A snapshot of the Real Estate sector

The real estate industry in India is currently estimated to be worth approximately US$ 16 billion with a CAGR of 30%. Growth in this sector is driven primarily by IT/ITeS, growing presence of foreign businesses in India, the globalization of Indian corporates and the rapidly growing middle class. The high growth curve in the real estate sector also owes some credit to the liberalized Foreign Direct Investments (FDI) regime in the real estate sector.

Role of FDIs in real estate

The Government of India in March 2005 amended existing norms to allow 100 per cent FDI in the construction business. This liberalization cleared the path for foreign investment to meet the demand for development of the commercial and residential real estate sectors. It has also encouraged several large financial firms and private equity funds to launch exclusive funds targeting the Indian real estate sector.

In 2003-04, India received total FDI inflow of US$ 2.70 billion, of which only 4.5% was committed to real estate sector. However, in 2005-06, post the liberalization, this figure went up dramatically. While total FDIs in India were estimated at US$ 5.46 billion, the real estate share in them was around 16%. The sector emerged as the recipient of the highest levels of FDI equity inflows in 2007-08, with a near five-fold increase over FY07.

India attracted FDI equity inflows of US$ 2,214 million in April 2010. The cumulative amount of FDI equity inflows from August 1991 to April 2010 stood at US$ 134,642 million, according to the data released by the Department of Industrial Policy and Promotion (DIPP). Better to put numbers in billions itself as done above

India will continue to remain among the top five attractive destinations for international investors during 2010-11, according to United Nations Conference on Trade and Development (UNCTAD).

Recent Developments

A recent joint report by Ernst and Young has urged the government to improve the regulatory environment to facilitate real estate development in order to stay ahead in the economic race. Some of the salient proposals of the report are:

• Creation of a regulatory body for real estate: The ministry of housing had issued a draft Model Real Estate Act in September 2009; the purpose of which was to establish a regulatory authority for the sector. The report has suggested that the role of the body should be purely advisory, and should not serve as a hurdle to growth.
• Infrastructure status to housing: Foreign direct investment norms of minimum area and minimum capitalization should be relaxed in case of affordable housing. At present, foreign investors are restricted by a minimum capitalisation requirement of $10 million (around Rs 45 crore) for wholly-owned subsidiaries and $5 million (around Rs 22.5 crore) for joint ventures with Indian partners; and a minimum area of 50,000 sq metres.
• Greater flexibility to foreign investors: According to the report, the three-year lock-in period for Foreign Direct Investment (FDI) in the real estate sector has been dubbed as too tough a restriction to allow the smooth flow of foreign funds. Currently while the original money invested cannot be repatriated before a period of three years from the completion of minimum capitalisation, investors can exit earlier with prior approval of the government through the Foreign Investment Promotion Board (FIPB). This approval is very difficult to obtain, and cases of investors exiting before three years have been very rare. It has also been proposed that greater leeway be given to foreign investors in cases of dispute between residents and non-residents, and the non-resident wishes to exit the project; or where the project could not be initiated due to lack of statutory clearances.

Government Decisions

In September, this year, the government announced that foreign investors in the country’s real estate sector will have to remain invested for a minimum of three years and rejected industry claims about the policy restricting FDI inflows.

According to Commerce and Industry Minister Anand Sharma, foreign investors should be willing to stay invested for longer than three years. The purported purpose of the move is to limit exposure of the domestic economy to external risks and fluctuations. In fact, Sharma pointed out, India was able to come out of the real estate generated global financial downturn quickly only because of its prudent policies in FDI. India’s central bank, RBI too is highly cautious of allowing unrestricted FDI into the real estate sector.

Furthermore, the department of Industrial Policy and Promotion (DIPP) has clarified that the lock-in period of three years will be applied from the date of receipt of each instalment/tranche of FDI or from the date of completion of minimum capitalisation, whichever is later. Previously, it was understood that original investment meant initial investment. DIPP has clarified it implies total investment.

