The subprime crisis

I found a very comprehensive and simplfied view of the subprime crisis...it deserves to be in a blog.

What is a sub-prime loan?

In the US, borrowers are rated either as 'prime' - indicating that they have a good credit rating based on their track record - or as 'sub-prime', meaning their track record in repaying loans has been below par. Loans given to sub-prime borrowers, something banks would normally be reluctant to do, are categorised as sub-prime loans. Typically, it is the poor and the young who form the bulk of sub-prime borrowers.

Why loans were given?

In roughly five years leading up to 2007, many banks started giving loans to sub-prime borrowers, typically through subsidiaries. They did so because they believed that the real estate boom, which had more than doubled home prices in the US since 1997, would allow even people with dodgy credit backgrounds to repay on the loans they were taking to buy or build homes. Government also encouraged lenders to lend to sub-prime borrowers, arguing that this would help even the poor and young to buy houses.

With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw sub-prime loan portfolios as attractive investment opportunities. Hence, they bought such portfolios from the original lenders. This in turn meant the lenders had fresh funds to lend. The subprime loan market thus became a fast growing segment.

What was the interest rate on sub-prime loans?

Since the risk of default on such loans was higher, the interest rate charged on sub-prime loans was typically about two percentage points higher than the interest on prime loans. This, of course, only added to the risk of sub-prime borrowers defaulting. The repayment capacity of sub-prime borrowers was in any case doubtful. The higher interest rate additionally meant substantially higher EMIs than for prime borrowers, further raising the risk of default.

Further, lenders devised new instruments to reach out to more sub-prime borrowers. Being flush with funds they were willing to compromise on prudential norms. In one of the instruments they devised , they asked the borrowers to pay only the interest portion to begin with. The repayment of the principal portion was to start after two years.

How did this turn into a crisis?

The housing boom in the US started petering out in 2007. One major reason was that the boom had led to a massive increase in the supply of housing. Thus house prices started falling. This increased the default rate among subprime borrowers, many of whom were no longer able or willing to pay through their nose to buy a house that was declining in value.

Since in home loans in the US, the collateral is typically the home being bought, this increased the supply of houses for sale while lowering the demand, thereby lowering prices even further and setting off a vicious cycle. That this coincided with a slowdown in the US economy only made matters worse. Estimates are that US housing prices have dropped by almost 50% from their peak in 2006 in some cases. The declining value of the collateral means that lenders are left with less than the value of their loans and hence have to book losses.

How did this become a systemic crisis?

One major reason is that the original lenders had further sold their portfolios to other players in the market. There were also complex derivatives developed based on the loan portfolios, which were also sold to other players, some of whom then sold it on further and so on.

As a result, nobody is absolutely sure what the size of the losses will be when the dust ultimately settles down. Nobody is also very sure exactly who will take how much of a hit. It is also important to realise that the crisis has not affected only reckless lenders. For instance, Freddie Mac and Fannie Mae, which owned or guaranteed more than half of the roughly $12 trillion outstanding in home mortgages in the US, were widely perceived as being more prudent than most in their lending practices. However, the housing bust meant that they too had to suffer losses — $14 billion combined in the last four quarters - because of declining prices for their collateral and increased default rates.

The forced retreat of these two mortgage giants from the market, of course, only adds to every other player's woes.

What has been the impact of the crisis?

Global banks and brokerages have had to write off an estimated $512 billion in sub-prime losses so far, with the largest hits taken by Citigroup ($55.1 bn) and Merrill Lynch ($52.2 bn). A little more than half of these losses, or $260 bn, have been suffered by US-based firms, $227 billion by European firms and a relatively modest $24 bn by Asian ones. Despite efforts by the US Federal Reserve to offer some financial assistance to the beleaguered financial sector, it has led to the collapse of Bear Sterns, one of the world's largest investment banks and securities trading firm. Bear Sterns was bought out by JP Morgan Chase with some help from the Fed.

The crisis has also seen Lehman Brothers - the fourth largest investment bank in the US - file for bankruptcy. Merrill Lynch has been bought out by Bank of America. Freddie Mac and Fannie Mae have effectively been nationalised to prevent them from going under.

Reports suggest that insurance major AIG (American Insurance Group) is also under severe pressure and has asked for a $40 bn bridge loan to tide over the crisis. If AIG also collapses, that would really test the entire financial sector.

