Floating home loan rates rise always know why?

The Indian home loan market, bedazzled by the low rate home loans, forgot to ask one basic question: what is my floating rate loan benchmarked to?

A floating rate loan is one, which is pegged to a rate and should rise and fall with the benchmark, according to the rise and fall of the cost of funds in the country. So far so good, but the most obvious things break down in India because the organised institutions profit from and exploit the financial illiteracy of the retail customer. Here is how benchmarks lose relevance in India.

What is a benchmark? A benchmark is usually a rate that is used as a yardstick to either evaluate performance or set other linked rates in the market. For example, diversified equity funds use the Sensex as a reference point for their funds' performance. A good benchmark, of course, needs to be independent.

This means that the person measuring performance or using it to set other rates should not be able to influence it in any way. Hence, the mutual fund rules have the need for an independently determined benchmark (the market determines the Sensex and not one fund or company) to enable the investors to evaluate performance.

The same rules do not apply in the home loan market. Who, do you think, sets the 'benchmark' prime lending rate that your loan floats against? The RBI? No, it is the banks themselves who fix the benchmark.

This gives them the ability to change the benchmark at will and introduce new ones when old ones stop going their way. For example, ICICI Bank has two benchmarks in operation. Borrowers till early 2004 are on what is called the Internal Retail PLR (or RPLR) and those after that are on Floating Reference Rate (FRR). This, in early 2004, was set 2 per cent lower than RPLR, at 7.75 per cent.

What this means is that instead of passing on the benefit of the falling rates in 2004, the bank preferred to float a new benchmark, that was lower, rather than reduce the old one.

New customers got a market benchmarked competitive rate, and the old customers, who thought their rates would float down, continued to pay more - defeating the very purpose of being on a 'floater'. Today these benchmarks are at 10.25 per cent for FRR and 12.25 per cent for RPLR.

And then there were none. The only banks that tried out independent benchmarks in India were ING Vysya and Kotak Mahindra Bank, and this October, both withdrew these. For Kotak Mahindra Bank, the benchmark was its own one-year fixed deposit rate, along with a regular PLR-based (internally fixed) rate.

The FD-linked rate would truly reflect the cost of funds because a hike in the FD rate would mean that the bank would have to pay its lenders a higher rate as well. Mid-October, the FD-linked rate was recalled. ING Vysya used the three-month FIMMDA-NSE Mumbai Inter-bank Offer Rate (Mibor) index operated by the National Stock Exchange.

This is as independent as a benchmark can get and most countries use a similar inter bank rate as a measuring rod.

Mibor rates have ranged from a low of 5.51 per cent in January 2005 to a high of 8.63 per cent in March 2006, and are ruling at 7.48 per cent today. A loan at Mibor plus 2 would have moved from a high of 10.63 per cent to a low of 7.51 per cent over this time period without the bank being able to influence its movement - up or down. It is indeed a pity that the only truly transparent home loan benchmark in India was discarded before it could become the industry standard.

Though both banks cite customer indifference to the independent benchmark rates as the main reason for dumping these, could it be that these banks were losing competitive margins because of not being able to set the rates as other banks with captive benchmarks were doing?

What now? The market is left with no independently fixed home loan benchmark. Two things can happen - RBI can make it mandatory for banks to disclose transparently their benchmarks like banks in Australia. Or, the RBI can make it mandatory for banks to fix home loans to an independent benchmark, like the Mibor. Outlook Money is rooting for option two.

Till then, carefully look at what your loan is benchmarked to and start engaging with the banking ombudsman in case you are unhappy with the way your bank tinkers with its benchmark.

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Pay more on Tour packages now

 Tour packages this season are set to shoot up by 10 to 15 per cent, owing to an unprecedented increase in demand for hotels and travel bookings.

Despite the tourism season still a month away, the cash registers of tour operators and hotels are already ringing.

On the domestic front, like the last year, Goa leads as the travel destination for Christmas and new year, followed by Kerala, Rajasthan and hill stations in the North and South.

Bookings for Goa have gone up drastically. India's leading travel portal Travelguru said it is handling as many as 30 bookings a day as compared with 5 to 10 bookings it handles in the lean season.

On the international front, Malaysia, Singapore, Thailand, Australia, New Zealand and Egypt score as the most sought-after travel destinations. Cox & Kings, however, is expecting more tourists to visit Dubai, as the Dubai Shopping Festival kicks off in December.

In Goa, the hotel occupancy is close to 80 per cent with a few hotels even levying a surcharge.

"The five-star hotels in Goa have jacked the rates up by 25 per cent, whereas four- and three-star hotels have increased them by 15 per cent. Though the occupancy is not 100 per cent yet, it is likely to go up with the New Year approaching," said Travelguru CEO Ashwin Damera.

However, besides these traditional family destinations, there are other destinations too that people are willing to explore.

"We have come out with exciting packages to Mauritius and Maldives, which are picking up. Indian Airlines has announced that it would start direct Bangalore-Male flights from November with an introductory offer of Rs 10,000. This would make Maldives very attractive. It has a lot of potential as a honeymoon market," said Karan Anand, director, Cox & Kings.

Thomas Cook too is offering new package tours to Turkey, Fiji, Bora Bora and Korea, recording most of the bookings for Turkey.