The change could be a boon to at least 30 Indian real estate groups, large as well as small, which had sold put options to foreign investors to bring in FDI through various deals. These put options required the Indian promoter to buy out the foreign investor. But grappling with a cash crunch, low demand and soft property prices, these developers are today not in a position to honour these options. And, even if they can cough up the amount, they want to avert a large payout.

Under these circumstances, if the government spells out that the entire investment of the foreign investor belocked-in for three years, the foreign investor will not be able to exercise the option immediately. This will give several cash-strapped developers time to organise money. However, it will further dampen the sentiments of foreign investors in real estate.

Future prospects

The Indian market has emerged as an attractive destination for foreign investors interested in investing in the retail sector. India was ranked as the fifth most attractive destination for future real estate investments in a list topped by China, according to a latest report of FCCI and Ernst and Young. In such a scenario, given the forthcoming opportunities, policy restrictions would not be the best way to protect traditional retailers.

The government should instead impose regulations such as sourcing requirements, zoning regulations and back-end investment requirements to protect traditional retailers. Furthermore, it should strive to make regulations more investment-friendly, like boosting the availability of liquid vehicles for investment such as REMFs and REITs.

The sector assumes an even greater importance given that real estate is second only to agriculture in terms of employment generation and contributes heavily towards the country’s GDP. In countries such as China, the retail sector has been a major propellant of growth and with a more liberal FDI policy; the story can be repeated in India.

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Strategy Digest Volume 3 (Nov)

New Messaging Platform by Facebook

In what could be a major threat to Gmail and Hotmail, Facebook has announced the launch of a new messaging platform. Facebook will provide an email address reading as [username]@facebook.com and intends to create something called Seamless Messaging.

It will integrate the messages sent on Facebook and via phone (if the phone is integrated with Facebook) under the sender's name. It will also have a history of conversations, and one can continue a Facebook chat over the phone.

Currently, it is too simplistic to threaten a Gmail since Gmail is more sophisticated however; it has the potential to upstage Gmail in future. Also, there is speculation that Facebook might have a Skype (or Skype-like) function along with Seamless Messaging in future.

Axis buys Enam Securities in Rs. 2,067 crore-deal

Axis Bank has purchased the investment banking and equity capital market business of Enam in an all-stock deal valued at Rs 2,067 crore.

Axis Bank can use the brand name of Enam for two years. According to most analysts, the deal has been priced fairly and offers fairly good synergies for Axis Bank, since Axis Bank is strong in corporate banking and debt franchise while Enam is strong in equity capital markets. This transaction will increase the share of Axis Bank in capital market transactions, as Enam was a prominent investment bank.

Makeover for Airtel

Airtel will be revealing its new logo which will lend greater synergy to its businesses the world over. JWT is in charge of the re-branding programme and the cost for the same might be several hundred crores.

With investments in many countries across Asia and Africa, Airtel believes that the current logo is not easily identifiable to everyone. The new logo, which will feature a swoosh along with the brand name' Airtel, will supposedly create a better connect with people around the world.

Applications hold the key for 3G

With the telecom providers having doled out hefty amounts of money for the 3G licenses, there seems to be a consensus amongst the providers that a price war will only harm their ARPUs.

With the first couple of years not likely to generate too much 3G revenue for the telecom providers, it is believed that differentiated products and value added services will be the key to increase ARPUs. Moreover, the recent 2G spectrum allocation controversy has only made the telecom providers more cautious about their margins.

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Growth strategies in the luxury industry: the case of LVMH

The author of this post is Erminia Monzo, an exchange student at IIM Ahmedabad. She hails from the University of Bocconi, Italy.

Growth is extremely difficult to manage in luxury companies, as they have to strike a balance between raking in the profits versus maintaining an exclusive aura around the brand and goods sold. Empirical research in literature shows that multi-brand companies dominate in the luxury industry from a dimensional point of view and all together retain a higher market share than mono-brand companies. Also, there seems to be no significant difference in terms of economic performance between mono- and multi-brand companies operating in different business segments of the luxury sectors. So, why is the general trend in the luxury goods industry towards the consolidation and the promotion of multi-brand conglomerates? The immediate answer lies in the importance of the intangible components of luxury goods: in order to maximize the company dimensions and allow it to achieve a dominant position in the market without destroying the brand equity, companies must accept the limits of brand extension and move to the next step, i.e. brand portfolio; therefore the intangible components strongly influence the decision to grow through the external acquisition of brands because of the need to find a balance between the firm’s necessity to grow and exclusivity, which creates high value for the final customer.