How is the rest of the world affected?

Apart from the fact that banks based in other parts of the world also suffered losses from the subprime market, there are two major ways in which the effect is felt across the globe. First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities.

Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and - to a lesser extent - India. Also, since global equity markets are closely interlinked through institutional investors, any crisis affecting these investors sees a contagion effect throughout the world.

Credit default swaps

It is a derivative instrument whereby the holder of a bond buys the instrument to cover the risk of credit default by the bond issuer. As per investopedia, speculation has grown to be the most common function for a CDS contract. CDS provide a very efficient way to take a view on the credit of a reference entity. An investor with a positive view on the credit quality of a company can sell protection and collect the payments that go along with it rather than spend a lot of money to load up on the company's bonds. An investor with a negative view of the company's credit can buy protection for a relatively small periodic fee and receive a big payoff if the company defaults on its bonds or has some other credit event. A CDS can also serve as a way to access maturity exposures that would otherwise be unavailable, access credit risk when the supply of bonds is limited, or invest in foreign credits without currency risk.

Now this means that with the CDS acting as speculative instruments, things can go really bad…and that’s what caused the failure of Lehman brothers.

More research on this in some time..

links: http://www.investopedia.com/articles/optioninvestor/08/cds.asp

 

US government to buy out AIG

http://online.wsj.com/article/SB122156561931242905.html

Thought leadership

I was reading Kumaramangalam Birla’s Viewpoint on Thought leadership in the Economic times this morning, and have come up with my viewpoints on the same. 

Thought leadership comes from those who endeavor to think. It is not just one of the numerous management jargons that echo the class rooms of a B school. We have seen so many concepts coming into foray, but how many of them have come from India? We Indians are busy trying to survive or making money as if there is no tomorrow. Forty years since the IIMs opened their doors, we have come a long way. There is a rising demand for B schools with the prime objective to live a better life, because our government cannot take care of our basic necessities. In our quest for more money, we use management degree as a passport to a better life, not to hone our skills. Undoubtedly this education teaches a lot that can be potentially used in all aspects of life; but how many of us use it? I have seen B school grads doing menial tasks, which even a barely literate person can do. Thoughts (and the capability to think) go down the drain.

Parental and societal pressures have a huge impact on the young minds that are ready to do whatever pays. Why this attitude? That’s because we live in a country sans opportunities. 

I was reading an article that mentioned that a passing out IIM graduate makes more than the director himself. Where can one find serious academicians? There are many capable individuals in this country, but it has to be seen what inspires them! There is hardly anything except prestige, which takes a backseat in this era of double digit inflation. 

That does not mean to convey that only academicians can have fruitful thoughts. Anyone with the right frame of mind can have it. Things will change, but it needs time. What is important for the professionals is to think about what they do and how better it can be done, rather than working like a robot day in and day out.

Taking on the slowdown

We are edging towards stagflation, an unwanted situation of high inflation with stagnation. It had occurred in 1929, and we do not want to see it again. But what is the finance minister doing about it?

“India’s fiscal consolidation has been interrupted by a sharp increase in subsidies, populist budget ahead of elections and an increase in public wage bill. If past reductions in government debt ratios – still well above rating peer group medians – are definitively reversed the sovereign’s local currency would likely be downgraded from the current stable outlook”

- Fitch ratings (July 15, 2008)

The above statement has only brought India’s country rating down to BBB-, the lowest one in the investment grade. A far cry from the desired safe bet, India is moving towards a situation that the hedge funds may not come back to India. The UPA government has acted strongly following its populist sentiments. They have increased salaries of babus, subsidized petroleum products and are now even found to buy MPs to keep their position in the parliament. Clearly we have come to a situation where politics has come to survival, the country’s welfare gets a secondary importance.

What can happen in the times to come? In the space of funds from overseas drying up, capital investments will suffer. India’s borrowing capacity will also be affected with the rising risk of investing in the country. Even terror situation doesn’t help. India seems to be a newfound target of the militants. In this juncture, it may not be good news for the India shining story.

But India will remain an attractive growing market. Corporations will spend heavily on marketing, and will take away the Indian money abroad. ADRs and GDRs will also suffer.

The finance minister and the politicians need to wake up to the fact that petty politics will do more harm than good for the country.

