Investment banking ambitions of two business houses
Anil Dhirubhai Ambani Group (ADAG) promoted Reliance Capital plans to enter into investment banking by the current fiscal end while Religare has announced an ambitious plan to start an emerging-markets investment bank. Do these plans make sense? Will they be able to compete against the well-entrenched franchise of ICICI Securities, SBI Capital Markets, Kotak, JM Financial and foreign entities like Goldman Sachs, Morgan Stanley and Merrill Lynch?
 
Reliance Capital, the non-banking finance arm of ADAG, is set to foray into investment banking by end of March 2010. The company already has presence in asset management, retail broking and insurance businesses. Although entering the i-banking space has been on the agenda for Reliance Capital for a long time, the market downturn during 2008 forced the company to put its plans on the backburner. Now, with the markets enjoying a good run, the company is finally set to enter into the competitive space currently occupied by players like ICICI Securities, SBI Capital Markets, Kotak Investment Banking and so on. With this new venture, Reliance Capital aims to fill in the ‘missing link’ in its business, to become a full-fledged financial services provider. 
 
However, Reliance Capital’s investment banking move raises concerns regarding the potential conflict of interest with ADAG’s current businesses. Being the large, diversified group it is, there might be many customers and suppliers in its various businesses who would be wary of sharing business details and vital information.
Religare’s vision of becoming a global-oriented investment bank is more suspect. Barely a few years into operations, it would be extremely difficult for Religare Capital Markets to step into such a relations-centric business overnight. The key thing in investment banking is generation of leads and closing the deal based on previous relationships with the client. With its focus initially towards emerging markets like Indonesia and Malaysia, Religare Capital hopes to tap the opportunities arising out of potential M&A activity in these countries. For that, however, it will have to put in place an effective system of generating business leads. Secondly, investment deals materialise from having solid, long-term relationships. This is something which has worked in favour of investment banking giants like SBI Capital Markets and ICICI Securities. SBI gets the cream of the customers through its efficient loan appraisal process. This gives them a better quality loan portfolio and better quality borrowers. The background and knowledge of SBI, apart from the comfort level, provides an edge to SBI Capital Markets. Similarly, investment banking behemoth Merrill Lynch’s India operations are driven by the fact that it is run by people with age-old client relationships. Kotak Investment Banking too has the experience of the last 25 years and has developed relationships that make it a seasoned player in this area. Enam Securities’s ability to provide good quality portfolio advice to top level management has given it a unique edge. Global investment banks like Goldman Sachs, Morgan Stanley, Credit Lyonnais derive their strength from robust research and global relationships. All these companies thus have distinct advantages in terms of long term connections, routes and pedigree. Compared to them, Religare Capital Markets is a small fish, with little connections even in India. How it would manage to attract clients globally on a sustained basis is an even bigger issue. It would be a long while before Reliance and Reliance make their mark. -Debashis Basu with Sanket Dhanorker [email protected]

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FIIs invest most in beaten-down stocks

There has been a surge in foreign institutional investment over the past six months. The sensitive index of the Bombay Stock Exchange has gone up by more than 100% between early March and now, mainly because of investment by foreign institutional investors (FIIs). Collectively, they have put in Rs18,677 crore between March and June 2009. Who have been the big beneficiaries of this investment? Interestingly, it is the real estate companies that seemed to be going under in late last year and early this year which have got most of the money from FIIs.

An analysis of foreign holding in 1,300 companies in the Moneylife database shows that FIIs portfolio in Unitech and DLF has increased from 8.24% to 22.79% and from 6.24% to 15.4%—a rise of 277% and 247% respectively. Investment by FIIs in Dewan Housing Finance Corporation rose from 8.56% to 20.56%—a solid gain of 240%. FII holding rose manifold in Ruchi Infrastructure (from 6.53% to 13.83%) and Indiabulls Real Estate (from 41.73% to 61.71%) also. Among other stocks in which FIIs poured money were Soma Textiles & Industries (from 17.51% to 37.11%) and IFCI (from 6.06% to 12.07%) also—a rise of 212% each.
 