Star Cruises, on the other hand, is also seeing an upward trend in bookings this season.  In terms of itinerary, its three-night cruise to Kadmat in Lakshadweep has received tremendous response from passengers for this New Year.

"We are expecting more bookings with the numbers picking up as the New Year draws closer. So far, our cruises are doing well and we are positive that it will be better than last year," said Naresh Rawal, senior manager, marketing, Star Cruises.

Star Cruises has revised its itineraries from four nights, two nights and one night last year to three nights, two nights and one night this year and the rates are also lower.

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About Lanco Infratech Ltd. IPO issue offer on 6th Nov

Background:

Lanco Infra Tech Ltd. (LITL) was originally incorporated on March 26, 1993 as “Lanco Constructions Limited” in Andhra Pradesh. On November 24, 2000 the company’s name was changed to present. LITL is an infrastructure development company in India with interests in power, construction and property development.
It has experience in the execution of several power projects, transportation networks, water supply works, and commercial and residential building complexes. The power business is expected to contribute significantly to the income and profits in the near future. The property development business is still in the early stages of growth.
It owns 11 power projects (of which five are in operation and six are under development) with current operating capacity of 149.75 MW in operation and 1,260.0 MW under development. Company’s power assets consist of gas, bio-mass, hydro, coal (indigenous and imported) and wind-based power plants. It also commenced power-trading operations in January 2006.
Various projects executed by the company are the coffer dam for the Tehri Dam project, the Veeranam water supply project, modernisation of an 825-bed hospital for the Indian Navy in Mumbai, a cable-stayed flyover in Navi Mumbai, and construction of the Kondapalli Power Plant and the Aban Power Plant.
In the property business, company owns or have won bids to develop approximately 19.5 mn square feet of saleable area, including a 100-acre integrated IT park and township and a 21.8-acre residential development, both located in Hyderabad.
LITL is coming up with the issue for the purpose of the reorganization and consolidation (started in May 2006) of the power and property development businesses into one company to derive synergies from operating across various businesses in infrastructure development. Currently, it has 19 subsidiaries. Also as part of the reorganization, Lanco Kondapalli Power Private Ltd. (LKPPL) is expected to become a consolidated subsidiary of LITL by the quarter ending December 31, 2006.
Upon completion of the issue, promoter’s holding will get reduced to 75% of the post issue equity share capital from current 93.75%.


Objects of Issue:

Investment in various subsidiaries
Investment in Nagarjuna Power Project
Payment for acquisition of 13.3% equity stake in Aban Power to Aban Ventures
Payment for acquisition of 25.1% equity stake in Lanco Kondapalli to Globeleq


Strengths:

LITL has strong order book of Rs. 16,118.3 mn as of September 30, 2006, of which Rs. 12,299.5 mn (76.3%) represents contracts with affiliates of the company.
LITL’s OPM & NPM have improved substantially in FY06 at 12.2% & 6.2% from 6.9% & 1.8% in FY05 respectively.
Company’s FY06 revenue & net profit was Rs.1471 mn & Rs.91.5 mn where as in Q1FY07 LITL’s revenue stood at Rs.1102 mn & PAT Rs.93 mn (more than full year FY06 PAT).
LITL has entered into strategic and financial partnerships with leading international firms and have strong relationships with leading Indian financial institutions, which help in easy access of funds. In the power sector, it has worked, or are currently working, with Genting Group (Malaysia), Doosan Engineering (Korea) and General Electric Company. For construction projects, it had strategic partnerships with Hyosung – Ebara Company, Voist-Alpine Tech Wabagh (India) and Punchak Niaga Holdings (Malaysia).
Benefits from the use of the Lanco brand. LITL is the flagship company of the Lanco Group. Due to the long-standing history of the Lanco group of companies in India (over 40 years), the Lanco brand enjoys brand recognition in India. Company uses the Lanco brand in each of its power, construction and property development businesses.
Company is present in the construction industry which is witnessing high growth fueled by the large spends on the ongoing infrastructure development projects by the Government of India. Over Rs.60,000 crores of investment is expected to be made in key infrastructure sectors like road, ports, railway and power plants in the next five years.


Weakness:

LITL’s has been witnessing inconsistent revenue since past five years starting FY02. Also, revenues have declined at a CAGR of 4.2% since FY02.
LITL’s had witnessed decline in net profits from Rs.107mn in FY02 to Rs.32.7 mn in FY05, however FY06 witnessed a whooping 180% rise in net profit.
LITL’s debtors/sales ratio has increased from 10% in FY05 to 26% in FY06.
The company has been generating negative operating cash flow for last two years. Cash from operations as on 31st Mar 2005 & 2006 was –Rs.372.59 mn & -Rs.99.65 mn respectively.
Company’s RONW & ROCE has shown declining trend since FY02, from 16.1% &16.4% to 4.2% & 5.6% in FY05 respectively. However, both ratios showed some improvement in FY06 with RONW at 9.6% & ROCE at 6.9%.
Construction companies are highly dependent on timely supply of the requisite raw materials. Also, prices of key raw material like cement are firming up which can have an adverse effect on company’s profit margins.

