Deflation Arrives...!

As India celebrates its first test match victory in 33 years against New Zealand in their own backyard, the year 1976 is peculiar to the current economic situation as well. March 1976 was the last time since India faced Deflation. Is the ghost of deflation coming back to torment us.? Lets find out..




Deflation in simple terms means reduction in price level over a period of time. Deflation is negative growth in the yearly inflation rate. For example if the price of commodity 'X' was Rs.100 a year ago, the same commodity is available for lesser than 100 say 95 Rs. Now you may think that this is favorable since prices fall but this is a double edged sword. Since the prices decline, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity - contributing to the deflationary spiral. This idles capacity, so investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral and it could destroy a country's economy. India would not be able to acheive the already low GDP growth rate of 7.1% if deflation sets in.



Inflation has tumbled from 12.91 percent last August to 0.44 percent, partly due to a precipitous slide in the global price of oil and other commodities. Deflation in India, a result of the economic crisis and a subsequent cut in domestic demand, is threatening to lower growth in production and investments. Goldman Sachs economist Tushar Poddar says "We think deflation will be a much bigger risk for the economy in the rest of 2009... due to ongoing demand destruction and commodity price collapses" It could last till the end of 2009.

What is the way out..? The Reserve Bank of India should cut interest rates further to initiate purchase. The Government should introduce measures to spur demand and consumption. People should be urged to spend more money rather than holding it. Elections are a good news as far as spending money is considered..!

The reality of Realty..!

In India, the ultimate aim of any earning individual is either to marry off his Daughter or Sister or build a safer future for their childrens. The first thing that comes to mind about a secure future is owning a house. There lies the secret of the success of Indian Realty.
The Indian real estate sector plays a major role in the economy. The real estate sector is second only to agriculture in terms of employment generation and contributes heavily towards the gross domestic product (GDP). Five percent of the country's GDP is contributed to by the housing sector. The real estate sector is also responsible for the development of over 250 ancillary industries such as cement, steel, paints etc. After the IT boom, real estate was considered the heaven for investors. But the times have changed. Many firms are on the verge of breaking down. So whats the Reailty of Realty..? Lets find out..

Foreign direct investment (FDI) in real estate has provided a platform for many players to grow.. The real estate sector, thrown open in 2004–05, saw the FDI picking up significantly between FY 2004–05 and FY 2007–08; it was US$ 38. 71 million in 2005–06 surging to US$ 470.18 million in 2006–07 and rising to US$ 2.18 billion in 2007–08. But oflate. due to the lobal economic crisis, Real Estate is also feeling the heat. Areas like Bangalore, coimbatore, Noida, Hyderabad etc where real estate prices were on a bull run, thanks to the IT sector, are feeling the heat. While pink slips and pay cuts are the order of the day, professionals can very well forget the dream of buying their own houses. In wake of the weakining demand, the realtors are trying tosave their face. Huge debt obligations are likely to haunt many big realty players for most of next fiscal. A relief from the Reserve Bank — allowing restructuring of commercial loans till June 2009 without them being classified as non-performing assets — is not much of a breather. This is the indication of how worse the things are.



Some real estate firms have highly leveraged balance sheets. Unitech, which successfully rescheduled its loans only a few of days ago, has a net debt-equity ratio of 2.1, which is among the highest compared with its peers. The country’s second largest realty player has a net debt (gross debt minus cash) of Rs 9,000 crore (as of November). Bangalore-based Sobha Developers has a net debt equity ratio of 1.8. While that of the country’s largest realty firm, DLF is only 0.6, and has a net debt of Rs 13,340 crore. HDIL has a net debt of Rs 3,598.4 crore while Parsvnath, Omaxe and Sobha have debt in the region of Rs 1,700 crore to Rs 1,750 crore. Debt due for repayment in March is as high as 45% of the total debt for Sobha, 39% for Puravankara, 30% for Omaxe and 28% for Unitech. While the RBI's direective comes as a huge releif, many fear that this might be the silence before the storm. All these companies have large debt obligations in March 2010 which haunts many realtors. People who buy homes for investment purposes are also shunning away from this option. According to Crisil, the investments or offtake from investors have fallen across all urban centres in 2008. Mumbai has seen the steepest fall with investors’ offtake coming down from 30% to 20%, in Bangalore it was down from 30% to 22% and in the NCR and Chennai it declined from 30% to 25%. With the realtors strugling to find buyers for their finihed projects, new projects have almost stalled. They are not able to meet their operating and interest expenses.

