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Déjà Vu All Over Again

The real estate sector's current fate is reminiscent of the dot-com bubble of yesteryears

The underlying foundations of the great Indian growth story rested on our impervious fundamentals. Facts, figures and realities, all of these were supposed to catapult the Indian economy into the double digit growth trajectory. Perhaps, everything was on the right track and the case was well advocated by the spin doctors. But as they say, when everything's coming your way, you're probably in the wrong lane…

In a matter of just a few weeks, the growth story, which was supposed to be intact, was in remnants; it has turned out to be nothing more than an entertaining story or piece of information of uncertain origin that was circulated as to be true. In other words, the story turned out to be an urban legend. This sudden cascade of the Indian economy bears a striking resemblance to the fall of the mighty Titanic.

The situation in January - "So this is the ship they say is unsinkable. It is unsinkable and even God himself could not sink this ship."

The situation in February - "From this moment on, no matter what we do, Titanic will founder." "But this ship can't sink!" "She is made of iron, sir. I assure you, she can. And she will. It is a mathematical certainty."

Yes, the ship has capsized and the rats are not yet finished leaving the sinking ship. Rats (read, FIIs) have pulled out $6.3 billion in the first six months of 2008. The billion dollar question that is doing the rounds is - How deep is the cut? Is there more pain left in the market? Has the market bottomed out? Everybody says valuations are cheap, yet no one wants to invest…!

To arrive at a conclusion as to where the bottom is, we revisited the nearest bubble burst - the 'Dot-com bubble' in the year 2000 and analysed the extent to which companies were smacked.

But first of all, let's define, what exactly is a bubble? When you have an era of total participation - an era in which people suspend all logic, become part of the crowd and start buying things just because they are rising up, you have got a bubble in the making. And there are only two ways a bubble goes down, you let the air out of the balloon and it pops or you just slowly let it all out. However, in one way or the other, the air has to come out.

The 'Dot-com bubble' was a speculative bubble covering roughly the period between 1995 and 2001, which climaxed on March 10, 2000 with the NASDAQ peaking at 5132.52, during which stock markets saw their value increase rapidly from growth in the new Internet sector and related fields.

Infosys Technologies - the most established firm of that time, and even today, touched a high of Rs 1,598.72 on March 7, 2000, but couldn't withstand the technology jitters, the epicentre of which was in Wall Street, US, pretty far off from the Dalal Street. The Indian IT stalwart dropped to an unbelievable low of Rs 300 on October 8, 2001, a cut of 80-85 per cent from its highs. The BSE IT index, which touched a high of 8613 in February 2000, crashed to a low of 864 in November 2001, which is a drop of 90 per cent.

Similarly in the US, Yahoo, one of the few Y2K survivors touched a high of $118 on January 3, 2000 and after the burst, plunged to a low of $8.00 on September 2001, which is a cut of over 90 per cent. The point to note here is the magnitude of the fall after a bubble burst.

So, if the past bubbles are any indication, the current one's aftermath will be more painful and will be a more prolonged one. Not to mention that the overall situations today are far worse than what they were in 2000.

The sector that has been butchered the most in the current stock market turmoil is the real estate sector. The stocks in this sector have dropped by as much as 60-70 per cent. The BSE Realty Index, which will be one year old by the time this magazine reaches you (the index was launched on July 10, 2007) rallied 85 per cent from its initial closing value of 7377 to 13647 as on January 14 2008.

But after this current global meltdown, which is showing no signs of fatigue, since it has many dimensions to it; the BSE Realty Index was down 69 per cent, at 4215 as on July 01, 2008. So you know now that all the air is not out of the balloon, yet.

Hence, if one were to ask us - is the worst behind us for the real estate stocks? The answer is a clear 'NO


First, let's take a look at the externalities. Both interest rates and Inflation are playing spoilsport and have hit sentiments badly. The inflation at 11.5 per cent and the interest rate (repo at 8.5 per cent) combo has literally torpedoed the economy and the real estate sector in particular. And with pundits predicting a double digit figure for interest rates as well, it's only a matter of time before the other shoe also drops.

Many in the industry feel that notwithstanding the final verdict on the extent of global economic slowdown and recovery of financial institutions, real estate players in India may continue to face liquidity problems in the near future due to the global credit crunch and unfavourable stock market conditions for raising capital.