Valuation:

The company’s net worth as on 31st March 2006 is Rs.954.28mn and book value per share at Rs.15.5 per share (pre equity issue) and Rs.4.3 post equity issue. However in Q1FY07, company’s net worth has increased substantially to Rs.3000.92 mn. On Q1FY07 post issue book value per share is Rs.13.5.Hence, company’s post issue price to book value band is14.8-17.8 times.
Post issue annualized EPS based on 30th June 2006 earnings is Rs.1.67 per share. The shares are being offered in the price band of Rs.200-240. At P/E range of 119-143. The average industry P/E is 39 for construction industry & 11.4 for power industry.

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SBI and ICICI in global banks ranking

The State Bank of India and ICICI Bank, at the 61st and 66th positions, respectively, are the only Indian banks that figure in the global 100 most valuable banking brands list for 2006 published by the UK-based brand valuation agency Brand Finance and The Banker magazine.

"ICICI Bank remains one of the most potential Indian brands to go global," says Unni Krishnan, CEO - India, Brand Finance.

The report is based on the analysis of the world's 500 largest banks by market capitalisation. The top-100 table shows the most valuable banking brands ranked by financial value in dollars. Citi (Citigroup) followed by HSBC bagged the top two spots with brand values of $35.1 billion and $33.4 billion, respectively.

According to a statement by Brand Finance, 'The two brands are good examples of how fragmented and undifferentiated banks have become well-liked and most valuable brands internationally.'

However, only four of the top 100 bank brands, namely HSBC, Citi (Citigroup), Bank of America and American Express, receive triple-A brand ratings (extremely strong brand status). While SBI received a 'AA-' rating, ICICI Bank received a 'AA' rating on par with other international financial brands such as Capital One.

Credit card oriented bank brands such as American Express and Capital One display the highest proportion of brand value to market capitalisation.

"This is because emotional or image-related factors are significant drivers of demand in this sector as customers look for privilege and credibility," said Krishnan.

American Express and Capital One are ranked fourth ($18.1 million) and 25th ($5.7 billion), respectively, despite their relatively smaller market capital in comparison to other banks included in the index.

For instance, American Express has a market capital of $63.89 billion compared with UBS which is at number six with a market capital of ($103.52 billion), but a brand value of only $15.1 billion.

Investment and wholesale banks display surprisingly large brand values.

'This is because banks of this type do not need large retail networks, infrastructure and tangible assets. Much of their value is intangible and the two main assets are key personnel knowhow and the corporate brand itself', says the report.

As many as 11 of the 20 most valuable bank brands are headquartered in the US. Banks that are headquartered in large and rapidly emerging markets such as Brazil and India benefit from increasing business banking activity and the increasing demand for consumer banking services.

The examples are India's State Bank of India ($3.08 billion) and ICICI Bank along with the Brazilian Banco do Brasil ($ 2.3 billion).  However, there are no Chinese bank brands in the Global 100 Banking Brands Index.

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Increase of home loan? Your action plan

Examine your home loan agreement. If your bank uses an internal benchmark rate, you need to be alert. Start by getting a copy of the home loan agreement. If the bank does not provide you with one, insist on it - it is your legal right. If necessary, lodge a complaint with the RBI.

Keep a tab on the interest rate. You need to track the changes in the interest rate on your loan. Says Ian Hamilton, analyst with Australian consumer infomediary Infochoice:

"Don't sit and forget your loans and accounts; review them regularly and shop around, comparing widely. Don't be afraid to vote with your feet and move elsewhere. But more often than not, you may win by going back to your lender and demanding a better deal."

Fend off agent's hardsell. Don't sign a home loan agreement without spending a few days looking over it. Take your time, and don't feel pressured by your home loan agent -for most of us, our homes are the largest single investment we will make. Above all, remember that the banks need us as much as we need them.

The financial logic in favour of buying a home continues to be compelling. But to exploit the multiple advantages to the hilt, the home buyer has to be on his guard while taking the loan. That's the important caveat to the unchanged home truth.

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Home loan rates of different banks

In order to lend you money, banks and housing finance companies borrow from depositors like you and from corporate and government institutional lenders. Obviously, they need to charge you a rate higher than what they pay out. The difference between the cost of their borrowing (also referred to as their cost of funds) and the cost of your borrowing, or home loan rate, is their 'spread'. The higher the spread, the greater their profits.

Floating rate loans. In the case of floating rate home loans, the bank or HFC determines the rate you pay with reference to some benchmark, referred to by different banks as 'prime lending rate' (PLR), 'advance rate', or 'mortgage rate' (see: Owning the Keys to the Treasury).
 

Owning the Keys to the Treasury
Banks	Benchmark	Fixed by	Current benchmark rate (%)	Current floating rate (%)1
Citibank	Citibank Mortgage Prime Rate	Bank	11.5	9.5
HDFC	Retail PLR	Bank	12.25	RPLR minus 2.75
ICICI Bank	Floating Reference Rate	Bank	10.25	9.5
SBI	State Bank Advance Rate	Bank	11	SBAR minus 1.25-2.25
Bank of Baroda	BoB Prime Lending Rate	Bank	11.5	BPLR minus 1.25-2.25
HSBC	Prime Lending Rate	Bank	11.5	9.5
ABN Amro Bank	Mortgage Floating Reference Rate	Bank	11.5	9.5
Kotak Bank	Prime Lending Rate	Bank	12.25	9.25
ING Vysya Bank	Home PLR	Bank	13.5	9.5
1As applicable to new borrowers
PLR: Prime Lending Rate
In all the above cases, the floating rate is revised every three months from the date of first disbursement and it matches the revision in benchmark rate; the benchmark rate is reviewed every quarter (exact date not specified by a majority of banks) and it is at the discretion of banks to revise it or not

Your floating loan carries a rate that is usually upto 3 per cent lower than this benchmark. But that does not mean you are being obliged - this benchmark rate is not the cost of funds for the bank or HFC. It is an internal measure related to the cost of funds.