But as rescued by RBI this time, will it lend a helping hand in future too..? I am afraid it will not. Because other sectors will get a wrong signal and even the RBI is finding it hard to keep the market up with enough liquidity. The third quarter results show discouraging signs. Very cleverly, the real estate sector seemed to have passed the collapse to the global crisis. They are asking for help from RBI, government and whichever source. They are threatening that without support there would be massive unemployment etc.
With almost no new houses sold, will it be possible for the Realty sector to face the reality..? No prizes for guessing....!

Banking Crisis on the Way..?

Is this the beginning of another crisis in the Banking history..? The Bank of America reported a whooping $ 1.79 billion loss for the quarter ending December 2008. The Citigroup posted a loss of $18.7 billion in 2008,$ 8.3 billion in the last quarter itself this too after receiving $45 billion as Government handouts. Merrill Lynch also reported $16 billion in write-offs. Bank of America has run into losses after 17 years, this shows that the worse is yet to come.

The new fears over the health of the banking sector were also made visible by German giant Deutsche Bank which disclosed that it made a loss of more than $6bn in the final three months of last year. An analyst at Morgan Stanley predicted HSBC may need to raise up to $30bn in a rights issue. That means it has to literally beg for cash in the already cashless market. Citigroup also split itself into two- core and non core banking. This could be a possible sign of Mr.Vikram Pandit's failing attempts to rebuild its capital base. I wont be suprised if Citi Holdings runs out of cash and declares bankruptcy if Mr.Pandit does not sell it off.

Back in India, Standard Chartered Bank, India's largest foreign bank also ran into losses due to its consumer finance business. This made Stanchart to close down its consumer finance business in India. The reason-rising defaults. HDFC bank also seems in a bit of trouble. According to Emkay research, the bank's gross NPAs increased to Rs19.1bn (1.9%)as compared with Rs16.8bn (1.6%) in Q2FY09. These are not encouraging signs. The health of ICICI bank has also come under scanner. Many analyst predict that ICICI may soon reclare bankruptcy. The shares of ICICI are traded at Rs.424 much less than HDFC which stood at Rs.937, SBI which was higher as expected at Rs.1165. But the top brass of the company insist that there is nothing to worry about. Its also a known fact that ICICI has the highest amount of NPA. On the other hand, all Public sector banks are doing well. Infy has also parked its money to PSU banks from ICICI. It is also reported that many other organizations have closed its accounts with ICICI, which is considered the most unethical of all the private banks. But it also remains the fact that ICICI was the bank which brought banking revolution in India with its technology and wide range of services.

Where is the banking sector heading..? World over, banks are showing their employees the exit door because of rising costs and credit scarcity. The umemployment rate is a good indicator of the economy's health. But more important is the health of the Banking sector which are the veins of any country. What would be the future of the banking sector? Would the Goverenment roll out a bailout plan if the fall of ICICI seems certain..? Will the Banking sector crash or will it be a see saw ride..? Only time will tell...!

An End or Just the Beginning..?

What’s the future of Satyam.? Probably no one knows. After the arrest of the Satyam brothers, uncertainty prevails in the minds of its employees. This unfortunate event has changed the way investors look at the ever profitable IT companies. The collapse drained out $27billion of investor wealth. But how was Mr.Raju able to maintain such a big fraud under cover,as an active volcano just about to explode? If prominent sources are to be believed, a brief look at Satyam’s balance sheet would have given many a clue. A very senior executive in a finance role quit just within two months of joining Satyam. The executive is now working with a Mumbai based IT company. According to the CFO of a top tier Indian IT company, “for competitive purposes when I used to analyse their balance sheet, large amount of money in current account did not make any sense. Perhaps it was being siphoned off to other businesses.”


