Mumbai

• Mumbai is a ‘hot property’ when it comes to buying or selling real estate
• The buyers here pay a steep premium because a residential or commercial property is a coveted asset in this ‘city of gold
• While demand for budget flats is very strong, demand for commercial space is slowly picking up
• Real estate prices in Mumbai have gone up by about 24.0% till April 2010 as compared to prices in 2007
• Volumes in 1Q10 in Mumbai dropped compared to 3Q09 and 4Q09 due to price escalation
• Most developers focus on premium housing because of higher margins, though the demand for mid-income housing is high
• Buyers and investors may be advised to wait for correction and then enter the market

Delhi & NCR

• The October 2010 Commonwealth Games in New Delhi have proved to be a big trigger for real estate in Delhi and NCR region
• Rising demand for residential and commercial property in Delhi and NCR regions have driven the property prices quite high
• Further, new Metro links have provided boost to property prices in the city and NCR
• Volumes in 1Q10 in Delhi dropped compared to 3Q09 and 4Q09 due to price escalation
• The end-users can buy a home now as the prices are expected to go up further due to the ensuing Commonwealth Games
• As for investors, they too can enter and make decent profits in about a year’s time

Kolkata

• The property prices in Kolkata had risen by a whopping 59.0% in about a year-and half since 2007
• After the rally, realty prices have remained stable in the second half of 2009
• Prices in areas like Salt Lake City, Maniktala, Lake Town, Bhawanipur etc. 60-100 per cent in first half of 2009 as compared to 2007 prices
• Since the prices have already appreciated quite a lot, it is advisable to wait for the prices to correct and then decide on buying/investing

Bengaluru

• The lag effect of the global economic crisis which began in late 2007 and continued till end-2008 saw prices of residential and commercial spaces declining sharply in 2008 as well as 2009
• However, the fall in property prices was arrested in second half of 2009 as prices began to stabilize
• With the revival of the IT sector, the positive impact will be felt across all markets
• This may be the ideal time to buy or invest in residential and commercial properties

Chennai

• The fall in demand from IT professional for residential properties and IT companies for office space saw property prices correcting in the second half of 2008
• Property prices have stabilized in the second half of 2009 and with revival in demand expected from IT professionals and companies, one can expect prices to show an upward trend going forward

Author:Rahul Sonthalia, Research Head, Kredent

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Our analysts update you regularly on the developments in sectoral outlook so as to enable you to take better investment decisions. Following is an update from our analyst Rahul Sonthalia on automobile sector

• A reduction in excise duty helps to make car cheaper
• Sale of passenger vehicle grew at 25% in FY2009-10
• Although Tata Motors is delivering Nanos but Maruti 800 leads the market
• Hyundai become the second-highest selling car by overtaking Maruti Wagon R market
• Overall, Tata Indigo sales have risen in the last quarter of 2009-10
• On the otherside Mahindra-Renault Logan sales fall by 60%
• The UV major Mahindra & Mahindra’s share shot upto 55%,Armada grew 31.3%,scorpio grew 25%,but newly launched Xylo sold 28558 units which is 50% of its past
• The second highest selling utility vehicle, Innova grew at 23.8%

Author: Rahul Sonthalia, Research Head, Kredent

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Results highlights – India’s largest manufacturer of motorcycles, Hero Honda Motors second quarter results were ahead of the market’s expectation mainly on account of better margins. The company reported a strong surge of 95% in net profit to Rs 597.14 crore compared to the second quarter of financial year 2008-09.  A similar sharp surge came in the first quarter ending June, when net profit rose by 83 per cent to Rs 500.11 crore.

The growth in sales is 26.8% compared to the same quarter in previous financial year.  The company reported a strong total income of Rs4,059.4 crore. This was driven by huge volumes as the company sold more than one million units in the quarter.

Growth Factors – The festive season spread over two months during the quarter worked wonders for the company in terms of volume growth, which was also seen across all the segments in the automobile sector.