Nor is there any legal sanctity to the difference between the benchmark and the floating rate. For instance, on 1 July 2006, Standard Chartered Bank had a current home loan reference rate of 12.50 per cent and stated that the floating loan interest will be upto 5 per cent below this. On 31 August, this was 9.85 per cent.

If the cost of funds goes up, banks and HFCs tend to maintain their spread by increasing their benchmark rates and hence your floating loan rates. But the two do not necessarily rise at the same pace or time.

Says Sujon Sinha, head, retail assets, UTI Bank, "When interest rates are falling, a bank lowers the prime lending rate only after the cost of funds falls by 0.50 to 0.75 per cent. But if the rates are climbing up, a bank is prompted to raise the rate for every 0.25 per cent rise in the cost of funds."

Obviously, you do not benefit by this arrangement. Says Harsh Roongta, CEO, apnaloan.com: "Lending rate affects only loans. A far more objective benchmark reference rate would be one that affects a much larger body of parties - for instance, fixed deposit rates, since they also represent the cost of funds for a bank or HFC."

Banks and HFCs even differentiate between existing floating rate customers and new ones. For example, as ICICI Bank reduced its internal retail PLR from 11.50 per cent in 2002 to 9.75 per cent in early 2004, its existing floating rate borrowers saw their loan rates drop by two per cent, but new borrowers received a further one per cent benefit.

Says Sreenivasalu Raju, loan manager at Andhra Bank: "The problem of non-transparent rates is felt by a customer only when the rates fall. A customer does not have an accurate idea of the fall in rates."

The case of Kamal Baldi, 43, illustrates what can happen when a bank follows an internal benchmark. When he signed up for a Citibank home loan in April 2005, it was at 7.25 per cent.

The bank uses an internal benchmark rate, mortgage PLR, and when it revised it upwards, his interest rate moved up to 7.75 per cent without any intimation. In April this year, his loan rate was further revised to 8.25 per cent, though he was informed this time around.

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Buy a house now for these reasons

Given the current situation of high real estate prices and loan rates, does home buying have to be purely driven by emotions or is there an adequate financial logic for purchasing your own home? The good news is that even in this scenario, there exist five compelling reasons why you should buy your dream home.

1. Advantage from tax breaks and inflation

Tax breaks for home loans and inflation's impact on home loan repayments are two factors that continue to work as loyal servants for the home buyer. Under the present tax rules, you can get a tax break on interest repayments for home loans to the extent of Rs 150,000 and on principal payments up to Rs 100,000 per annum.

And, as inflation raises all other costs (and incomes), the real cost of your EMI becomes easier to bear. If you look at a loan of Rs 30 lakh (Rs 3 million) with a tenure of 15 years carrying a 9.50 per cent interest rate, the EMI works out to Rs 31,326, or roughly Rs 375,000 per annum.

After accounting for the income tax deductions thereon, the real cost to your cash flow for the first year would be only Rs 256,000.

Assuming that interest rates remain the same, by the end of your loan period, the 'real' cost of this EMI, after adjusting inflation and deducting tax, will be only Rs 72,428. This is probably the only time you will bless the bites that rising prices take out of money - it works to make your EMI cheaper each year.

2. Rising salaries

Meanwhile, salaries will continue to rise, both in nominal and real terms. According to a recent survey, the wages of mid-level IT professionals in India have risen by an annual average of 23 per cent in the last four years.

For other sectors too, be it new economy ones such as telecom or old economy ones such as FMCG, the salary growth rates have been in double digits. Thanks to these hikes, the average cost of a home has dipped from 11 times the home loan borrower's income in 1997 to 4.6 times now.

Estimates vary, but forecasts indicate that the salary growth is slated to remain in double digits for at least the next two to three years. With corporations increasingly including performance-linked pay in compensation packages besides wealth-creating pay components such as employee stock options, the effective impact of pay hikes will be much more.

3. Longer working lives

Your parents may have retired at 58 or 60, but you are unlikely to hang your boots so soon. Increased lifespans and better healthcare facilities will help you have a much longer professional life than your parents. This means that you will get a much longer period to repay the home loan. This is especially helpful if the tenure of your floating rate loan gets extended.

As the Indian economy grows, an acute talent shortage - signs of which are already beginning to surface - will make it financially tempting for skilled individuals to move on to a second, third and, perhaps, even a fourth career.

This is something that is already happening in the West, especially in the US, where people are increasingly looking at working till age 70. Thus, even if someone is taking a loan at 31 today, it is unlikely to stretch him financially since he will be 51 at the end of a 20-year tenure.

