July 2007 | Team Chankya | +91 44 2454 1111 Volume I Issue IV

Chanakya
Valuable Indian Real (i) ty Contents
With yields between 30% and 40% during the past two years, India's real Special Interest Articles
estate industry has been the toast of global investment funds. According to
Valuable Indian Real(i)ty 1
the Wharton Business Outlook the expectations for future returns have been
The Future Buildings 2
sharply reduced to between 12% and 20% over the next few years. To the
many foreign investors, who flocked this dark horse, it means having to weigh Competitiveness of Indian Maritime
Indian real estate opportunities against deals that offer comparable returns Sector – Part I 4
in other emerging markets. This is apparent from the fact that only less than
US$1 billion came directly into India for real estate purpose last year out of Snippets
the approval of US$15 billion as per Trikona Capital, an equity firm based Port Snippets 2
out of London. Green Initiative in IT 3
Economic Snippets 4
As per the report of Trikona Capital, till April 2007 around 12 companies
Team Chanakya 4
raised about US$2 billion in London’s Alternate Investment Market (AIM). All
most all excepting Unitech Corporate Parks are quoting at considerable
discount to the issue price. Even in the case of Unitech the appreciation is
around 3% only against its issue price of 93 pence. What does this show? It
shows a relative disenchantment of the investors towards the real estate
market.

Is India’s real estate market as bad as the AIM imagines? Let’s do a small
math. The P/E multiple of BSE is 17 from 1997-2006 and has been growing.
The P/E multiple touched a high of 19 in the early 2007. This means that the
price of today should be less than 17-19 times the future earnings of the
property for it to be more attractive else the interest will kill the principle.
Having this as the basic assumption the following can be inferred.
 of capital at 16.5%. Now let’s plug the
The formula that I coined is numbers

2
P/E = 1/ (K-G) P/E = 1/(16.5-7) = 1/9.5 = 0.10 i.e our P/E
works out to 10 times. At 10 times P/E a
Where property that earns a rental return of
Rs.7000/- per month (current prevailing rent
in Velacherry for 900 ft2 apartment, as per
P = Price of the Property, E is the
Hindu Property Plus) and an yearly income of
earnings, K is cost of capital and G is
Rs. 84,000/- can be valued only at
the growth rate. Rs.8,40,000/-. At a capital value of Rs.6000
The real GDP is growing at a rate of per ft2, a 900 ft2 flat in Velacherry would
8% and inflation is currently at 6%. cost around Rs.54,00,000, at a P/E multiple
Discounting the inflation the G can be of 65 times which is absurd.
positively taken as 7%. This is the most
positive view. Interest costs are 11.5% If the property is costing anything more than
and take 5% towards upkeep cost this Rs.8,40,000/-, then it can be considered
as not logical as this will result in the interest
which includes taxes, levies, and
rate (on principle) killing the returns. This is, as
depreciation charges (very positive,
stock market rise, would be temporary till the
this will actually be more). This puts cost logical price is arrived.

ARE WE TALKING ABOUT A BOOM OR BUBBLE? THE FOREIGN INVESTORS HAVE

SHOWN THEIR SCEPTICISM IN THE INDIAN REAL ESTATE STOCKS IN THE AIMs.

Maritime Snippets The Future Buildings ‘Green Way’

• Gross Registered Tonnage Traditionally Indians has built some of the massive structures which are highly energy
efficient. The massive Fatehpur Sikiri is one fine example of an energy efficient city
in India is 6.8 million built in the 17th Century. With its fully landscaped gardens, shaded arcades, light
finishes, thermally massive walls, flowery designed jolly windows for ventilation to
• It is the largest merchant control daylight and the two layered marble bed with water flowing underneath to
keep the emperor cool in the scorching summers, this city can be a darling for the
shipping tonnage in the environmentalists. Down the years we have forgotten this wisdom and have been
developing world and is 17
th constructing modern buildings which are nothing but energy guzzling machines in their
intensive power consuming air conditioning and lighting to meet our thermal and
largest in the world visual comforts.

• Indian ships carry 30% of World over environment is taken very seriously and Europe and USA has formulated
the energy efficient building codes which are statutory. The adoption is so stringent
the total imports and that in Europe even residential buildings are graded according to their energy
efficiency and the market price of the building is determined by the rating to which
exports in India
the building belongs to. For some time, through United Nation Framework Convention
on Climate Change(UNFCCC) and Climate Change Convention (CCC) and various
• US$ 4.5 billion required to other forums, the developing countries, especially China and India is been
improve the minor ports in pressurized to adapt to these standards. Having said that, these are standards that
make the country and the citizens to be the environmentally responsive global
India. citizens. India on 3rd June declared its Energy Conservation Building Code 2007 in
line with the appliances labeling policy.

India is seen as a fast emerging global business giant. In the year 2006-07, India
built around 450.95 million ft2 of commercial and residential space and this is
growing at the rate of 7% annually. The water and electricity demand per year is
increasing by 5.4 billion kWh and 450 million m3 respectively. The share of
electricity consumption of large buildings in the commercial sector is currently of the
order of 7 percent of country’s overall consumption, and it is growing at about 12
per cent over the last few years.
 3

Green Initiative in IT

The Infosys Building in Bangalore

implemented the use of timers in
the switching application for the
lights at its multi-level car park,
with the result that the energy
This translates to 200 kWh of annual energy consumption per m2 of commercial consumption, which was initially
space. It is at times like this that the concept of green building appears to be the 25,000 units per month, fell to
only way out. Application of energy efficient building design concepts, 15,000 units per month. The total
techniques and technologies in new constructions can save about 2 billion kWh savings in energy cost is
annually. Appropriate water efficiency measures can save 135 million m3 of estimated at Rs 8.4 lakh annually
water in the building stock added annually. from just this measure.