Decrease in raw material prices, depreciation, and the effective taxation rate at the Haridwar plant (from 28% in first quarter to 22.31% in second quarter) led to the higher bottom line compared to the 26.8% increase in top line

Hero Honda vs. Index (source: BSEINDIA.COM)

Stock prices have been building up since August in accordance with strong market fundamentals and good earnings forecast. Prices touched a high of Rs.1724 in 3rd week of September and moved in the range of 1600-1700 ahead of the earnings announcement. Prices opened up on Thursday post announcement and rose up by 2.4% but were dragged down due overall weakness in the market. Prices corrected to close at Rs 1595, about 0.9% down from previous day on October 22, 2009. A better than expected performance failed to keep to prices at increased levels.

Caution – Though the company has achieved a strong volume growth in first half of FY2010, we believe that with the ongoing strikes at one of its major suppliers Rico Auto and few other auto ancillaries in the Gurgaon belt could lead to production constraints in second half of FY2010. Thus we believe that if the demand continues to remain strong, the ongoing agitations in the factories of its major suppliers could affect its production, thereby pushing down its sales volume on a quarterly basis.

Company expects an increase in prices of steel and aluminum between 5 to 10 per cent in the coming quarters as the economy revives. Increasing Interest rate can be threat to all the automobile players in the short term.

We believe given the sound management, consistent performance and expected increase in demand due to reviving economy makes it good long term bait for long term capital appreciation and stability of dividends. But all the above positive points are already factored in the current price. At the current market price of Rs1586, the stock trades at around 16.5x its FY2010E and 14.9x FY2011E Bloomberg consensus earnings of Rs97.6 and Rs108 respectively.

Full disclosure: No position at the time of this writing. Please do your own research before making an investment decisions for HEROHONDA.

Authors:

Vineet Patawari , B.Com (H), ACA, PGDM (IIM Indore)

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The world’s population can be divided into three basic segments based on the economic pyramid. Majority of them would lie at the bottom of the pyramid with annual income less than $1000. This economic inequality must be overcome to ensure the welfare and happiness of people all around. The need of the hour is to develop innovative products or services for these people.

THE MUTUAL FUND ADVANTAGE

A mutual fund for the rural population is one such solution. The fund would require minimal investment on the part of the people in the rural areas and will be designed in such a manner that it helps them increase their financial position with respect to the other strata of the society. The fund will be designed in the simplest possible manner so that even a layman or an illiterate can understand the way it will function and will have no complex terms and conditions. The fund will not only boost the income of the rural households but will also increase their spending capacity thereby leading to the overall welfare and development of the regions in which they reside.

If we consider the case of India, even the irregularity of monsoon can play a role in the overall functioning of the fund. By securing or insuring the rural people against such natural phenomenon, the fund can extend its advantages to higher levels.

But for all this to happen, private partnership in this initiative is also a must. Large corporate houses must come forward and join hands with the government in building a financial instrument of this kind so that the people at the bottom of the pyramid can have something to cheer about and lead a better life altogether. They should take up the responsibility of first creating awareness about such a thing by educating the masses about it and then taking up the cause of these people by developing a simple instrument of this kind.

By developing this mutual fund and implementing it, the rural population will definitely be moved to a new level in the economic pyramid.

BRINGING ABOUT A CHANGE IN RURAL INVESTMENT PATTERN

The next wave of growth in rural areas will come from the rural markets. Presently the underdeveloped world is facing a crisis in the infrastructure sector. Once the growth story embraces this sector, the biggest gainer will be the villages. Government policies and employment generation programs will also improve the standard of living of rural masses by enhancing their per capita income.

Now a question which lingers on everyone’s mind is: How can ordinary, presently low-income earners, from rural background become rich? The answer to that question is as simple as it is routine: Start by saving and investing something regularly, even modest amounts, in anticipation of big returns in the future. If a villager is looking for big returns, it cannot come from the traditional sources like bonds or insurance.