The new IPO norms

As per the new IPO norms laid down by SEBI, retail investors would not
pay the applied amount to an IPO until the shares are allotment. This
is a welcome move, since with maturing markets and expectation of high
listing premiums, a lot of investors tend to put in 1 lakh (limit set
for retail investors); but can expect to be allotted only about 1-10%
of the invested amount, depending on the popularity of the IPO (which
further depends on the marketing strength of the company). Now these
investors have to wait a long time to get their refunds. Further, the
linked accounts are not directly credited, they are paid by cheque
leading to further delays are risk on the part of the investors.

With these norms, the amount would be locked at the bank account of
the investors, and would be available only after refunds are declared.

This process has a lot of operational issues. First, a lot of retail
investors not having a demat account are allowed to invest in the
primary market. This creates problem of traceability. Second, the book
runner will have to coordinate with all the possible banks and their
branches (RTGS affiliated or not) in order to pass on the information
seamlessly. In the event of the inability of the banks to accept such
information, a section of the investor populace will be at a
disadvantage. Third, this process increases the role of the banks as
IPO investment partners. Banks may charge (the book runner or the
customer) for providing such a service. It remains unclear who will
bear the brunt. Fourth, it might be a step for SEBI to move to a
situation of uniform demat account linked savings account. This would
put most of the DPs at a disadvantage.

The online version of demat accounts has not gained enough popularity
due to lack of Internet penetration and lack of working knowledge of
computers among the general population. The above move might make IPO
investment less popular (added the fact, that markets are no longer
performing as before).

The oil crisis

The black gold has once again crept up as the world's greatest crisis of 2008. The rising crude oil prices silently contributing to the higher inflation in most of the developed and the developing world. Its no secret that we are in a situation where the US has shun signs of growth and it is coming mainly from the EMs coupled with rising demand.

Whats the cause? And whats the reason? The economist article gives an interesting view of the politicking around the world, and how politicians are trying to find scapegoats. Menial interests apart, I feel that there is something much more fundamental to the petroleum consumption.

With development comes dependency. The world today is so dependent on petroleum product as its primary source of power that absence of it can actually cause a worldwide standstill. And it is this dependency that the OPEC is taking advantage of. And even if they didnt, it would get increasing difficult to supply oil to the ever increasing world populace. After all, its a natural resource, and is not infinite (though it might seem so).

As rightly mentioned in the article, it is imperative that new oil basins need to be looked for. But they will dry up too. But they will dry up too. It takes so many years for nature to create petroleum..and we humans deplete the resources much faster.

What is needed is are practical alternate energy sources, perhaps coupled with scientific discovery of artificial fuel. It may not be long when we have to get back to bicycles, horses, camels, elephants et al.

Aroop wants to tell you about an article from Harvard Business Review

Hello Aroops Blog,

Aroop wants to share this article from Harvard Business Review with you. Simply click on the link below to be taken directly to the full text of the article.

The Contradictions That Drive Toyota's Success
Hirotaka Takeuchi, Emi Osono, Norihiko Shimizu
Reprint #R0806F

Access this article now by clicking on the link below:

http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/articles/article.jsp?ml_action=get-article&ml_issueid=BR0806&articleID=R0806F&pageNumber=1&ml_subscriber=true&uid=24485505&aid=R0806F&rid=24567727&eom=1

Division of labor

The main focus of Adam Smith's The Wealth of Nations lies in the concept of economic growth. Growth, according to Smith, is rooted in the increasing division of labor. This idea relates primarily to the specialization of the labor force, essentially the breaking down of large jobs into many tiny components. Under this regime each worker becomes an expert in one isolated area of production, thus increasing his efficiency. The fact that laborers do not have to switch tasks during the day further saves time and money. Of course, this is exactly what allowed Victorian factories to grow throughout the nineteenth century. Assembly line technology made it necessary for a worker to focus his or her attention on one small part of the production process.

During my economics classes in school, I remember that one of the disadvantages of such a labor specialization is the inability to look at or gain expertise in anything else. Being a jack of all trades may not be the best thing to happen, but being unemployable does no good either. This article focuses on how the concept is prevalent in today’s corporate world.

When a project is in an initial stage with just a few members, it becomes imperative for each to know the integration points of the other. That’s because there are unknown regions that everyone has to explore, and drive the project to its completion. The organization may face such a situation when it is starting up, it has labor shortages or just that it wants to save cost. In such a scenario, an individual is expected to take up multiple roles. The downside is that this model is not scaleable. With the increase of complexity and size, it becomes important to develop expertise by restricting individuals into their own regions of expertise. And the organization as a whole benefits since they can produce outputs more efficiently and by using lesser overall resources.

