such an outlandish possibility suggests a CLSA report in a surprisingly sharp critique on the ruling party’s performance, especially about governance, till date...
Brokerages are not known for their sharp and insightful, let alone incisive, political commentary. Therefore, a recent CLSA report, which is quite critical of the UPA government's performance so far - despite the general opinion that a stable government is better than anything else - comes as quite a surprise.
The central theme of the report seems to be an attempt to answer the question "Stable government, but is that enough?". And the answer seems to be an unequivocal, no. As the report says, "Poor governance may yet come to haunt the markets, if something does not change over the next couple of years."
The report admits at the onset that the government has been successful in implementing a few things - this includes transparent auction of 3G spectrum (after the controversy over 2G spectrum allocation with allegations of large-scale corruption); (partial) freeing of petro-product prices, and minority stake-sale in some PSUs.
However, in areas such as implementing the Goods and Service Tax, Direct Tax Code and change of Foreign Direct Investment norms, progress has been slower than expected. It also points out that with quite a few elections ahead, there is very little hope that pending reforms will be pushed through in the next 12-18 months. In short, this is as good as it gets.
There is also a sense of drift within the party. As the report says, "Many times there are conflicting views on major issues or policy matters between different arms of the government or a minister and party leaders. If the government does not reverse this sense of drift soon, India's macro story will be seriously dented."
While this does hold true, it must be said, that drift within a party is much better than a coalition government where different parties' agendas clash and nothing eventually gets done.
Economic failures: Inflation, roads
Although the report does not elaborate much on this point, it does say that one of the biggest failures of the incumbent government has been its dismal failure to contain inflation. Perhaps its recent biggest failure is the 'rotting food grains scandal' where nearly 15 million tonnes of grains were found rotting in different warehouses of the Food Corporation of India. In a country where 37% of the population lives below the poverty line, this issue will come back to haunt the government. The food inflation that has been seen in the last five years is like India has never seen before. From just January 2009, average rice prices are up 23%, fruits and vegetables are up more than 200%, milk is up 28%, sugar is up 27% and edible oils up 12%. This in a country where a sizeable chunk of the population still spends a large part of their earning on food is nothing short of disastrous.
The only reason this issue has not blown up into a civil unrest kind of situation is the government has cleverly put more money into the hands of the poorest sections of society with schemes such as the National Rural Employment Guarantee Scheme. Even so, the government's stress on inclusive growth rings hollow in the face of rampant inflation.
On the economic front, the other biggest failure of the government has been the slowdown in the roads sector, after a good start, with ugly corruption allegations flying around. CLSA estimates that "over 9,000km of orders will have to be placed by March 2011 to meet the FY11 target of 11,800km and there is a shortfall from FY10 of 8,000 km."
This is a big blow after the ambitious targets of 20km of road per day.
Political pitfalls: Naxalites, Kashmir, international relations
On the political front, a monster that the present government has let grow is the Naxalite movement, which has only got stronger under the governance of the present government. As the CLSA report points out, "What in 2006 was confined to about 170-180 districts, now engulfs over 220 of the 640 districts in the country today."
(SOURCE: South Asia Terrorism Portal)
One of CLSA's notes dated 12 April 2010 had summarised the problem, "What the Naxal attack brings to the fore is the inadequate state preparedness to respond to a crisis situation and also the deterioration in governance over decades… The government more often than not seems to be responding in a kneejerk manner. The uncoordinated response was witnessed during the 26th November terror attack on Mumbai. It was witnessed once again during the Telangana crisis in Andhra Pradesh. The Indian state seems to lack any grievance redress mechanism to tackle issues of importance before they reach crisis proportions. The Maoist problem has been simmering for years. As a result, the state often comes across as unsympathetic, uncaring and lacking in any coherent strategy."
The report also points out to the Kashmir issue. "The 2008 elections in Jammu & Kashmir (J&K) were hailed as a victory for Indian democracy, given the reasonably large turnout and defeat of some of the separatists who participated in the elections. However, just two years on, there is an eruption of violence in the state among renewed demands for a separation. These have been met with military action and an almost deafening silence from the government. The report points out to the failed economics of this state - J&K receives 8%-10% of annual grants given to states by the central government when its share of population is only 1%. The tragedy, says the report, is that in spite of the grants, the developmental work is pathetic - hence even more separatist violence.
The UPA government once seemed to have a Midas touch as far as foreign relations were concerned - strategic relations with the USA were taken forward, dialogue was started with Pakistan and there was progress in the bilateral relations with China - however, all three achievements seem to have crumbled. President Obama is noticeably cool towards India, relations with Pakistan have taken a turn for the worse, and China's stance has hardened, the report points out.
CLSA points out a few other things that, although minor in the larger scheme of things, could haunt the present government - no action against people accused of corruption in the 2G telecom issue, talking about a Food Security Act for distribution of free food grains of a minimum quantity to people living BPL (below the poverty line) when there has been no improvement in the public distribution system which is still "steeped in corruption", and the scandal surrounding the Commonwealth Games 2010.
So while the Congress could very well be back for a third term based on Rahul Gandhi's popularity and good economic growth, the silver linings for the party seem to be thinning out. Additionally, with a lax approach to governance, the government could very well hurt India's economic growth, which most have taken for granted will be at 8% for the next many years.
