Economy News Notes

Don't bail out

They found it profitable when the going was good and there were fewer competitors. Now that competition is tight and airfares cannot be raised at will, the business model, financial management, and operational efficiency make all the difference to success or failure.
In the case of Kingfisher, the entire industry knew that the crisis was imminent. Salaries to staff were being delayed; aviation fuel bills were not being paid on time; dues to the Airports Authority of India and the new private airports were also mounting.
Kingfisher would like its passengers and the authorities to believe that the ongoing cancellations are on account of “route rationalisation” and “reconfiguration of aircraft for full service market.” The management is laying the blame on oil prices, high taxes imposed by the States, the fall in the value of the rupee, and the operation of services on “non-profitable routes.”
The time is ripe for a review of the Civil Aviation policy. A major decision on aviation policy relates to FDI in the industry.
The time has come to make a clear and transparent decision on FDI in an industry that has acquired considerable popularity among the travelling public but needs to get its house in order.

Economic slowdown and a rating downgrade

The most conventional way of gauging the slowdown in the economy is to look at the downward revisions in the GDP forecasts for the year.
The most optimistic of the official forecasters has pegged economic growth at no more than 7.7 per cent for 2011-12. Chances are that there would be further downward revisions as the year proceeds.
In India, apart from the CSO's national income statistics, the Reserve Bank of India's growth forecasts are also keenly watched. The Prime Minister's Economic Advisory Council, headed by C. Rangarajan, through its half yearly reports on the economy, is another authentic, purveyor of economic statistics, including those on growth.
Reinforcing the perception of a slowdown are data emanating from individual sectors that have been released recently. As much as the GDP forecasts, these count. After all, sectoral declines do impact on the macro economy. Besides, they may serve as early warning signals of the risks ahead.
On a year-on-year basis, exports have grown by 10.8 per cent, the slowest in two years.
Clearly, the sharp demand contraction in the principal export markets, the U.S. and Europe, is beginning to impact on the trade figures.
The annual target — fixed in more optimistic times — is $300 billion. Exporters received an incentive package from the government recently to help them tide over hard times.
Apart from the recession in the U.S. and Europe, exporters have had to reckon with some unfavourable macro variables such as high interest rates and until a few months ago a strong rupee.
Ironically, the sharp depreciation in the home currency, it is claimed, has not benefited the exporters either. Many of them, including their bankers, were caught unawares and could not manage their forex risks on time.
Equally significantly even as exports are on a declining trend, imports have remained high. In the first six months of the year, imports have gone up by 31 per cent to $273.5 billion.
The trade deficit has touched $93.7 billion at the end of seven months.
The upshot is that the widening merchandise trade deficit will make it difficult to contain the current account deficit within a comfort zone of, say, 2.7 per cent. (As estimated by several experts).
This means that the economy will continue to be dependent on volatile capital flows for bridging the balance of payments. An economy slowing down is less likely to attract the right kind of capital flows.
There are other indicators of the slowdown. Tax collections, both direct and indirect, are lower.
The Index of Industrial Production itself grew at 1.8 per cent, its lowest in two years.
Moody's, one of the top three rating agencies, downgraded the outlook on Indian banks from stable to negative. The argument is that as the economy slows down, more bank loans will become bad.
Moody's action has been criticised for being hasty and not taking into account the inherent strengths of India's largely government-owned banks, which, unlike their better known peers in the developed world, acquitted themselves creditably during the global financial crisis, no doubt backed by sound regulation.

Private equity players bet on realty sector

Real estate private equity (PE) players have become a part of growth story since their entry into India in 2006. Their investment went up to $7.6 billion within a year from $1.2 billion.
The investment into the Indian real estate was primarily due to the futuristic view adopted by the PEs and developers during the peak period. Investors from the U.S. and the U.K. lined up to India to invest in the real estate sector as they felt that India was a stable country. But subsequently global economic crisis has resulted in slowdown in investments.
With FDI (foreign direct investment) in place, small developers, too, are now able to take up large projects. Developers either enter into agreement with PEs as joint venture partners or let PEs take up stake in their land bank by creating a special purpose vehicle for a particular project.
Urban housing in India is a trillion dollar opportunity over 2011 to 2026. It, in fact, has the strength to push the GDP (gross domestic product) growth by another 2 percentage points and seek the much wanted 10 per cent rate of growth.
about $15.8 billion has been invested from 2006 till date on various types of assets. Of which, $2.7 billion went to residential projects and $2.4 billion to township projects.
During 2011, Hyderabad attracted the highest investment of $190 million followed by Chennai $143 million, NCR (national capital region) $66 million and Bangalore $22 million
Globally, return on investment for private equity firms averages around 16 per cent. Accounting for risk associated with emerging markets like India, international investors seek 20 per cent return.
Weak governance, financial mismanagement, lack of transparency, execution capability of developers, market absorption, over-valuation of the project and malpractices are way too common in real estate sector for private equity players to come in and feel comfortable.

Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange.
Among the most common investment strategies in private equity are: leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital.
Leveraged buyout, LBO or Buyout refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage. The companies involved in these transactions are typically mature and generate operating cash flows.
Growth Capital refers to equity investments, most often minority investments, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business.
Venture capital is a broad subcategory of private equity that refers to equity investments made, typically in less mature companies, for the launch, early development, or expansion of a business. Venture investment is most often found in the application of new technology, new marketing concepts and new products that have yet to be proven.
Distressed or Special Situations is a broad category referring to investments in equity or debt securities of financially stressed companies.
Secondary investments refer to investments made in existing private equity assets. These transactions can involve the sale of private equity fund interests or portfolios of direct investments in privately held companies through the purchase of these investments from existing institutional investors