For the individual, things might get different. If she takes up multiple roles, the experience widens, and so does her value in the market. It is definitely much more difficult jugging multiple tasks at the same time; but the scope of learning is immense. On the other hand, in a large setup, the individual is lost, has limited expertise; and she might even find herself being unemployable in the market (since the limited experience is not valued enough). Diversifying one’s experience always makes sense for those who want to grow.

One needs to have an insight of the larger picture and the future prospects. Decisions are dependent on the individual’s priorities. If one wants to be valuable, it makes sense to get others do the repetitive tasks, while she learns something new..Call it politics?

I have learnt it the hard way.


Inputs form: http://www.victorianweb.org/economics/division.html

Bol India bol

The TV ad of reliance infocom takes us through the history of telecom in india. There was a time when trunk calls were the order of the day, it was followed by STD, booths, queues and then to expensive calling rates of the cellular phones. Even the constant reduction of the calling rates to 1 Re / min doesn’t seem to be good enough. And so Reliance came out with free unlimited STD to another reliance mobile in the country.

What does this mean to us? I don’t know many people who use 93 numbers, and I don’t think I will benefit by taking the scheme. But who will? Cant discount the long lost lovers who cant get with more of talking. I can even suggest it to some of my friends. Perhaps reliance is trying to woo some GSM customers as well, since Tata Indicom has been offering it for quite some time now.

Why this sudden surge of low margin propositions? This is an indicator that the industry has matured, and can be treated as an FMCG. There is a clear lack of innovation or differentiation in the services offered by the many operators. This morning I read that around 25% of the Indian population is already connected. The growth from here is not expected to be exponential anyway. The original high costs were fallout of initial investments in towers and other infrastructure (which are capital intensive). Now that the golden years are over, the multitude of players can only compete on costs.

3G has not taken off very well in India, primarily due to high costs of usage. Till wireless broadband gains popularity, people will have to make do with GPRS data packets only.

For the heavy talkers, there is good news. Falling rates implies they can talk even more. Bol India bol!!

Business standard article

What does the global delivery model have for the low cost worker?

IT projects have traditionally been priced based on labor hours. Availability of skilled and comparatively labor in a far fetched country has driven IT work offshore. Clients definitely love the presence of the employees at their site, if costs are good enough. This is because it gives them feel more comfortable about the kind of work they are getting.

Hence India and Indians have enjoyed the incoming cash flows over the past decade or so. There are so many who passed out of their engineering colleges, to be lured with the huge opportunities abroad. Many of them, by virtue of being acclimatized with the alien environment, chose to stick on. Going forward they have applied for dual citizenship and a green card.

Water flows from a region of higher pressure to a region where it is low. The flow of money can also be compared to this model. But there comes a time when the speed of flow gets reduced, as the pressures try to reach equilibrium. The real world is much more complicated. But it would not be wrong to use this model to understand what opportunities offshoring can give us.

Undoubtedly, the speed has reduced and the opportunities are not so many. The US growth rate is stalled at 1-2%, while the Indian economy is growing at 9%. There are various sectors contributing to this, and software does not feature at the top. If one looks at the price chart of the various stocks in the BSE sensex in the past 6 months, it is evident that IT does not remain in the top 10.

So does that mean it marks the end of IT? It seems unlikely. Its time IT developed itself into a mature industry. Companies are being forced to be more innovative in their solutions & services. In this effort to make them more wanted, IBM has developed and is strongly focusing on the global delivery model.

The GD model simply means more offshore, minimum onsite. Clients are being made to believe that India has emerged as a favorable destination, and reducing their data privacy and quality concerns.

What does that mean to the employee in the GD era? It simply means lesser onsite, implying lesser good experience, and more offshore. The organizers of the GD party (ie the management) will definitely have a lot to add to their CV, for they are bringing in a new way of doing business.

But for the employee it is bad news. Lesser travel means interacting with the client only on chat, telephone and (where practical), video conferencing. They do not get to know their client, nor do they get to understand their working. More importantly, the ground level workers are shielded from the strategic initiatives, and one often gets to hear rumors (usually bad).