Having said that, we must appreciate that although the rural economy is looking to give the urban economy a run for its money, there isn’t enough exclusively “rural” financial instruments to channel this money to productive purposes. The most feasible tool seems to be “Mutual Fund” specially designed to address the unique needs of the rural world. The concept of Mutual Funds for the poor provides significant institutional mechanisms to move the poor out of the village economy and into the more dynamic corporate sector, to a stage where a significant share of corporate wealth could be owned by the poor.

The Mutual Fund is but one institutional mechanism to link the rural population to the corporate sector. The underlying premise of the Mutual Fund is the notion of creating possibilities for the poor to own corporate assets. Financial policy could accordingly be restructured to ensure that all assets, from urban land to real estate development, from banks to corporate trading houses, could be redesigned to accommodate the rural masses (indirectly by the MF way) as equity partners. The two institutional instruments to make this possible remain the Mutual Fund and the need for private limited companies to transform themselves into public limited companies. Here monetary and fiscal policy can provide incentives to encourage the corporatisation of private wealth along with the reservation of space for equity ownership of this wealth by the rural public

The savings of the poor can not only augment the savings base but also broaden the investment capacity of the economy, whilst transforming the poorest rural household into stakeholders in the process of national economic growth. So any mutual fund that targets the rural economy for raising the money and investing it at the best place can change the face of rural investment pattern and has the potential to become a big threat to low interest yielding insurance or post office products.

A GOOD STRATEGY HAS TO BE CHALKED OUT

To produce worthwhile returns any investment instrument which can be offered needs to be linked with the equity markets but the returns have to be assured. The only viable option is regular investment through a scheme similar to Systematic Investment Plan (SIP), a scheme where you can periodically invest a fixed sum, which could be as low as INR 500 per month. Considered as one of the ideal low-risk methods of wealth accumulation, SIP helps investors overcome the fluctuations of equity investment. Investing through SIP makes timing and cycles of the share market totally irrelevant. With SIP, farmers have to invest a fixed amount regularly. Therefore, they end up buying more units when the markets are down (when the NAV is low) and fewer units when the markets are up (when the NAV is high). SIP works as a disciplined investment method as it forces you to buy even when the markets are low, which is actually the best time to buy.

There must be no risk to the capital invested. Looking at all these aspects a special type of mutual fund has to be designed for the rural Indian market. The per capita income is below INR 50 per day for a huge chunk of the population. So keeping their standard of living, risk profile, awareness towards such instruments, etc. the concept has to be very unique. It’s very difficult on their part to accept any instrument which can require even an iota of their wealth. The device needs to be backed up by some assurance from a trustworthy sponsor like the government or reputed business houses like Birla or Tata. For a player who has low recognition in the rural market it is difficult for the rural masses to accept it.

In the initial stage, the mutual fund can be introduced for as low as INR 200 to join; this variant of mutual fund can be targeted to daily wage laborers and landless farmers as they have the ability to pay that small sum up front when they get their wages or remuneration. They have surplus cash whenever they get their pay and will be willing to invest it if the terms and conditions are simple. To keep the depositor involved and interested in the process of making money from the savings, the mutual fund needs to bring in the option of adding to their investment in increments as small as Rs. 20 and as frequently as daily or weekly.

The average length of time an investor stays in a securities scheme, other than a money market/liquid scheme, is one-fifth of the time in the UK and two-fifths of the time in the US. Furthermore rural people will normally remain invested for even lesser time. While designing the network this point has to be kept in mind. One challenge is to tackle the liquidity issue of the instrument. To make it customer oriented, the liquidation of the instrument should be very fast and there should be no impediment to exit from the investment. Communication and synergies between the channel partners thus becomes a decisive issue in the overall state of affairs.