LVMH, known as the luxury industry best player, has managed to formulate and execute this strategy successfully. Headquartered in Paris, LVMH Moët Hennessy – Louis Vuitton is world leader in the luxury sector with a unique portfolio of over 60 prestigious brands. The sustainability of its strategy of growth through brand acquisition is mainly due to the following reasons:

• Ability to grasp the sector specificities of the brand;
• Creation of a balanced and attractive brand portfolio;
• Management of the brand portfolio not just with a logic of maximizing financial results in the short term but also with a logic of creating symbolic value for customers in the medium/long term;
• Ability to acquire the adequate managerial to tools to reach an appropriate balance between brand autonomy and integration, search for synergies and maintenance of the brand identity.

The resilience of the multi-brand strategy during the last financial crisis has shown its capability not solely confined to managing cyclical patterns of luxury goods during good times but also to be able to weather through extreme periods of down turn. LVMH as a group managed to recover from the crisis remarkably also because sales from a division or market could cross-subsidize losses made in another. The diversity of LVMH’s business allowed the possibility of LVMH to free resources to meet new challenges and also take on emerging opportunities whereas other competitors in the same industry were barely surviving. LVMH took advantage of this period to expand into the hotel industry, a move indirectly strengthening specific brands in its portfolio. Also, despite facing a complex market, LVMH has been able to discover the peculiarities of the Chinese consumer by leveraging on its existing brand capabilities and also developing new competences together with local Chinese managers. Up till date, LVMH has successfully managed the acquisition and positioning of the Chinese brand Wenjun, one of China’s top traditional spirits distilleries, because of the organization’s ability to adapt and learn. Accordingly, despite failed attempts at multi-channel marketing via the internet, LVMH shows no slowing down when it comes to e-shops and has recently launched separate e-stores for Kenzo and Loewe, two of the brands it owns. The point here is that, with an era of hyper-competition and rapid change, LVMH as large as it seems, is nimble when it comes to learning, adapting and reacting to contemporary challenges.

Overall, with LVMH’s fundamental values propelling it forward, and financial bottom lines restricting its parameters and overall direction, there is no doubt that LVMH has mastered the art of the multi-brand strategy. Although, this must be said with caution, that this strategy is not for the faint hearted or simply any aspiring conglomerate. Competitive advantages such as material scale advantage, a stellar brand portfolio, balanced categories of goods and a wide geographic exposure are built up over a long period of time, led by a strong leadership.

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Strategy Digest Volume 2 (Nov)

Videocon to reorganize businesses

Videocon, an electronics-to-energy conglomerate, has decided to undertake reorganization to facilitate greater focus on each of its businesses. Videocon has been increasing the number of verticals it operates in, all under the Videocon umbrella.

The consumer electronics business of Videocon, which contributes approximately half of the company's revenue, is likely to continue under the Videocon brand whereas the other business will likely be spun off. Videocon while most likely appoint a consulting firm to assist them in figuring out the best way to reorganize in order to benefit the company and its shareholders.

Harley to assemble bikes in India

In a move that will most likely reduce the prices of high-end bikes in India, Harley Davidson, the well-known manufacturer of luxury bikes, will start assembling bikes at Bawal in Haryana.

The Harley Davidson recognized the potential in India for such bikes in India and said that the growing economy, rising middle class and better road infrastructure makes leisure bikes a good proposition. India is currently the 2nd-highest bike market in the world but most of the bikes are used for commuting purposes. However, the rising number of millionaires in the country has increased the demand for high-end leisure bikes.

Tata DoCoMo prices 3G services aggressively

In a bid to convert many of its 2G customers, Tata DoCoMo has announced an aggressive tariff policy for its 3G services. In the process, Tata DoCoMo has also become the first private operator, and 3nd overall after BSNL and MTNL, to introduce 3G services.