The tax paid or payable is also a good indication of the things to come. Satyam has not paid the advance tax for this quarter. If lesser business was to be cited as the reason, then too it would be caught on the wrong foot as the other three major IT firms had paid their advance tax well in advance. Satyam’s FBT payment in Q3 too was below expectation of taxmen as it paid just Rs 5.5 crore against Rs 25 crore during the same period last fiscal, indicating that the company began to cut cost on fringe benefits extended to its employees. The role of Auditors in this whole case is questionable. With such huge pile of cash, any auditor would have attempted to question the management. Following this, the ICAI has served notice to PWC asking for explanations on the whole saga. Even DSP Merrill Lynch is at its own dilemma whether to proceed with the work entrusted or not. It is reported to have met SEBI officials and told them about large scale accounting irregularities. It told the regulator that it was uncomfortable in handling the mandate.



The question of the hour is what the future beholds for Satyam. Even as Infosys has ordered its HR not to hire Satyam employees, not even the top project managers, people around expect other IT companies to come to its rescue, especially Infosys. The Board was dissolved by the Government and new members have been appointed on its behalf. Even as companies and individuals start lobbying to make it to the new Board, companies such as Lazard Asset Management, LIC, etc hold a considerable stake and are expected to be on the Board. The Government is sure of reaching the roots of the problem. With the arrest of the CFO, things are ought to be clear. The immediate problem for Satyam would be cash. Citi Bank has reportedly frozen 30 accounts belonging to the company. Various banks which have issued credit card to Satyam employees have reduced their credit limits.

What the future beholds for Satyam is really the million dollar question. But with the biggest corporate scam ever in the history of the nation, Satyam can be rightly called India’s Enron. Where Enron deserved its fate, Satyam deserves to be rescued. It was this company that discovered the opportunity in the field of IT. Its fall also sounds a caution for all the corporate firms. I expect many more disclosures of corporate irregularities as even Mr.Murthy described it as “a good signal for other companies”. This brings into question the role of Auditors and the vulnerability of the accounting policies and practices.

The Satyam Saga..!

While ‘Satyam’ means truth in Sanskrit, the company Satyam Computers defeated the purpose of its name, according to many. Satyam Computers is one of the leading software firms in India. With revenues over $2 billion and 52,000 employees, Satyam has operations in 66 countries. It serves over 650 companies around the world. On 16^th December 2008, an uninvited trouble visited Satyam. Its founder and Chairman Mr. Ramalinga Raju decided to acquire two firms belonging to his family- Maytas Infra Ltd and Maytas Properties Ltd for a total value of $1.6 billion. This was to be paid through the cash piled up with the company. The Investors revolted against this which forced Satyam to call off the deal within 12 hours. Questions on the valuation of the deal came out. This feud led four Independent directors of Satyam to resign. Corporate Governance at the company was questioned after this unsuccessful bid. This is after the company has received the Golden Peacock award recently for excellence in Corporate Governance. At the heart of the continued controversy is how a large related party transaction into unrelated and troubled business area such as real estate was pushed through by the company. This was mainly because of the influence of the promoters who had only a 8.6% share which fell ever lower after lenders pledged the promoters shares for loans. Its shares fell drastically both in Indian and international markets.

This is a classic example of the power and role of shareholders in the company. Maytas was said to have extremely good projects in its hands and is a reputed company in the real estate industry. It was agreed to get around Rs.1 crore for every acre of land. But the valuation of this takeover was not done by any big firm as claimed by the company. Many people even questioned the need for such a deal since the synergy between a software company and a real estate company did not match. The secretariat at the Golden Peacock award observed that the company had laudable corporate governance policy when it was instituted by this award. The role of prominent personalities as independent directors has also surfaced. Outsiders can easily be deceived by high profile names on the board. This is not the first time Satyam is in problem. The World Bank had banned Satyam for eight years in October this year stating improper benefits and documentation. In April 2007, a British telecommunication company, Upaid Systems had filed a case of fraud, misrepresentation of facts, forgery and breach of contract against Satyam. These questions on business ethics and Corporate Governance will haunt Satyam for long. Satyam has much at stake. It has built a reputation of being one of the most transparent and well managed companies in India. But has the Board given in to Mr.Raju’s demand and functions just for his family? Is Maytas really worth the deal or is Mr.Raju trying to use the company’s money for his benefits? Only the God and Mr.Raju knows it…!

Yet another cut..!

RBI today cut the CRR and other prime lending rates. The CRR stood at 5% after a 50 basis point cut while short term lending (repo) rate by 100 basis points to 5.5% with immediate effect and short-term borrowing (reverse repo) rate by similar percentage points at 4%. This would mean infusing another 20,000 crores into the economy. Banks are expected to slash interest rates further after the RBI's decision.