4. Appreciation of property values

As an investment, homes will continue to be as rewarding as in the past. Even if housing prices tumble over the next few years, they will more than recover - this has been their history in modern India.

Urbanisation is bound to accompany our economic progress - 30 per cent Indians will be living in cities by 2010, a figure that will go up to 40 per cent by 2020. Experts expect this to create a long-term housing shortage.

In the next 10-15 years, it is estimated that 85 million housing units will have to built to meet the demand for homes. That's a tall order. Thus, it is reasonable to conclude that the possibility of a few years of drop in housing prices will be dwarfed by the virtual certainty of housing values going up manifold over the lifetime of a typical home buyer.

Some experts are quoting an annual return of 12-15 per cent over the next six to seven years despite short-term dips. If these forecasts materialise, not many would be complaining.

5. Reverse mortgage

The great thing about owning your own home is that if you need the money in the future, you can always unlock its value - even without moving out. With reverse mortgages coming to India, your home can become a financial planning tool for your old age, especially if you have paid fully for it by then.

What is a reverse mortgage? In a conventional mortgage, with every EMI that you pay, your equity in the house increases. Once you have paid up the entire loan to the housing finance company, your equity in the house will be 100 per cent.

In a reverse mortgage you do the opposite. You pledge your house with a financing institution that pays you a monthly amount based on factors like your age, value of your house and so on. Proposals for implementing reverse mortgage in India are being prepared by the National Housing Bank.

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Thinking of Buying a house now

In the bad old times not so long ago, only rich old families owned homes. Salaries were low and loans expensive, costing upwards of 15 per cent per annum. In the early part of this decade, home loan rates dropped sharply, and by 2003, you could get a home loan for as little as 7.75 per cent per annum (floating). Meanwhile, real estate prices had been depressed for five years.

Home buyers' ecstasy . . . Rising income levels and the boom in the information technology and related services sector made it possible for many families to buy homes.

"Sustained growth in the economy coupled with easy availability of home loans led to a huge demand for quality residential projects," says Maj. Gen. (retd) Jayant Varma, executive director (north), Knight Frank (India).

Younger and younger people began putting down money to buy homes, signing attractive home-loan agreements to fund the bulk of their investments. For the next couple of years, things looked great - salaries continued to rise, making EMI payments a breeze.

Inflationary home economics

In 2004, if you were planning to buy a two-bedroom flat in the suburbs of Delhi, it would have cost you around Rs 20 lakh (Rs 2 million). At that time, a 15-year loan would have come at 7.50 per cent. If a down payment of 15 per cent came from your own resources, so that you took a loan of Rs 17 lakh (Rs 1.7 million) to buy the flat, your EMI would have worked out to around Rs 15,759.

Today, the same property would cost you over Rs 40 lakh (Rs 4 million), and a 15-year home loan attracts an interest rate of 9.50 per cent. So, if you were to borrow Rs 34 lakh {Rs 3.4 million (again funding the 15 per cent down payment yourself)} for 15 years at 9.50 per cent, your EMI will work out to around Rs 35,503. This is just the cost of the house, other costs like registration will set you back by a few extra lakhs.

Are Things Going to Change Radically?

Real estate prices. Experts believe that select areas in metros are seeing a reduction in prices. "Delhi, Mumbai and Bangalore are indisputably seeing areas of correction. Property prices in Kolkata and Chennai might see a slowdown in the growth rate soon," says Anuj Puri, MD, TrammellCrowMeghraj.

In Mumbai, prices of residential units in Andheri and Goregaon are 20 per cent below their peak levels. There has also been a correction in Navi Mumbai and other suburbs. In some parts of the Delhi NCR region, prices have sunk by 15-20 per cent. In parts of Bangalore, residential property prices have gone down by 10 to 20 per cent.

However, the correction is not likely to be either sharp or deep - international experience shows us that most rallies in residential property end in a soft landing rather than abrupt drops.

Also, asset prices, including prices of residential units, tend to move in cycles. In India, this cycle has tended to move up for six to eight years before softening for another six to eight years. This particular uptrend is only four years old, so those betting on downward moves in housing may yet see higher prices in certain areas.

Home loan rates. As regards interest rates, they have firmed considerably in the last two years. From a low of 7.50 per cent in 2004, the rate of interest on a 15-year loan had climbed to 8.25 per cent by January 2006. This has now gone up to 9.50 per cent. What lies ahead?

"It is very difficult to predict interest rate movements. Though liquidity is strong now, it would be important to track factors such as inflation, growth rate and money supply to know the trend," says Rajiv Sabharwal, head, retail assets, ICICI Bank. Sameer Kaul, business manager, mortgages, Citibank, believes that "interest rates may continue to have a slight upward bias; however, it is difficult to predict how much higher they can go from here". At the same time, few think that we are likely to see interest rates at the historic heights of the 1990s.

Home buyers' emotion. The way we look at it, trying to second-guess the markets, whether in real estate prices or in interest rates, is a difficult proposition. While the speculator profits or loses directly with the rise or fall in real estate value, for home buyers, the special feeling of owning a house is more important than these notional gains.

