CHAIRMAN'S COLUMN

The RBI announced its much awaited monetary policy today and as expected, has left the key rates unchanged. While this should have brought some cheer to the markets, they plunged deeper into the red not only because the RBI looks set to raise interest rates going forward, but also because the central bank has upwardly revised its target inflation by March 2010 end to 6.5% from 5% earlier. The upward bias in interest rates was apparent from the RBI's move to hike the statutory liquidity ratio (SLR) to 25% from 24%. Having said that, whether interest rates in the future rise or not will depend on whether the inflation continues to rise the way it is doing now, and the economic momentum continues to pick up pace.

Meanwhile, real estate companies are set to face some challenging times ahead. This is because the RBI has indicated its worry about rising property prices by increasing the provisioning requirement for advances to the commercial real estate sector from 0.4% to 1%. This is surely going to hit realty companies that are looking to borrow from the banks to fund their commercial real estate development plans. Not only will the RBI's SLR move action make it difficult for realty companies to get sufficient loans, the higher provisioning norms will also likely raise their interest costs on such loans.

engineering companies in India constantly win large orders and build up large order backlogs thus assuring them of revenues for anywhere between 1-3 years, or even more in some cases. What's more, they never miss a single opportunity to boast of the above fact. Consequently, the valuations that many such companies have been enjoying have been nothing short of amazing. However, even though order backlogs mean that orders have already been placed and there is a high amount of revenue visibility, what those high valuations arrogantly overlook are the inherent execution risk in a project based business.

Cost overruns, delay in financial closures, cash flow problems with customers, time overruns, problems with sub contractors, delays in getting approvals etc are just some of the potential problems that can always turn out to be just around the corner. You wouldn't have to look any further than engineering major Punj Lloyd's September 2009 quarterly results to get a taste of what we are talking about. Or even L&T's for that matter. Moral of the story? There's more to engineering companies than just large order backlogs. --

Thanks & Regards,

Ajit.N,
Area Manager, ICICI Prudential
Kothamangalam
09947060460