The foreign buying pressure was intense only in the small-cap counters. While these stocks were the most sought after by foreigners, there were hardly any
large-cap stocks which hogged the attention. Crompton Greaves and Larsen & Toubro are two such stocks where FII investment increased. There was a lot of buying in Bank of Baroda also.
 
The surge in FII investment is an indication of renewed hope among foreigners about India. Whether they believe in the long-term India growth story or is it merely an opportunistic move to collect some short-term gain will be clear during the next correction.
—Pratibha Kamath and Subrata Das [email protected]

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The reality in realty

Vested interests in the real estate market are falsely spiking property prices. Developers and broking firms are creating a false bubble by exaggerating the improved market sentiment

The convergence of vested interests of a few developers, media houses and broking firms is creating an exaggerated bullish atmosphere in the real estate market. While realty prices have indeed moved up, builders themselves are shocked at the extent of rise claimed by the media.

“Some newspapers have been reporting that our rates for the‘Global City’ residential project at Virar have gone up from Rs 1900 per sq ft to Rs 2700 per sq ft but actually our rates have only risen from Rs 1900 per sq ft to Rs 2100 per sq ft because the building is in the process of completion,” said Boman R Irani, chairman and managing director, Rustomjee Builders. 

He also added, “There is no steep spike in the rates especially by credible developers who have got a brand name and brand image to protect.”

Our sources say that property prices have only increased in South Mumbai by 10% - 25%; elsewhere in Mumbai the prices have just started moving up. According to bankers, prices of residential properties across the country are still down by 15%- 25% from their 2008 peak.
 
M D Mallya, chairman, Bank of Baroda said, “There is a brisk sale of flats in the Rs22 lakh-Rs25 lakh range.”

KV Kamath, Chairman, ICICI Bank, said, “People have curtailed the size of home loans and the 20%-30% drop in price has certainly made 800 sq ft-1000 sq ft apartments more popular. That seems to be the new mantra.” He also added, “People are not buying today on the basis of future income.”

Since the past four months, real estate developers have been raising funds through Qualified Institutional Placements (QIPs) and through Initial Public Offerings (IPOs) or follow-on issues so that they can complete old projects which were stuck since November 2008.

Companies like Unitech Ltd, Indiabulls Real Estate Ltd, Housing Development and Infrastructure Ltd, Sobha Developers Ltd and Orbit Corp Ltd have raised funds through the QIP route. Developers such as Emaar MGF Land Ltd, Nitesh Estates, Lodha Developers Ltd and Sahara Prime City are planning to raise a total sum of around Rs9,800 crore through IPOs—Sahara Prime City has filed its draft prospectus for Rs3,450 crore, Emaar MGF Land Ltd for Rs3,850 crore (down from the Rs6,400 crore it planned to collect last year). Ambience Ltd, a Gurgaon-based developer has filed a draft prospectus with BSE to raise approximately Rs1,125 crore. 

Brokerage firms and investment bankers want to create a scenario which depicts a booming market. Angel Broking in a recent real estate analyst report said that some of the developers have increased their prices by 30%. Industry sources say this is exaggerated.

“Speculative buying is not taking place but a pent up buying (demand) is coming back to the market,” said Pranay Vakil, Chairman Knight Frank (India), a property consultancy firm.

He also explained, “Since the past eight months people had resisted from buying, thinking that prices may go down further. But now they have realised that there will be no fall in prices or interest rates, so we are seeing a demand in the market. The demand is one year old.”

Renu Sud Karnad, joint managing director, HDFC Ltd, said, “There is a lot of demand from first-time house buyers. There is a good demand for house prices in the range of Rs30 lakh-Rs50 lakh in metros and about Rs20 lakh to Rs25 lakh in smaller towns.”

She also added, “In India the housing shortage is huge. Therefore in the long run it is important for the developers to focus on affordable housing and see that the property prices do not rise sharply resulting in customers being priced out of the market.”

Many developers believe that fake hype about prices will hurt buyer sentiments. In the long run if the prices keep rising, a lot of customers will be priced out of the market.
–Pallabika Ganguly [email protected]

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