Take the case of Neeru Kumari, 27, a Bangalore-based Chinese language specialist. Neeru lived in a rented flat in Bangalore. She calculated that renting was a lot cheaper than buying. Yet, she decided a month back to take the plunge and book her own flat. She made it easier for herself by taking a step-up loan, where her EMI will be Rs 17,000 for the first two years, before settling down at Rs 20,000.

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Find on Top 10 IPOs more

The media and several analysts have been flooding us with reports on the deluge of IPOs and the losses to investors arising from the overpricing of new issues. This scare has led to a proposal of rating IPOs - an untried and questionable idea.

For one, there is no deluge. In the one-year period, only 79 IPOs have been floated raising a meagre Rs 12,898 crore (Rs 128.98 billion).

For another, the analysts seem to forget that IPOs do not operate independent of the secondary market, once made, they list on it and are influenced by it.

For me, efficient IPO pricing is determined by whether an IPO gave the investor an opportunity to exit at a profit and if not, was the reason a crash in the secondary market around the time of listing.

Ten Largest IPOs
Company	Issue Date	Issue Amount (Rs Cr)	Offer Price (Rs)	Current Price(Rs) 19-Oct-06
Reliance Petroleum	13-Apr-06	2,700	60	65
GMR Infrastructure	31-Jul-06	789	210	286
Punj Lloyd	13-Dec-05	642	700	740
Sun TV	3-Apr-06	603	875	1,228
Tech Mahindra	1-Aug-06	465	365	764
M&M Financial	21-Feb-06	400	200	247
Gujarat State Petronet	24-Jan-06	373	27	40
Jagran	25-Jan-06	369	320	320
Deccan Aviation	18-May-06	363	148	107
Gitanjali Gems	16-Feb-06	331	195	221
Ten largest IPOs from Diwali 2005 (1 November 2005) to Diwali 2006 (21 October 2006)        Source: Prime Database

On this parameter, I find that almost all IPOs offered a profitable exit window. Of the 124 IPOs floated between April 2003 and April 2006 - the period of the bull run - as many as 85 were still quoting above their offer prices as on 31 May, 15 days after the crash. And the collective loss on the remaining 39 issues, at Rs 1,324 crore (Rs 13.24 billion), was a fraction of the Rs 25,511 crore (Rs 255.11 billion) gain on the 85 winners.

The top 10 IPOs, even after months of listing, have given a positive return. The only exception - Deccan Aviation - is suffering entirely due to the increasing warfare in the airlines industry.

Significantly, all large issues, which also entail larger number of investors, have done well. In this period, 79 IPOs were floated, to collectively raise Rs 12,898 crore (Rs 128.98 billion). The top 10 IPOs accounted for Rs 7,035 crore (Rs 70.35 billion) of the total amount.'

If these have given positive returns, and as they constitute a major portion of the issuances, the bogey of IPO over-pricing should be laid to rest.

The proof of pricing should lie in only two parameters: the level of over-subscription and the listing price. If both are significantly in the positive zone, the accusation of overpricing becomes absurd.

Lessons to be learnt. Like all mid cap and small cap stocks do not do well and like an investor typically does not invest in all secondary market stocks, all mid and small size IPOs would also not do well post-listing. The investor should do value investing in IPOs, and keep three parameters in mind.

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Invest in these stocks and sectors

The markets are lackluster today due to lack of buying interest. At this juncture, which stocks and sectors do experts feel one should invest in?

Speaking about his top trade for the day Rajat K Bose of rajatkbose.com says, "I would say that one could safely have a look at Asahi India. If it stays above Rs 121-122 range, then it may be heading towards Rs 128-129."

He adds, "One can also look at Finolex Pipes. My target for the day is first Rs 99.75 and if it manages to stay above that, then may be Rs 103-104 could well be reached. So these stocks are looking good."

Giving his picks for the medium term, he says, "Saregama's stock has actually been consolidating for seven to eight trading sessions. After that, this jump has happened and now one needs to watch out for a level of Rs 204. I will be closely watching the level of Rs 204 to Rs 210, and if it manages to get past that, then definitely this stock can give a good medium term upswing."

According to Bose, ONGC is giving leadership to the market. "I was watching the level of Rs 846 yesterday, today that Rs 846 has been crossed and it is trading decisively above that. So maybe it is heading towards Rs 860, which is the immediate target. Of course that can be reached anytime now."

He goes on to say, "After that, Rs 873 would be the next target to look at. Around that level there could be some profit booking because ONGC never sustains two big moves consecutively."

Bose is very positive on Voltas. He mentions, "First the target will be around Rs 110 for Voltas and then the target will be Rs 117. As of now, one should be watching the level of Rs 102 for support and if it manages to stay above Rs 105, then the next target will be Rs 110 and then Rs 117, the chart really looks good, It is a buy here."

Speaking on the banking and financial services sector, he states that Bank of India has been an out performer.

He adds, "The run was pretty much vertical for Indiabulls Financial Services. Yet if it manages to stay above Rs 480, then the next target is Rs 485 and then Rs 496 would be another target to watch out for. Unless and until it falls below Rs 474, it would maintain its strength."

Speaking about which sectors will give a lead to the market Vibhav Kapoor of IL&FS says, "Probably cement could be one sector, which could take a lead. Banking is of course another sector, which could still continue to do very well with benign interest rates."