LEVERAGING THE RURAL ECONOMY – THE GRAMEEN BANK EXAMPLE

We believe that promoters of such rural world focused fund have to follow a course that few others in the world have done — and that is, leverage the rural economy. This is something that most of the Mutual fund companies don’t do because it requires hard work. There have been some incidences of similar instruments invented to cater to the investment needs of rural population, but they were unable to tap such a huge population of villages. So the main challenge lies in reaching to such a mammoth area. So their challenge is to invent a new business model where they can create a distribution base effectively in all the villages in the world, and to learn to do that at one-tenth the cost of implementing it in the urban world. Just to put that on a scale that someone could understand, to succeed in urban world, they need to be able to do business at one-tenth the cost of the West. The challenge is to be able to work with partners because that the branch-led model will not work in this context. For example, they might partner with a local financial institution (banks, post office, insurance agents, cooperative banks, etc.), a micro-finance agency or companies’ outlet like ITC’s Choupal Sagar in India or someone who is already in the village for a business purpose. The Mutual fund might even partner with someone who is selling fertilizers or seeds or tractors. How can we leverage these partnerships to do business? That question drives the need for a new business model to reach out to this market.

A classic case in point for the overall setup is Grameen Bank, Bangladesh. It has taken the initiative in launching the first Mutual Fund of the poor, where it is providing opportunities for investing a small fraction (15 Crore taka) of the savings of its members, in a managed, close-end, Mutual Fund which would invest its portfolio in the corporate sector. The potential of this experiment has to be tested within the small, rather unstable capital market of Bangladesh. On the contrary, looking at the huge, fundamentally strong and stable stock markets in India, the probability of success of such Mutual Fund is much higher. Many clues can be taken from this model to develop a similar instrument in other parts of the world.

VARIOUS CONCERNS

The biggest risk is the failure of the monsoon. Now, can  one expect savings and investment from rural population without fixing this risk? What they have to do, is to ask if this is an insurable risk. Can they get such insurance? The answer is yes. Can they then sell this insurance to the farmers? Again, the answer is yes. Finally, can this insurance be further reinsured outside the home country so that the risk was shared even more widely? Yet again, the answer is yes. This will create a win-win situation for all. The farmers will be liberated of the jeopardy of tribulations of monsoons. This can surely act as a side stream of revenues for the same company which is coming up with the MF. Otherwise they can gain from strategic alliance with insurance companies to get readymade insurance product. The same distribution channel will be used to sale insurance products. This protection provided to farmers will ensure a continuous flow.

The next point of concern lies in redistribution of the returns as they understand simple things like the value of their money doubling in 5 years. This is possible considering a modest return of 14-15 % compounded annually over a horizon of 5 years. The money can be tripled in less than 9 years at the same interest rate. They can understand this concept better than the complicated NAV for MF. Generating this kind of returns will not be a daunting task for the expert fund managers who are at presently generating much higher return than that.

ROLE OF IT AND FUTURE

For this MF, information technology will play the most vital part. Instead of making it too complicated by involving paper work, chip embedded cards can be issued to all the investors. The rural population is familiar with such cards like Kisan credit card, etc. These cards will store all the information regarding the investor and all the addition to the fund can be easily made without any paper work. The investor should be allowed to check the value of his/her investment. Different schemes can be made based on the requirement of the investor. The minimum time period for exit should be 3 to 5 years for any scheme. The people who start investing for the marriage of the son/ daughter or retirement planning, etc can remain invested for a longer period of time.

There should not be any entry load for the fund but exit load of around 3-5% should be imposed. We can make this instrument a unique one where the investor can see his money grow and be encouraged to invest more money. The surplus money is generally wasted because it is difficult for them to find rational avenues for spending this money or to invest them in a cogent manner. The investment opportunity should be made as trouble-free and effortless as possible.

People in rural areas should be educated about such instruments with the help of Gram Panchayats and other influential people in rural areas.

There are many complexities involved in the model. Keeping in mind the basic framework suggested above, we can work upon the idea of such a MF by presenting the idea among the people who have crystal clear knowledge about the conditions prevailing in the rural market and those who are competent enough to chalk out the intricacies of the MF. We are sure this mutual fund has the potential to see the light of day and also show the rural Indians some light at the end of the long tunnel.

Author: Vineet Patawari , B.Com (H), ACA, PGDM (IIM Indore)

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