Most of its plans do not differentiate between its 2G and 3G customers as 3G customers will pay 0.66-1.1 paise per call, which is approximate the same as 1 paisa a second paid by the current 2G customers of Tata DoCoMo. Also, for its 2G customers wanting to experience 3G services, they can do so at a nominal cost. Of course, it remains to be seen how the other private players price their services, and these set of prices introduced by Tata DoCoMo could only be transient prices till the competitors set theirs.

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Strategy Digest Volume 1 (Nov)

Can Nokia regain ground?

In recent times, the smart phones and high-end touchscreen phones have dominated the market and much of the market-share has been taken away from Nokia by players such as Apple and Samsung.

However, Nokia is ready to launch new phones which touchscreen facilities, high of design, overhauled current operating system and a new operating system. The new operating system, called the MeeGo, will be launched later this year and promises to be competitive with the rest. Nokia also plans to price its new products aggressively to regain the lost market share.

An example of such a phone is the N8 which is banking on its overhauled operating system, Symbian 3, which is more memory-efficient and can also run more applications simultaneously. It has a 12-megapixel camera and will be priced at approximately Rs. 26,000 competing with the Samsungs and LGs. Nokia wants to build its brand and increase sales through improving user experience and giving them more value for money phones.

Oracle to buy software firm

Oracle Corp. announced that it would be acquiring the Art Technology Group (ATG) for $1 billion. This would strengthen its e-commerce software applications. This acquisition will increase Oracle's retail software portfolio, which also includes Retek, a company it acquired in 2005. This acquisition is another example of a major technology company acquiring other firms in order to diversify its product portfolio.

This deal is considered to be a safe and sound acquisition for Oracle which was reflected in its share price increasing after the acquisition announcement.

SpiceJet plans for expansion

SpiceJet, the low-cost Indian airline, is planning for a huge expansion and intends to spend upto $ 900 million to buy new aircrafts. SpiceJet will buy 30 NextGens from Bombardier Inc. and plans to double its fleet size from the current 22 by 2013.

SpiceJet is looking at taking advantage of the growing aviation sector in India and the growth opportunities available by connecting tier 2 and tier 3 cities. Also, it is looking at entering the international markets where there are few low-cost airlines.

However, the source of funding for this expansion plan is unclear. It might resort to the share plan that it had planned to raise $ 75 million before Kalanithi Maran, the Sun TV founder, came forward and bought a stake in the firm.

BHP Billiton still forced to wait

BHP Billiton, the resources major, is still awaiting a green signal for its offer for Potash Corp, the world's largest supplier of fertilizers, an all-cash $ 39 billion deal.

The Canadian government is still unwilling to let the deal go through although there have been rumours that the government is being advised by bureaucrats to pass the deal.

BHP has currently bid for Potash Corp at $130 per share and analysts expect the offer to go higher before the deal goes through. The deal is expected to help BHP gain access to high-quality resources at a reasonable rate.

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Airline Debt Restructuring Plan

The Indian airlines industry exhibited explosive growth in the period from 2003 to 2007. Thousands of passengers started flying for the first time, drawn by new airlines offering bargain flights around the country. However, the industry was hard hit by the economic crisis in 2007-08. Passenger growth, which was touching 40% at the onset of 2007, went into reverse. Soaring fuel prices in 2008 pushed up ticket prices, which further reduced demand.

The three major players in the aviation sector in India - Jet Airways (India) Ltd, Kingfisher Airlines Ltd and National Aviation Co. of India Ltd (NACIL)—which collectively control 65% of domestic passenger traffic, were the worst affected. The three airlines currently have a combined debt of $13.5 billion (Rs63,315 crore). State-owned NACIL runs Air India. Other than the exogenous factors, poor managerial decisions including predatory pricing by the larger players and underutilization of capacity were prime contributors to the huge debt.