He is positive on the sugar space. "I am reasonably positive on sugar. Of course, the last few months have been very bad for sugar stocks and they have fallen steeply. The ethanol issue seems to be resolved now and the pricing of Rs 21.5-22 is almost fixed in most of the states. So that will help sugar companies going forward," says Kapoor.

He adds, "Selectively, a lot of benefit over 6-12 months will come from the fact that a lot of these companies particularly in the northern belt are going to start power projects. That will be a big driver over the next two months. So all in all, it's time to accumulate gradually and sugar stocks should give good returns over the next 6-12 months."

Speaking on the auto space, he says, "The four-wheelers and commercial vehicles still look very good. Although prices have run up in some of them, I think one should be looking at every correction as a buying opportunity in them. We are positive on the four-wheelers, both commercial vehicles as well as tractors and passenger cars. But we are not so positive on two-wheelers at this point of time."

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Introduction of Wrap Schemes in indian market

Indian asset management companies are exploring the option of introducing a new product — Wrap — in the domestic market, which is increasingly gaining popularity in developed markets.

Also known as wrap account, the product brings various investment avenues such as shares, insurance, bonds, tax shelters etc, under one roof, even if they come from different providers.

While this proposal is yet to take shape, a representation of the industry has sounded out the market regulator Securities and Exchange Board of India (Sebi) about the plan, sources familiar with the development said.

“The market regulator seemed to be open to the proposal, but this would need the permission of finance ministry, as other regulators (IRDA) also come into the picture,” an industry official said.

In developed markets, wrap account service, which uses a web-enabled software platform to aggregate client investments, involves managing assets within a single portfolio and is investor friendly as an investor pays a fee to the agent based on the value of the assets contained within the wrap.

This is different from the traditional investment method, where an investor pays an upfront charge to the agent on each trade. As a result, agents do not have an incentive to sell a product, which earn them higher commission and at the same time, may be disadvantageous to investors.

This product has a simple cost structure involving a single annual management fee, instead of a range of separate costs such as management fees, investment advice, portfolio management and brokerage commissions.

“Once this is introduced there will be a big change in the way insurance and mutual fund products are marketed and priced. Policy changes in the pension sector will also add variety to it,” the official said.

Wrap accounts have gained popularity in Australia, Canada, New Zealand, the UK and US in recent years, where they now account for 75% of new investment business. The original concept of the traditional wrap account has been extended to creation of mutual fund wrap accounts and ETF (exchange-traded fund) wraps.

Mutual fund wrap products, similar to the concept of fund of funds in investment philosophy, are designed to make investment allocations across range mutual funds, which may cover a variety of asset classes.

Industry officials said, in addition to regulations, the key to the development of the wrap market would be the partnerships and understanding between companies of various asset segments.

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Pay placement tax for IIMs and IITs

ndia's premier technology and business schools like IIMs and IITs, which charge placement fee from companies for campus recruitment, will now have to shell out service tax from May this year, a CBEC circular said on Wednesday.

The circular said these services rendered by the premier institutes are liable for service tax at 12.2 per cent.

Educational institutes like IITs and IIMs charge a fee from prospective employers like corporate houses or MNCs, who come to these institutes for recruiting candidates through campus interviews, it said.

Earlier, there was a confusion whether these educational institutes fall in the category of manpower recruitment supply agency and accordingly, whether service tax can be levied on the placement fee.

Clarifying the exact position, the CBEC circular stated that the service tax was leviable for the activity of manpower recruitment or supply agency only if undertaken by a commercial concern.

Given that most educational institutes do not have profit as their primary motive, they were not covered earlier under the taxable service definition till the amendment was done in this year's budget.

With the enactment of Finance Act 2006, the expression "commercial concern" was replaced with "any person" engaged in the recruitment or supply of the manpower even without commercial concern now comes under the tax net.

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Consider exchange rates while investing

Many investors who hold foreign currency -- let us take the US Dollar in this case -- worry a lot about the 'exchange rate' at which they will get to transfer their proceeds into India and back. What they should, however, be looking at is whether all this 'worry' is worth it, i.e. does the exchange rate actually have a significant impact on the overall returns.

Before we look ahead, let's look into the past to understand how significant has been the impact of the exchange rate (Indian Rupee/US Dollar).

If we take the period starting December 1998 (which is about five months after Russia defaulted on its international debt repayments; the Asian crisis started with Thailand's currency losing its value significantly in July 1997), the Indian Rupee has oscillated quite a bit, but within what is apparently a band of Rs 42.49 per US Dollar and Rs 49.05 per US Dollar.

From point-to-point (December 1998 to September 2006), however, the depreciation in the value of the Indian Rupee vis-�-vis the US Dollar is just, hold your breath, 1.0% per annum (p.a.)! In the same period, the Indian stock markets, represented by the BSE Sensex, returned 18.9% CAGR (compounded annual growth rate). In effect, the impact on returns was an insignificant 5.1%!

Within this period of nearly eight years there are two distinct phases. The first phase, between December 1998 and May 2002, saw the Indian Rupee depreciate by 4.3% per annum. This phase saw a very unstable global environment marked by the Asian crises, the Technology-Media-Telecom (TMT) bubble and the Y2K issue.