After the Indian trade data was released yesterday which pointed out that the economy is more seriously effected than previously estimated, these steps by the apex bank were obvious. This could be seen in the decline of exports and imports.

Exports contracted by 9.9% in November, after declining by 12.1% in October. In the eight months ended November, exports grew by 19.4% to $119.30 billion (Rs5.81 trillion); imports by 33% to $203.64 billion. The trade deficit, exports less imports, for the same period was $84.34 billion, compared with $53.19 billion a year earlier. The RBI is required to do more than just cut these rates. The stock market also reacted to this by closing a mere 54 points up to 9,958 and Nifty ended 13 points up at 3,047.

Meanwhile another news that made headlines was the slash of fares by Kingfisher which were between 21-65%. This is after Jet successfully took advantage of a reluctant Kingfisher which did not reduce the rates at first even after being into an alliance wit Jet. Kingfisher would also offer discounts to its traditional corporate customer base which itself tells how its struggling.

An Array of Opportunities – 2009..!

The Dawn is here… A very Happy and Prosperous NEW YEAR 2009..! Will this year bring with it new reasons to smile? Or will the year come heavily on the markets? What ever it be, we are stepping into an Array of Opportunities. With much optimism, lets start these 365 days looking into what could be (not predicting but hoping) in store for us…
First, on the Indian Economy, with inflation reaching a digestible low of 6.61%, there are reasons to cheer for the Aam aadmi. The centre of attraction would be the growth rate – industrial and overall which is expected to rejuvenate any time after the first half of the year.

With hopes high on the Budget, people can expect a feel good budget this time around too. While the RBI would try to keep the liquidity barometer high, more rate cuts and economy stimulating packages would follow. The Planning Commission estimates a whooping Rs. 46,940 crore bailout and stimulus package. With our honourable PM Dr. Manmohan Singh expecting a GDP rate of 6-7%, it would look achievable (until some dramatic turnaround happens.!) The industrial production is set to improve as the massive 3 lakh crore reach the people.

Second, the Stock Market, which is extremely unpredictable. But ask the people on Dalal Street, they say they are still bullish. But who will win the race –the Bulls or the Bears? There is a mixed view among the analyst and market players over this. The fear of Sensex hitting 6000-7000 is far from over now. With central banks around the globe preparing the stimulus packages and bad news of developed economies coming down, the market is hoping the situation improves as the days pass on. Markets gave a thumb up for the New Year and began on a positive note, Sensex ending 83 points up to 9,652 and Nifty up by 25 points at 2,941. If a strategy note at Morgan Stanley is to be believed, Sensex would hit flat to 8,600 odd by the end of December 2009. It would also depend on the LS elections. Whatever be the predictions, lets be bullish as of now.

The next area to look forward is the Telecom Sector. Introduction of 3G spectrum for the commercial market in few weeks from now would open a new era in the Indian telecom industry. This would mean better voice quality, high speed internet etc for the users and a bundle of opportunities for the telecos to grow. TRAI has proposed to bring down various charges in the New Year, which would mean a 20-30% drop in tariffs. Telecom operates would be seen wooing the customers with lots of offers and value added services. All in all, a good time to own a mobile connection.

Finally, the dream of every MBA students, the Placement and Recruiting scenario. The HRs feel that this is the apt time to recruit the best talents. Placement scenario has been blunt for the past few months ever since the bankruptcy news of the top I-Banks came as a bolt out of the clear sky. Placements in the top B-schools in India were ruled by the financial sector which contributed a hefty 30-40% of the total placements and around 25-30% by IT & ITES sector. In the current situation where both these sectors are finding it hard to survive, the batch of 2009 curiously waits for things to happen. Stories of 100 % placements would be a thing of the past. These young managers would be required to go back to their drawing boards to get their calculations right about the company and industry they want to work for. One must look for careers in the FMCG industry, Management Consulting firms, Telecom sector, Insurance (in India) etc where there is high potential particularly in the phase of recovery from recession. The fever of entrepreneurship is yet to spread but with cheap availability of credit and loads of opportunities, the rules of the game may change.

With hopes fresh in our minds, we enter into a year that would be an eventful and memorable one (positively of course). The challenge is yours; meet it with positive attitude and passion to excel.