What will happen in the future? If we say that the GD era has arrived, it will translate to cost savings for the client, more revenues for the forerunner of the model, and lack of learning opportunities for the workers.

What must someone in this rut do? They must enhance their skills that will make themselves more valuable. They must make sure they get to meet a client and not take an impersonal view. They must be more innovative to look for things that sell…

For one’s value is determined by what the Market is ready to pay.

Links:
What is global delivery? http://www.offshore-softwaredevelopment.com/global-delivery-model.asp

Global delivery implies stronger partnership: http://www.itbusinessedge.com/item/?ci=16239

Comparison of global delivery models: http://www.forrester.com/Research/Document/Excerpt/0,7211,34317,00.html

Wall Street: Is It Just The Chill Or Convulsions Are Round The Corner?

Received from Tips 4 Trade.com

---------- Forwarded message ----------
From: Tips4 Trade <tips4trade@gmail.com>
Date: Sat, Mar 1, 2008 at 9:50 PM
Subject: Wall Street: Is It Just The Chill Or Convulsions Are Round The Corner?
To: Tips4Trade <Tips4Trade@googlegroups.com>

New York Sank Last Night, Will Bombay Sink On Monday?

Manmohan Singh re-capitalised PSU Banks 15 years ago, and will end his career the same way after the disastorous Budget presented by Chidambaram.

Indian's need to change their lives now-sell all assets, buy agricultural land and liberally borrow from PSU Banks. There is no tax on agricultural income, so income goes tax free. Then after years of making partial bad debt provisions, you will not have to pay-off the Bank Debt.

The Bank bail-out will be funded by taxing Stock market transactions...simple.

In a painful year for Wall Street, even the shortest month couldn't end soon enough.

Stock markets sank on Friday -- Leap Day -- after a new round of credit woes and a painful dose of weak economic reports reignited fears that a recession may be imminent.

The Dow Jones industrials plunged 315 points, and every major index shed more than 2.5 percent. The Standard & Poor's 500-stock index is off to its worst start to a year since 1941.

"The drumbeat of economic news has been unrelentingly bad," said Edward Yardeni, an investment strategist. "The recession scenario is looking more and more credible."

The market was poised for a poor opening after American International Group, the world's largest insurer, posted the worst quarterly loss in company history Thursday night. The Dow was off 100 points shortly after the opening bell.

The sell-off accelerated from there. A bellwether report on Midwestern business activity unexpectedly fell to its lowest level in more than six years. A survey showed consumer confidence at a 16-year low. And analysts predicted that banks stand to lose an additional $350 billion from the subprime mortgage collapse.

The bad news added up, and so did the losses. At the closing bell, the Dow had given up 315.79 points, or 2.5 percent, to 12,266.39. All 30 of its components closed down.

The S.& P. lost 2.7 percent, to finish at 1,330.63. The technology-heavy Nasdaq composite index dropped 2.6 percent, to 2,271.48.

"Fridays have become very difficult days for the markets," said Ryan Larson, a trader at Voyageur Asset Management in Chicago. "Given the uncertain environment, nobody wants to buy into a weekend unless they have good reason."

Shares of financial services firms, an albatross on the market for months, led the losses on Friday. A.I.G. stock tumbled 6.5 percent. Shares of MF Global shed 18 percent after the brokerage firm was hit with downgrades from ratings agencies stemming from an unauthorized trading incident earlier this week.

Treasury yields plummeted as investors flocked to the safe havens of government bonds. The dollar, already at a record low, ran flat against the euro but fell against the yen. Crude oil futures fell back slightly after flirting with their all-time high earlier in the week.

The losses followed declines in overseas markets. The Nikkei 225 index in Tokyo lost more than 2.3 percent, and the major European indexes were down around 1.5 percent at the close.

"Investors try to ignore the underlying trends -- credit conditions and economic indicators -- and jump on anything that says this will go away soon," Mr. Yardeni said. "And then you get hit on the head with the more serious underlying issues in the credit markets and the economy and you realize that the bullish news just isn't enough."

Indeed, the Midwestern business report was only one piece of a host of poor economic news that rattled investors on Friday, underscoring anxieties that the nation is facing one of the worst economic landscapes in decades.

Consumer confidence plunged in February to a 16-year low, according to a survey by Reuters and the University of Michigan, as rising inflation forced Americans to spend more and save less.