During this period, the Sensex yielded a return of 11.5% CAGR. The impact on a foreign investor was a very significant 7.2%, i.e. your return would stand reduced significantly to 7.2% on account on the depreciation in the value of the Indian Rupee.

In the second phase, between May 2002 and September 2006, the Indian Rupee actually appreciated against the US Dollar at an annualised rate of 1.5%.

In this period, where the overall global environment was very bullish and the premium for risk had reduced dramatically, the BSE Sensex returned 26.9% CAGR in Indian Rupee terms; in terms of US Dollars therefore the gain was higher at 28.4%!

What the graph then tells us is that over a longer period of time, the currency impact has been negligible. However, in shorter time periods you could have either gained or lost depending on the timing of your entry/exit.

So, should you pay little heed to the exchange rate when you are investing in India? Let's first list out the key factors that support this view:

One, if the view is that India is likely to grow at over 8.0% p.a. for the foreseeable future and continues to open up the economy from an investment perspective, then the flow of funds from abroad, be it FDI (foreign direct investment -- broadly investment in real assets) or FII (foreign institutional investor -- money goes into buying securities) will continue to be buoyant.

So far, the FII money has dominated the inflows; over time FDI, which is more stable, relatively more predictable, will also pick up. The inflow of funds, will lend support to the value of the Indian Rupee (the foreign investor will exchange his Dollars for the Indian Rupee, thereby driving up the demand, and therefore all else being the same, the value of the Indian Rupee will rise).

Two, growing exports (of both services and manufactured products) coupled with mobilisation of funds from the international markets by Indian companies and remittances by Indians abroad (in China, remittances from overseas Chinese is a big contributor to overall foreign currency inflows) should add to foreign inflows, which again will provide support for the Indian Rupee.

While exports will benefit predominantly from cost competitiveness, the investment opportunity in India will see Indians remit increasingly large sums of money to India.

Finally, over the long-term, a stronger economy should result in a stronger currency.

From what is apparent today, the American economy is slowing down (not to mention that it suffers from critical structural issues including excesses in the real estate market which in recent years has been a key driver of consumption and a burgeoning current account deficit), while India finally seems to have achieved a higher growth trajectory of 8.0% pa or thereabouts (being realistic, we will disregard talk of 10.0% pa growth).

Over time, as the US economy corrects the excesses and the Indian economy gathers momentum, the relative strength of the Indian currency vis-�-vis the US Dollar should improve.

Why a relatively stronger Indian Rupee may not be a reality?

1. First, the eight-year period that has been considered for the study in itself may be too short. If the time period under study is doubled (starting January 1990), then the rate of depreciation of the Indian Rupee vis-�-vis the US Dollar increases dramatically to 6.5% pa. The interest of the global investment community in emerging markets goes through phases.

The reversal in interest, as and when it comes, can often be painful. In present times, there is little risk premium attached to investing in the emerging markets, which simply put, is more a result of too much money flowing in emerging markets rather than a change in the fundamental 'volatile' nature of emerging markets.

As and when the risk premium reverts to the mean, the 'correction' in asset values and also the currency can be significant.

2. Second, even though studies have indicated that the Indian economy has grown irrespective of which political party is in power, it cannot be overstated that many a times the policy initiatives of the government are driven by factors which are other than economic.

Of course, there is more or less a unanimous opinion that the reform process is irreversible. In fact, slow as it may be, the process is chugging along. But concerns remain about proposed policy measures, including job reservation in the private sector.

Then of course, the biggest risk that India runs today is that its coalition government (single party governments do not seem a reality well into the future as of now) will not rise to the occasion and create an environment (read policy framework, infrastructure) where all this feel good about India will translate into actual money flows and therefore growth.

This failure is not without a precedent. This will impact the long-term attractiveness of India as an investment destination.

3. Third, in recent years even as oil prices have risen sharply, the impact on the Indian economy has been surprisingly muted. The reasons are not far to seek. Steady foreign inflows (both FII money and export proceeds) have helped India fund the import of this commodity which now accounts for about 40% of all imports.

4. Then, of course, the government has not permitted the complete pass through of the rise in crude price to the consumer; while a part of this burden has been borne by the government, oil marketing companies too have had to share the losses.

5. Finally, due to some clever accounting jugglery, this 'deficit' which the government has to bear is no longer part of the union budget i.e. the fiscal deficit no longer includes the losses incurred by the government on 'subsidising' prices of petroleum products.

The result is that finances of the central government appear better than they actually are. Historically, a rise in prices of crude oil used to create a flutter; now we are almost indifferent.

However, ultimately someone will have to foot the bill for this subsidy; but in case the price impact is passed through to the consumer, the impact on economic growth too would be felt. This would result in a toning down of near to mid term expectations of domestic growth.

So what should you do?

In our view, the best approach would be to allocate money to India depending on two factors:

a. Your needs which involve an expenditure in Indian Rupees: So if you are planning to retire here or you need to provide for your dependents in India, it is best that you do not pay much heed to the exchange rate and start to transfer funds to India.

b. The extent to which you are comfortable with the depreciation of the Rupee: If you are contemplating investing in India, it would be advisable to factor in a 3% annual depreciation of the value of the Rupee vis-�-vis the US Dollar. The current feel good environment may not last long and it is best that your investments are based on realistic assumptions.

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