(This article is based on secondary research. The report is for information only. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).
The Yamuna Expressway is nearing completion. What are the implications for Jaypee Infra, a stock that has been languishing since its listing this year?
Since its listing, the Jaypee Infratech stock has languished between Rs79 and Rs89. With the Yamuna Expressway nearing completion, will its fortunes change? A lot depends on the kind of toll collection it sees and the pace of real-estate development.
Jaypee Infratech Limited (JIL) was incorporated as a Special Purpose Vehicle for implementation of the 165-km-long 6-lane access-controlled Yamuna Expressway in the state of Uttar Pradesh connecting Noida and Agra. It will also undertake the ribbon development on 6,175 acres at five locations along the expressway for commercial, industrial, institutional, residential, and amusement purposes.
The first 40 kilometres would be located in district Gautam Budh Nagar, passing Noida, Dhankaur, Mirzapur and Jewar, followed by 20 kilometres in district Aligarh, passing Tappal. The following 90 kilometres are planned to be in district Mathura passing Nohjhil, Mat, Raya and Baldev, followed by approximately 15 kilometres in District Agra, with the expressway ending near Etmadpur, a village in District Agra. JIL follows the build-operate-transfer route under which it has the right to earn toll revenue for 36 years after it gets a certificate of completion of the expressway.
SOURCE: Yamuna Expressway Industrial Authority website
JIL has been provided the right to develop 25 million square metres of land across five different locations along the Yamuna Expressway: One in Noida, two locations in District Gautam Budh Nagar (part of NCR) and one location each in District Aligarh and District Agra. Of the total developable area of approx 530 million sq ft, approximately 310 million square feet or 58% is under the NCR region. Its annual report states that JIL has possession of around 3,745 acres of land and is presently developing an aggregate 24.3 million square feet of saleable area across five residential projects and one commercial project at Noida, which were approximately 88% sold as of 31 March 2010.
As of 31st March, JIL has deployed Rs65 billion on the Yamuna Expressway Project which has been met through equity of Rs12.5 billion, debt of Rs43 billion and contribution from real estate of Rs10 billion.
What CLSA and BoA ML say...
In a latest report, leading brokerage CLSA says that the expressway is in its last stages with concreting of 65km (40%) of road complete and trial runs expected to begin in early 2011 (making it motorable). It believes that the superior quality of road will attract traffic from the existing highway and assumes FY12 toll revenue at Rs3 billion.
CLSA believes real estate sales have progressed well at JIL's Noida land parcel with 27 million sq ft of space (out of total saleable area at Noida being 76 million sq ft) sold since April 2009 (with limited price appreciation because of a volume push by JIL and competition in Noida). However, CLSA expects it to recognise revenues from real estate from the September quarter. Basically, 62% of total land for real-estate development is under possession and land for the higher value parcels of Noida and Greater Noida is 93% acquired.
BoA ML expects JIL to recognise Rs21.5 billion from real estate in FY11, Rs32 billion in FY12, and Rs997 million from toll in FY12, Rs3 billion in FY13. CLSA's expectations are much higher - it expects Rs29 billion from real estate in FY11 and Rs47 billion in FY12 and Rs3 billion from toll in FY12 and Rs3.3 billion in FY13.
CLSA believes that JIL will spend Rs37 billion in FY11 on its road construction but is not looking at any substantial investment after that. Therefore, it will turn cash flow positive from FY12 and earn above Rs20 billion in cash over the next few years, leading to a rapid debt repayment. CLSA also hopes for a high dividend payout, which it points out is a rarity in the infra/realty space.
CLSA says that with the toll road near completion the execution risk in the stock will start dropping even if the uncertainty over toll numbers stays. This is because it contributes less than 20% to its NAV (CLSA's calculations) and at Rs84, the stock is trading close to its land value of Rs82/share. CLSA has initiated a 'buy' with target of Rs105/share set at 20% discount to NAV. CLSA's NAV for the stock is Rs131/share. It expects JIL to sell an average of 20 million sq ft of residential area over the next 10 years.
In a late June report, Merrill Lynch had a target of Rs104 which was at a 15% discount to its NAV calculation of Rs122/share. It had said in its report that if the proposed airport along the expressway is approved, NAV would rise by at least 16% since an airport would increase traffic and allow JIL to monetise land parcels.
(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).
Basel: Global financial regulators today agreed on new rules designed to strengthen bank finances and rein in excessive risk-taking to help prevent another crisis, reports PTI.
Banks will be forced to hold more and safer kinds of capital to offset the risks they take lending money and trading securities, which should make them more resistant to financial shocks such as those of the last several years.
European Central Bank (ECB) president Jean-Claude Trichet, chairman of the committee of central bankers and bank supervisors that worked on the new rules, called the agreement "a fundamental strengthening of global capital standards."
"Their contribution to long-term financial stability and growth will be substantial," Mr Trichet said in a statement.
US officials including Federal Reserve chairman Ben Bernanke in a joint statement called the new standards a "significant step forward in reducing the incidence and severity of future financial crises".
Some banks have, however, protested that the new rules may hurt their profitability and cause them to reduce lending that fuels economic growth, possibly dampening a global economic recovery.
Representatives of major central banks, including the ECB and the US Federal Reserve, agreed to the deal at a meeting in Basel, Switzerland, today.