Income growth slowed in January and consumer spending was flat when adjusted for inflation, the Commerce Department said. For the first time in at least 50 years, Americans spent more than they earned for the third consecutive month.

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

Nothing in this article is, or should be construed as, investment advice.


What does it mean for us? The Indian Budget coupled with slowing US economy has been construed as a recipe for disaster. The please all budget intends to fund its Rs 60000 crore to the farmers by adding to the capital gains tax, thereby discouraging trading. Long term investors (like me) are spared. No doubt, it would reduce volatility and encourage people to delve into the stock market only for investment purposes. But it would also reduce the responsiveness the Indian bourses have to the world conditions. In the event of FIIs making an exit due to (subprime) crisis, it will not enable retail investors to book profits (or losses) easily.

It has been seen in the past that when US sneezes, the the world catches cold. In the recent past, there have been instances when the bellwether index has kept up in the face of the impending storm, thereby implying that India is no longer a volatile Market, it is an economy of opportunities where funds can be parked (subject to stringent regulations,though). But my opinion is that with the budget proposals on the capital gains tax and the falling US indexes, India may also feel the brunt.

Old Boy Alan Talks Up Recession

---------- Forwarded message ----------
From: Tips4 Trade <tips4trade@gmail.com>
Date: Thu, Feb 28, 2008 at 11:11 AM
Subject: Old Boy Alan Talks Up Recession
To: Tips4Trade <Tips4Trade@googlegroups.com>


The former chairman of the US central bank Alan Greenspan has warned that US economic growth has stalled and a quick recovery is not likely.

"As of right now US economic growth is at zero," he said, adding the longer it stayed this way the greater the risk of a deep recession.

Wall Street giants Goldman Sachs and Merrill Lynch have both forecast that the US economy will contract in 2008. The US Federal Reserve has said 2008 growth will be between 1.3% and 2%.

The forecast, made last week, was half a percent lower than the Fed's previous estimation.

The gloomy outlook was blamed on falling house prices, reduced bank lending, turmoil in the financial markets and higher oil prices.

More gloom?

Mr Greenspan also predicted that booming oil prices, which reached a record of more than $101 last week would keep rising and that the US housing market would see more misery before the tide turned.

On Monday, figures from the National Association of Realtors showed US house prices fell 4.6% to $201,100 (£106,691), while inventories rose.

This adds to the drumbeat of bad news for consumers, including higher unemployment, more expensive fuel costs and higher credit card repayment costs and raises worries about their ability to spend and prop up the world's largest economy.

Increased globalisation of trade could offset a sharp downturn in consumer spending and "facilitate the absorption of shocks in the US," Mr Greenspan said.

Foreign investors

In a separate speech at an investment conference in the Gulf state of Abu Dhabi, he said US resistance to Gulf or Asian government-backed investors would be "counter-productive" and will result in all parties being "losers".

Lehman Brothers has predicted that these funds have assets of about $3 trillion at the moment, including large stakes in many banks, which have turned to them for capital after sustaining heavy losses on investments centred on soured US sub-prime debt.

Often secretive, they have come under fire for their investment motives, which some interpret to be political rather than commercial.

"The negative response is protectionism and that is counter-productive," Mr Greenspan said.

"The US has gained much in post-World War II globalisation and for us to be pulling back makes me sad and is not in the best interest of the US," he added.

Mr Greenspan left the Federal Reserve in 2006 after 20 years at the helm.

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

Nothing in this article is, or should be construed as, investment advice.

Thanks

Tips4Trade

www.tips4trade.com

Reliance Power bonus issues?

http://economictimes.indiatimes.com/R-Power_plans_bonus_to_win_back_investors/articleshow/2790920.cms

The financial acumen of ADAG is truly brilliant. They have carefully crafted a way to increase the valuation of the REPL by offering the bonus. The scrip has already risen some 10% after the news of a possible bonus issue.

Looking at the numbers, the existing shareholding report on the REPL website mentions a promoter share of 89.92% while institutional and retail investors have 10.08%

At 1:1 bonus issue, the share of the external investors will be 10.08 x2 / (10.08 + 100) = 18.31%, or a rise of 8.23%

At 1:2 bonus, it will be 10.08 x 1.5 / (5.04 + 100) = 14.39%, or a rise of 4.31%.

This implies that even in the bearish market, REPL has found more takers than the numbers suggest. A rise in price directly translates into higher networth of the promoters, who are laughing all the way to the stock exchange :D

Is it the end of the telecom era?