Factors Leading to the Debt

Kingfisher Airlines is labouring under a debt burden of Rs 7,413-crore (as on December 2009). Out of this, Rs 2,099 crore is short-term debt; the remaining amount being long-term debt. Subsequent to its launch in 2005, the first year and a half went quite smoothly for the airline. A lot of Jet passengers shifted allegiance and joined Kingfisher and the company registered rising profits. However, it spent money like water on onboard service and brand building; neglecting costs altogether. Things began to go downhill soon after the airlines a stake in Air Deccan in June, 2007. Not having a CEO further exacerbated the airline’s problems.

2008 proved to be the final straw in its operations, and as oil prices hit new highs, so did the merged entity’s problems. By end March 2009, the airline’s debts had touched over a billion dollars. Senior executives were also at loggerheads with oil companies, vendors and the Airports Authority of India.

Jet Airways is slightly better off than its rival. Although it has a debt of Rs. 14000 crore; short term debts constitute only a small portion of that amount. In 2009, Jet’s domestic revenues were 37% higher and profitability was superior to Kingfisher due to a higher share of full-service carrier operations, while the higher proportion of low-cost operations in Kingfisher’s operations dragged it down.

Furthermore, aircraft ownership is a key difference between the two airline companies. Jet owns 39 aircraft against 21 owned by Kingfisher Airlines. Difference in fleet ownership is reflected in Jet’s higher debt levels. As per Jet’s management, 85-90% of the debt is towards purchase of aircraft at long term interest rates of 5-7%.

In an effort to minimize losses, Jet entered into sale-and-lease-back of its aircraft, or the ability to sell off the aircraft it purchased and continued using them for a rental fee.

State-run Air India, which enjoyed a monopoly in the country till the deregulation of the aviation sector in 1991, is besieged by a debt of Rs. 40000 crore. One of the major factors for this colossal figure is over employment of labour. The airline has a workforce of 31,000; which translates into 230 employees per aircraft. According to international standards, the number should be 100-150 employees for every aircraft.

Another major reason for the spiralling debt are the massive aircraft orders placed by the beleaguered firm with aircraft makers — 68 with Boeing and 43 with Airbus. The orders were placed when the country was beginning to witness an aviation boom, but the figures were overestimated even according to the heydays. The orders cannot be cancelled now; since cancellation entails a hefty penalty, which the airline is ill situated to bear. Poor capacity utilization is another major issue for the national carrier, with over 40% of seats going unoccupied in 2009.

Braving the Storm

In June this year, SBI had approached RBI with a proposal to restructure more than Rs2000 crore of Kingfisher’s debt. RBI declined to clear that proposal as it was not comfortable with the idea of giving any special concessions to any particular aviation company. In an 18 June meeting with bank executives, the central bank noted it would be a moral hazard for RBI to give any regulatory forbearance for any specific company. It was made clear that any regulatory consideration of banks’ requests regarding restructuring guidelines could only be for the aviation sector—and not for any airlines in isolation—in view of the difficulties faced; and provided the banks came together in a consortium arrangement and took a long-term and holistic view on the restructuring.

This prompted the bank to put forward the case of the entire airline industry rather than that of a particular firm, which was approved by the RBI in September. The proposal asks for conversion of the short-term loans into long-term ones and then extending the repayment schedule to nine years, with a one to two-year moratorium. SBI’s investment banking arm, SBI Capital Markets Ltd (SBICaps) is working on the debt recast plan, leading a consortium of 13 banks.

The most significant beneficiary of the recast would be Kingfisher Airlines, and will get a much needed respite from the payment demands of various lenders including oil companies and airports. With the restructuring, more time would become available for repayment of loans and its operations would not be encumbered by the cash crunch. Other options like raising money overseas or diluting equity to raise cash could also be explored. In the fiscal ended March, the airline also reduced its losses to almost half of those posted in the previous fiscal. This improved performance was achieved through better seat occupancy and cost reductions.