Now let's take a look at the real estate companies. The Fear Factor that hounds real estate companies is that these companies are relatively new to the stock market gyrations.

Look at the entry of these real estate companies - Kolte-Patil Developers, Purvankara Projects, IVR Prime Urban Infrastructure Developers, Omaxe, HDIL and a lot of others - all of them made inroads when the great Indian bull run was into its final leg. All of them got listed in the second half of the calendar year 2007, which was the period characterized by 'irrational exuberance'. So you really don't know how safe and sound the hands that hold these stocks are. As Buffet says, only when the tide goes out do you find out who's been swimming naked. Well, in this case, quite a lot of them.

DLF - the real estate Goliath was mowed down to Rs 370 from an all-time of Rs 1225, down 70 per cent. The stock price of Omaxe dropped to a low of Rs 120 from a high of Rs 613, down by 80 per cent; HDIL - the sponsors for Kolkata Knight Riders (IPL), might have to find sponsors for itself, as the stock tumbled by 77 per cent, and the story goes on and on. Some of them might survive the shipwreck, but some of them might not. (see table)

The Real Picture
Company  Closing Price*  52-week high  Date
Akruti City 665.52 1399 23-Jan-08
Anant Raj Industries 125.35 394.95 15-Jan-08
Ansal Properties & Infra 61.25 469 13-Dec-07
DLF 369.1 1225 15-Jan-08
Housing Dev. & Infr. 338.6 1432 01-Oct-08
Indiabulls Real Estate 249.95 847.8 01-Aug-08
Mahindra Lifespace Dev. 405.35 907 01-Feb-08
Omaxe 120 613 13-Dec-07
Parsvnath Developers 115.05 598 01-Jul-08
Peninsula Land 49.3 167.6 13-Dec-07
Phoenix Mills 140 560 17-Dec-07
Puravankara Projects 164.7 535 13-Dec-07
Sobha Developers 263 1060 16-Oct-07
Unitech 161.75 546.8 01-Feb-08
* July 1, 2008

Past analysis of the bubble collapse shows stocks punctured by somewhere between 80-90 per cent. So if that is the yardstick, it implies that there is more pain left in the market and especially in the real estate stocks.

Just how many of them will actually board the lifeboats or will a Jack Dawson aka Leonardo DiCaprio come to their rescue, or will they have to wait the way Nikkei is waiting, after touching its lifetime high of 38,916 in 1989, we don't know. What we do know is that all is not over yet

Exclusive stocks, inclusive trouble
Company  Closing Price  52-week high *  Date
ACC 505.15 1314.85 16-Oct-07
Ambuja Cements 73 160.9 04-Dec-07
Bharat Heavy Electricals 1356.1 2925 07-Nov-07
Bharti Airtel 706.9 1149 10-Oct-07
Cipla 206.35 233.8 23-Apr-08
DLF 369.1 1225 15-Jan-08
Grasim Industries 1752.4 4074 29-Oct-07
HDFC Bank 965.25 1825 14-Jan-08
Hindalco Industries 134.75 223.35 15-Nov-07
Hindustan Unilever. 197.65 256 08-Apr-08
Housing Dev. Finance Corpn. 1838.75 3257 09-Jan-08
ICICI Bank 589.1 1465 14-Jan-08
ITC 183 239.45 08-Jan-08
Infosys Technologies 1717 2140 10-Oct-07
Jaiprakash Associates 134.85 510 04-Jan-08
Larsen & Toubro 2142.35 4670 01-Nov-07
Mahindra & Mahindra 447.55 872 01-Jan-08
Maruti Suzuki India 571.5 1252 29-Oct-07
NTPC 153.15 291 15-Jan-08
Oil & Natural Gas Corpn. 793.8 1386.9 02-Nov-07
Ranbaxy Laboratories 506.65 613.75 19-Jun-08
Reliance Communications 395.9 844 10-Jan-08
Reliance Industries 2044.15 3252.15 15-Jan-08
Reliance Infrastructure 701.35 2631.75 10-Jan-08
Satyam Computer Services 432.3 544 30-May-08
State Bank Of India 1025.3 2396.54 14-Jan-08
Tata Consultancy Services 847.7 1200 26-Jul-07
Tata Motors 408.5 840 12-Oct-07
Tata Steel 697.7 1048.84 26-Oct-07
Wipro 414.75 552 27-Dec-07
* July 1, 2008