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Economy Jun 25, 2012

Smart money is giving realty, aviation, power the go-by

By Sunainaa Chadha

Want to invest right? Or at least not invest wrongly and lose money? The best way to do that is to not listen to smart talk, but follow the smart money. And right now the smart money is avoiding three risky sectors: real estate, power and aviation.

Power and real estate stocks have fallen more than three-four times than the Sensex in the last one year. This might lead investors to think these stocks are now undervalued. Don't be fooled. The lower valuations merely mean they carry higher risk. ING Vysya Bank, for example, is staying clear of these sectors.

While industry experts have raised concerns over the non-performing assets of various banks, ING Vysya has outperformed the BSE Bankex twice over since January 2009. How? By staying away from risky assets, lending to small and mid-sized corporates and demanding hard collateral.

In an interview to The Economic Times, Shailendra Bhandari, MD and CEO of ING Vysya Bank, said the key is to avoid project financing and risk-adjusted returns. "We don't lend to airlines, real estate developers and power sector." And rightly so.

Reuters

Citing a CLSA report, Firstpost had earlier mentioned the real worth of PSU banks may be a mirage as any loans turning bad for them will impact them more than similar non-performing assets (NPAs) with private banks due to their higher leverage. And the worst affected would be Union Bank, Punjab National Bank and several Tier II public sector banks because of their high exposure to aviation and power.

Despite two main airlines, Kingfisher and Air India being down in the dumps, the aviation sector is still posting losses. The Vijay Mallya-led Kingfisher Airlines is down more than half in the last year, while Jet Airways is down 6.33 percent. Spice Jet is the only gaining stock, having risen 20 percent in the last one year. Spiralling jet fuel prices, rupee depreciation, stiff interest regime and intense competition are some of the factors that have kept the profitability of Indian carriers under severe duress.

A KPMG report points out that five of the six Indian carriers have posted losses over the last three quarters - some have not been able to net a profit ever since their operations began. All the three listed carriers have posted consecutive losses for the last three quarters of the previous fiscal, piling up crushing debts.

"Between 2008-09 and 2010-11, Indian carriers, barring Air India, have accumulated losses of about Rs 10,000 crore. And that this is happening despite an over 15 per cent annual growth in passenger traffic points towards systemic flaws in the industry," it said.

Kingfisher Airlines' woes are well-known, having come to such a boil that doubts are being whispered on how long Mallya could remain in the cockpit.

The real estate sector, which is delaying projects, inflating house prices and selling non-core assets to just repay its piling debt, is down 17.6 percent in the last year, compared to the Sensex fall of 6 percent. This means investors in this sector have lost thrice as much as the Sensex. DLF, the country's largest realty player, is down 7 percent in the last one year. A Veritas report claims that DLF's overexposure to Gurgaon is a risk, and that its shares are worth Rs 100 a piece as that market is speculative.

The other realty majors have land banks concentrated in one or two cities, the only exception being Unitech. Foreign direct investment and private equity funding has dwindled and a weak equity market no longer makes IPOs a viable funding option All this, together with the banks' cautious approach, limits fund raising options for the sector.

And finally power, which has created a mess by the inability of power utilities to charge consumers the right price for the electricity they consume. Power sector shares are down 24 percent in the last one year!

According to a Crisil report, the accumulated losses of distribution utilities are estimated to have crossed Rs 2 lakh crore by the end of FY12. That report estimates that as much as a third of the 56,000 mw of new thermal generation capacity is in trouble due to the combined impact of fuel and financial problems. "Had power tariffs grown in line with household expenses, the Rs 88,000 crore loss at utilities in the five years to FY10 would have turned to a profit of Rs 8,000 crore," it said.

Till the government sorts out the policy handicaps in these sectors, real estate, aviation and power are clearly strict no-nos for investors.

by Sunainaa Chadha

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