While the airlines are talking about cost-cuts and route rationalizations to turn things around, Jet Airways posted a profit in the current fiscal year through a number of innovative strategies. These include improving aircraft utilization efficiency, increasing flights on existing and new routes without adding new aircraft, reducing the weight of flights to scale back fuel expenses, and launching a second low-cost carrier; by converting some of its full-scale flights into a no-frills all-economy service under the brand name of Jet Konnect. Jet Airways has also sought approval from the Foreign Investment Promotion Board (FIPB to raise $400 million via qualified institutional placement (QIP) to repay debt and augment capacity.

Air India’s debt of Rs. 40000 crore is a different story altogether. More than any proposed debt restructuring, measures taken by the government in terms of equity infusion and guaranteed loans would have a larger impact on the public sector carrier. However, the government has hinted that the airline should generate more funds through better passenger yields and cost-cutting, instead of expecting further bailouts.

Is the Restructuring Justified?

In the past, the government has extended support to crisis hit sectors such as real estate and steel on previous occasions, and there is no reason not to provide the same to the domestic airlines. However, the debt recast should come with certain riders. A major cause for the heavy losses was the overcapacity inducted by the airlines and the undercutting that followed.
They should commit to keeping costs under leash and run their operations with maximum efficiency. The debt restructuring also makes sense from the banks’ point of view. Big players like SBI have an exposure of over Rs. 3500 crore to the industry. RBI’s move would help provide relief to banks as they would not have to classify airline-sector loans as non-performing assets (NPAs), giving them an opportunity to contain the growth of NPAs, while airlines would get some breathing space to repay their loans and would not be compelled to raise costly debt to continue operations.

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Strategy Digest Vol 5 (Oct)

Conglomerates now look for brand-holding firms

Several business conglomerates in the country are looking for ways to take care of their generations-old brand names and manage their different brands for different industries. Juggling a wide portfolio of brands and retaining the core identity of the parent calls for more than sound brand management capabilities and a simple brand identity manual. This means a strategic shift in thinking about the brand as a core intangible asset that has to be safeguarded and monetised through a robust mechanism like a brand holding firm. These firms would earn royalty from each of the operating companies using the brand as a shared resource. It is like a licensing agreement within a company. The contract in this case spells out how and where the corporate brand can be used in existing and new business areas. It could also be useful option for family-owned companies where frequent spats can lead to dilution of the corporate brand as members deploy it indiscriminately into new businesses and markets.

As new India strategy, ArcelorMittal to build smaller plants

As part of a new strategy for India, ArcelorMittal plans to begin with, smaller steel plants in states of Jharkhand, Orissa and Karnataka, that could be expanded later, instead of mega units as proposed earlier. This would help them have larger number of footprints and allow for faster execution of plans. Going ahead with the new strategy, the company may also look at acquiring small units in India and was reportedly in talks with at least a dozen firms for the purpose.

Dr Reddy's to enhance OTC presence by marketing drugs for Cipla, Vitabiotics

Dr Reddy's Laboratories (DRL) has entered into an agreement with drug major Cipla and UK-based Vitabiotics to market over-the-counter (OTC) and prescription drugs, besides nutraceutical products, in Russia and CIS countries, adding immediately to its revenues from the Russian and CIS market. There are long-term synergies, as Dr Reddy's has a strong sales and marketing network and our partners have a basket of products already registered and distributed in these markets. The agreement with Cipla will enhance Dr Reddy's presence in the OTC space and in therapy areas of gastroenterology, dermatology and oncology in both Russia and Ukraine.

Corporates look to cash in on growing football craze, Venky's close to a club buy

Venkateshwara Hatcheries, better known as Venky’s, is close to becoming the first Indian company to own an English Premier League (EPL) football club, the 135-year-old Blackburn Rovers. Both foreign football clubs and Indian firms have sought to promote football in India, given the sport’s rising popularity and growing business opportunities. Chelsea FC has been in talks with several companies to promote the game in the hope that India can seek to host the World Cup by 2030. Venky’s move comes after several attempts by domestic companies to own EPL teams. Sahara India Group earlier this year placed a bid, of which they later pulled out, to buy a 51 per cent stake in cash-strapped Liverpool. Ambani brothers Mukesh and Anil have also been keen on owning Liverpool and Newcastle United, respectively, but denied making any bids.

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