Dec

30

Lessons From Satyam Investor Issues

Filed Under IT BPO KPO Services, India Business, India Investment Opportunities, India Real Estate, Indian Companies, Indian Stock Market, Metros | 2 Comments

http://economictimes.indiatimes.com/thumb.cms?msid=3913608&width=200&resizemode=4The Satyam event has been on the centre stage on Indian business for the last two weeks. This year 2008 has shown us so many events in the financial space that we are primed for every kind of possibility.

The Satyam event has no precedence in the Indian business environment where most Board members unanimously vote for the agenda proposed by the Executive Chairman (who may have only a minority share holding).

Satyam stock lost almost 40% market value (falling from Rs 225 to Rs 135) over the last two week, though it has now recovered about 20% (Rs 160).

The events of the past two weeks have raised many questions, but all of them can be summarized into two basic issues:

1. The viability of Satyam’s strategy to diversify into unrelated business like Real Estate

While the debate remains hot, we did not see any projections or scenarios of how the Maytas deal would have given a better EPS for Satyam shareholders. As a Satyam shareholder, I was fine with diversification if the company leaders believe they can execute it.

Maytas has Rs12,000 crore of orders, so the order book is good, and profits can be made there. And the Indian real estate market has potential for many more players at the top-end level, who can do metro rails, airports, highways etc.

If Mukesh Ambani or Anil Ambani of Reliance starts a diversified business, the shareholders are happy that a new revenue stream will start. Its because Reliance has been diversifying into every possible industry. There is no reason to believe Satyam will fail, if the business plan is good. Raju understands the real estate business well, and Maytas looks like a healthy business.

Now whether the valuation being offered for Maytas by Satyam was fair-value is a different question, and that brings us to the second learning.

2. The effectiveness of Satyam’s corporate governance

Its likely that investors felt the valuation of $1.6 billion for Maytas for much higher, and there is no way to solve such a question expect by taking different views into account. You can’t push a valuation without the support of majority investors.

Since only 8.5% equity of Satyam was with Raju/promoters, and 61% with FIs, Satyam board should have done two things:

(a) passed the entire business plan and projections through the FIs, and got them on board, and their agreement.

(b) It would have been even better, if Satyam asked each of the three FIs to give their valuation for Maytas, and finalized an average of it as the proposed valuation.

If the above two steps we were done, its possible Satyam’s investors could have supported the deal.

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Nov

28

Indian Real Estate - Time for bigger Investments & Change

Filed Under Emerging Sectors, India Business, India Investment Opportunities, India Real Estate, Indian Companies, Indian Government, Metros, Tier-2 Cities, Tier-3 Cities | Leave a Comment

The Times of India reports of a conference in Chennai hosted by Dun & Bradstreet about ‘Dynamics of the Real Estate Market: The Investment Perspective’. As per the conference, the Indian Real Estate Market is pegged at around $14 billion. Although the article presents a summary on the major discussions, 2 major points of discussion emerge.

1. Foreign Investment into Real Estate

This aspect has been well explained in previous posts on this website. The article on FDI in India puts Real Estate as one of the top 3 attractions for Investment.

And the article on Indian Commercial Real Estate also discusses the potential there is in Real Estate. But just to add an interesting fact here – Financial Institutions are among the biggest investors in Real Estate Projects in India.

Merrill Lynch is paying about $377m for a 49 per cent share in a portfolio of residential projects managed by DLF- Indian’s largest listed developer, in one of the biggest deals of its type in India. The transaction, Merrill Lynch’s sixth in Indian real estate, brings its investment in the sector to about $550m.

Late last year, JPMorgan announced its first investment on its own balance sheet in Indian property, paying $60m for a stake in a residential project being developed by Mumbai group, Lodha Builders.

2. Innovative products by Financial Institutions

The Times of India article quotes S. Sridhar, Chairperson and Managing Director, National Housing Bank:

“the real estate community needs to think out of the box and offer wide range of products, which suits the pockets of even people in the low-income group.”

Perhaps new financial products are needed various rate increases by the Reserve Bank of India (RBI) had serious impact for the retail loan segment.

Borrowers have declined in number and default has increased as the interest rates became unbearable and the burden of a rising EMI became too much for the average borrower. The resulting slump has made it difficult for the banks to match previous year’s record breaking credit growth.

Banks have tried to counter the retail loan growth decline by offering discounts on home loan and other retail loan interest rates and associated processing fees during this festival season. This led to a small increase in retail loan off-take, but the results didn’t match the expectations. Home loans have been worst hit - with the segment not taking off as expected, even after festival-season discounts.

About the Author: Ishan Sethi is a Sales & Marketing professional with keen interest in emerging sectors and India business opportunities. He is an alumnus of Indraprastha University and IIM Lucknow. He can be reached via the Contact page.

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