Considering the global consensus on the climate change and energy agendas a
time has come where we can no longer ignore the benefits of green building
practices that have major impact on environment. The governments world over
are taking serious steps to ensure that including India. The recently launched
Energy Conservation Building Code 2007 and the appliance labeling program
of the Bureau of Energy Efficiency and the rating system for appraisal and
clearance of large construction projects by the ministry of environment and
forests are some of the significant steps towards green buildings.

While providing immense environmental benefits in terms of resource savings,

green buildings also makes great business sense. The ICICI Bank Towers at the
Bandra Kurla Complex in Mumbai was built incorporating `green' building
materials and concepts. Energy efficiency measures include day lighting, green
rooftops, and double-glazed low-emissive windows. The total savings on energy
bills alone is estimated at over Rs.2.6 crores annually. The RBI Central Office
building in Mumbai has been recording energy savings through the replacement
of an old air-conditioning chiller package with energy efficient centrifugal chiller
unit, besides measures such as switching to energy-efficient fittings and lamps
over the last three years. Electricity bills have plummeted by nearly 35-40 per
cent as a result.

Small things like these apart from increasing the profitability of organizations
help preserve the environment in which we all are part off. If anything to go by,
the future organizations need to be environment conscious to exist in the
business.
4

Team Chanakya Competitiveness of Indian Maritime Sector - I

For five hundred years the epicenter of maritime trade moved steadily west. In the
Mr. Subramanyam 15th century, Venice (and soon after Genoa) was at the crossroads of trade, followed
Head Strategic Planning by Antwerp and Amsterdam in the 16th and 17th Centuries, and London in 18th century.
By 19th Century steamships carried West line across the Atlantic to North America and
Mr. D Joel K Pandian in the twentieth century the growth centre of maritime commerce took another giant
DGM, Strategic Planning step towards west across the pacific to Japan and South Korea. So finally, in 21st
century, the growth centre of maritime trade has shifted to China and India.
Mr. Anup Chowdhry Historically, it has been observed that the nations that have industrialized later have
Asst. Manager, SP grown at a faster pace and in a shorter time frame. Western Europe grew with a
growth rate of 1-2% over an extended two and half centuries. Subsequently, as the
Ms. N. Gayathri maritime epicenter shifted to North America, the growth rates inched to 3-4% in the
Secretary late 19th and first half of 20th century. Japan grew with 7-8% in its growth phase in
1950s-60s. The emerging Asian tigers grew by 9-10% in 1980s till mid-90s. China is
growing by 13% since 1990 and India is fast catching up.

What will make Indian Maritime sector competitive?

High Trade Volumes: Currently India handles close to 460 mn tones of traffic at its
ports. India’s 9% trade growth (by volumes) means that its market share in global
trade will increase – given the low growth rates of global trade at 3%. These growth
rates mean that India is well poised to garner about 10% of global trade volumes by
2020 (current share 3.5%).
Availability of Advanced Information Technology: Many international maritime
companies like Maersk, Royal Nedlloyd, and CP Ships have set-up back offices in
India. Together they are employing around 1500 people. Indian IT companies are
employing around 500-odd software professionals on maritime and logistics related
projects for their global clients. By 2010 this number is expected to become around
20,000 generating an output of US 1.0 billion.
High Port Profitability: Current port charges and tariffs have historically evolved on
cost plus basis. In the past, the port operations were inefficient and there was little
incentive to improve efficiency due to cost plus based tariffs. The reduced operating
costs, with the infusion of advance technology would further enhance profitability of
maritime companies. The sector can be highly profitable by focusing on productivity
and efficiency. High profitability of ports (after initial gestation) does make it
attractive, and has witnessed increased interest by new participants. This can, over a
period, give rise to increased competition.
Natural Advantage: Large geography, young population, long coastline: Globally,
India is 7th largest in Area, 2nd in population, 11th in GDP, 7th in electricity generation
and 20th in international trade. It is expected to reach Top-10 in international trade by
2010 and be amongst Top-5 by 2020. India is also one of the youngest nations
indicating that its demography would continue to support national output. The country’s
size is continental and can be compared to Europe in terms of population and cultural
and religious diversity. Country’s 7500 km coastline is also one of the largest in the
world.
Low Manpower Cost with High Availability: India has always been regarded as a
major source of skilled manpower for world maritime sector. India has around 150
training institutes with 4 in the public sector and around 146 in the private sector.
Together these institute produce 11164 seafarers (4,575 officers and 6,589 ratings)
annually. This is the highest in the world over.
Strong Related Service Industries: A developed maritime sector evolves only on a
strong foundation of logistics, and rail-road networks. To reach to the hinterland
interiors, Indian Maritime sector has 63,100 km strong rail network, 100 odd CFS/ICDs
and 2.1mn trucks plying on its roads.

India has all the right ingredients to be a successful maritime nation. In the next
Chanakya further details on Benchmarking of Indian port charges with the global ports
would be done for identifying the competitiveness.