Investment Ideas

Indian real estate market has been in a booming phase for quiet sometime. The macroeconomic picture of world including India is getting deteriorated. Recently, inflation in India touched 8.75% which is highest in 7 years. Interest rates are also rising in India and every now and then property exhibitions are organized by the reality developers in major metros. These are indications that the real estate prices which were booming for some time in India, will take a knock from here following the US housing market.

Despite this gloom doom scenario for real estate, there has been continuous interest from investors for Real estate focused PE funds in India. According to an article published in livemint in May 2008, the PE firms that enter the Indian reality market expect a 20-25% Internal Rate of Return (IRR). However, similar kind of IRR opportunities are available in some of the Real estate pockets of US also which is an obvious preference over any emerging market due to lesser risk associated in terms of completion of the projects.

Although, the PE firms always lookout for early exit opportunities, the investment horizon has to be increased by real estate focused PE firms entering India. The valuations of Indian real estate companies have come down drastically. Major public companies which attracted PE investments, like Unitech, DLF, HDIL, are trading at their year lows. According to an article in ET, the IRR expectations for PE firms have increased off-late due to increased risk. For long term PE investors this seems to be right time to enter the market as many deals can be struck at more favorable terms. The deal time can also be taken adequately which was not the scene sometime back when the valuations were at peak and the deal closure cycles seemed to have become shorter from an average of three to six months to three to six weeks.

Thus, in my opinion this seems to be the right time to launch India focused real estate fund which can do fund raising in next 4-5 months and evaluate deals after that, as in next 4-5 month the valuations would be looking more attractive. Also, the funds can look for Private Investment in Public Equity (PIPE) deals as most of the listed Real Estate firms in India are currently trading at their year lows giving attractive valuations.

The current race by Indian telecom majors to gain access to African markets and establishing a global footprint seems to have gone reverse way. The talks that were started by Bharti on 6th May 2008 to acquire 51% stake in MTN mainly via debt. However, as the talks moved further, the deal started shaping up in the form of a Merger rather than an acquisition i.e. MTN and Bharti as combined entity instead of two different entities. Lastly, on 24th May 2008, Bharti called off the deal saying that MTN wanted Bharti to be a subsidiary of MTN i.e. MTN acquiring Bharti from what started with Bharti acquiring MTN.

The most interesting part is just two days after this deal was called off, Reliance Communications (RCOM) got into the 45 day EXCLUSIVE negotiations with MTN. Initially, when Bharti was in talks with MTN, RCOM categorically said that they are not interested in MTN as the valuations are pretty high. The talks started with the similar term sheet which the MTN board had presented in front of Bharti (Or was it RCOM which might have provided the term sheet which looked favorable to MTN management before 24th May 2008. Just a loose thought, as the gap between the new negotiations was just two days and RCOM got into exclusive talks which Bharti didn’t). The term sheet states that RCOM will be a subsidiary of MTN (Similar to what was offered to Bharti in the end).

Now, the talks are in a phase where MTN is offering 51 shares for 100 shares of RCOM which values either RCOM at $23 billion which is very low compared to $30 billion current market cap if we value MTN at $45 billion, or values MTN at $59 billion if the value of RCOM is considered to be $30 billion. MTN was vying for 200 Rand/Share compared to Bharti offer of 175 Rand/Share at the time of its talks with Bharti which valued it at $45 billion. Even if 200 Rand/share is MTN’s expectation, the value comes to be around $ 51 billion and thus the value of RCOM that MTN is negotiating comes out to be $26 billion (Significant downside from current market valuation of $30 billion). However, RCOM is trying for a swap of 66 MTN shares for 100 RCOM shares.

A new twist in the tale is entry of Mukesh Ambani claiming that Reliance Industries Limited (RIL) has the first right to refusal in case RCOM is sold off. So if this deal is also called off due to any of the reason, who’s next in line for MTN – Vodafone?

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Today an opportunity in Nifty 2011 Expiry 5000 Strike Put is available. You can write it at 1021 i.e. Cash inflow is Rs. 50,000 per lot and Cash outflow (Margin) is Rs. 50,000 only. Now, I would recommend to write 10 lots of this Put option at 1021. Thus, you will get a cash inflow of Rs. 500,000 on a cash outflow of Rs. 50,000. I assume that the market would not go below 4450 so keep around 10,000 per lot for cushioning the open position if the market goes to that level. i.e. for 10 lots you have to keep Rs. 100,000. These margin can be in the form of Securities also after a haircut.

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Today the Nifty June 2009 expiry, 4700 strike Put option is available for ready trade at 542 i.e. the cash inflow of approx Rs. 27,000 and the Cash outflow for marginwould be around Rs. 32000 as the market is trading at around 4660. Thus, for Rs. 5,000 you can open a position. Right now a buyer for 1000 shares or 20 lots is available at 542 as shown. So if you write 5 nifty put options, your outflow is Rs. 25,000 and the potential upside can be Rs. 135,000 (if u wait till June 2009). I would recommend to write 5 options and add another 5 if the market fall more tomorrow. So just keep some cushion of around Rs. 5,000 for current 5 lots or Rs. 25,000 if the market falls to 4600.