Real estate stocks rose on Tuesday, thanks to a huge fall in international oil prices. At the end of trading, the BSE Realty index was up 7.35%. The reasoning of investors is simple: Lower oil prices will reduce the fiscal deficit, ease pressure on inflation and therefore the pressure on the Reserve Bank of India to raise interest rates.
This optimism was reflected in bond yields, which fell to two-month lows.
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A Mint study of the companies that make up the BSE Realty, the Bombay Stock Exchange index comprising real estate stocks, shows that interest charges as a proportion of earnings before interest and tax (Ebit) rose sharply in the June quarter.
As the chart shows, interest charges as a percentage of Ebit had increased from 10.13% in the September 2007 quarter to 12.52% in the March 2008 quarter.
In the June 2008 quarter, however, there was a sudden jump in interest payments, as a result of which interest charges for these companies went up to 19.38% of Ebit.
Most economists do not believe that the central bank will be in a position to lower interest rates anytime soon, especially with the need to tackle inflation paramount among policy makers and with inflation, money supply and credit growth running well above targets.
Nor are interest rates the only issue with real estate companies.
As a research note from HSBC Securities and Capital Markets (India) Pvt. Ltd points out, “Property prices will likely have to come down—not just interest rates—to revive demand. Many investors expect a tapering off of WPI (wholesale price index) inflation from 4Q FY09 to improve business conditions for developers. We consider this to be premature.
Even in an optimistic scenario of 10% income growth and a 200bp (basis points) drop in mortgage rates, we estimate that property prices would need to fall approximately 17-21% to improve affordability.”
One basis point is one-hundredth of a percentage point.
Ranbaxy shares to plummet after Daiichi’s open offer
Delivery-based transactions in Ranbaxy Laboratories Ltd shares plummeted on Tuesday, as investors realized that they would no longer be able to participate in Daiichi Sankyo Co. Ltd’s open offer with shares acquired since Tuesday. The open offer ends on Thursday, and shares acquired on Tuesday would be credited to investors’ accounts only on Friday because of a mid-week holiday. Delivery-based turnover on the National Stock Exchange, or NSE, fell to Rs25 crore, which is just a fourth of the average in the past three months.
Ranbaxy shares last traded at an average price of Rs473 each on NSE on Tuesday and are expected to fall to Rs390-400 once the open offer ends. So investors buying shares at current levels are clearly in a losing position.
Daiichi Sankyo, which agreed in June to acquire 34.8% from Ranbaxy’s founding family, is offering Rs737 per share in the open offer for a fifth of the firm’s capital, about 50% higher than the prevailing market price. As a result, all shareholders are expected to participate in the open offer. Assuming all shareholders tender their shares in the open offer, the acceptance ratio or the proportion of shares accepted in the offer vis-a-vis the shares offered will be about 40%.
Since two out of every five shares held could be sold at Rs737 each, it made sense for investors to buy Ranbaxy shares at about Rs500 even with the knowledge that the value of the remaining three shares would fall to about Rs400 after the open offer. But this could be done only till Monday, when the shares acquired would have been credited before the open offer’s closure on Thursday.
Investors buying at higher rates since have missed the point that the shares will drop to around Rs400 by the time the shares are credited to their account. How can we say this for certain? Needless to say, without the prop of the open offer, the shares are bound to fall. Besides, Ranbaxy’s September futures which expire on 25 September have traded at an average rate of about Rs390 in the past one month, even while the shares have traded at an average of Rs508 in the cash segment during the same period.
With one day of trading left before the open offer closes, investors need to be mindful of the imminent fall in the shares in the cash segment.
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