Today I read an article on business standard, which reported Indian Telecom minister A Raja mentioning that local call rates may drop to something like 10p / min. I was wondering if it would do me any good. That’s because I enjoy free local calls to airtel already; to other operators its about 40p, and 1 Re to landlines (which I call rarely). If it were a few years ago, I probably would have been delighted by this news. But not today. My line of thought has moved to a different direction. While in italy, local calls costed me some 35 cents (Rs 20) on my Vodafone prepaid; and I couldn’t imagine using my mobile to make a call back home (2 Euros or Rs 114 / min).

I remember reading a report mentioning that local call rates are the lowest in India. That was some years back, when local calls were charged at Rs 2.40 or more. With increased penetration, it is evident that costs would reduce, adding to the revenues and falling ARPUs.

Bharti Airtel has an ARPU of Rs 359, and RCOM is close on its heels with Rs 339. These figures coupled with a national average hovering around Rs 300, the figures amongst the lowest in the world.

The industry has grown at 30-40% CAGR over the last 5 years; and investing in telecom companies was a sureshot win.

But it may not be so for long. With a wave new licences being issued to newer (and little known) operators, the market will only get more competitive. In my recent visits to some of the rural areas of West Bengal, I was amazed to find the Airtel signal strength at the remotest of the regions, though getting through was difficult during the evening (peak) hours. These new players can be expected to target such far flung areas, but this may not justify the massive investments required.

The value added services do not find so many takers as the voice services do. It is a niche segment, and applications on GPRS are only being explored by the early adopters. These services are expensive, and contribute significantly to the revenues. With competition coming, the operational margin may only demonstrate commoditization.

In spite of the growing concerns of commoditization; the vastness of the country can only serve as an opportunity. The teledensity in India stands only at 18%, as opposed to much higher numbers for some of the developed economies.

India still has a lot of catching up to do. Yet the astonishing numbers and jumping scrips may be a thing of the past, as Sunil Bharti Mittal mentioned.

IPOs losing their sheen?

A few months ago, any investor worth his name would jump at the mention of an IPO, in order to pocket, if nothing else, the listing gains. Even non sophisticated investors, sans any working knowledge of the capital markets, knew that IPOs guaranteed gains, even though they did not assure allotment.

This was the scene at the time of high demand and low supply of shares. IPOs have always been over hyped for their listing gains, even though not for investment. It allowed companies to conveniently price their issues high, making good money in the market. And everybody was happy.

But the party did not last long. With the exodus of FIIs it appears that capital markets are not that interesting any more. Caution is the name of the game. Everyone is trying to sell or is stuck because they had bought at higher levels.

Who would believe that an infra IPO could not get fully subscribed? But it has happened to Emaar MGF, they have resorted to private placement for funding. At least this capital budgeting technique does not work on volatile sentiments, but on fundamentals.

http://economictimes.indiatimes.com/Emaar_MGF_withdraws_IPO/articleshow/2767016.cms

The biggest IPO (already devoted two articles in my blog) does not seem to find many takers. Banks are already bombed with stop payment orders. The IPOs suddenly appear overpriced.

How to expect next? The IPOs listed in this bear market will surely have a hard time. And listing gains may be a thing of the past.

I am not technical analyst, but I believe in the India story. Over the long term, the fundamentals look intact. Hence I will take every opportunity to buy…the FIIs wont knock before joining the party!!!

The jumbo offer

Last Friday’s big news was the offer of Microsoft to buy out Yahoo Inc for $ 44.6 bn; I heard somebody shouting it out in my office. I had no idea whats and whys of the breaking news, but it was big nevertheless.

So I decided to do some investigation. The news was probably big because of the amount involved..it was probably larger than the valuations the current price levels reflected. And yes, I was right! The scrip rose from $19.15 to $ 28.38 on Friday, giving it a jump of a whopping 48%!. In the volatile and sentiment stricken economy like ours, a 20% would have touched the upper circuit. But at 48%, it had to be something!!

The valuation at the end of Thursday was $26.45 bn, while it rose to $ 39.58 by the end of the week, still lower thMicrosoft’s valuations. Whats there in yahoo that Microsoft is after?

One of the apparent objectives appears to be to take on google, the fastest growing name in the industry. With its unique offerings and revenue models, google is leading the way; and is strongly challenging Microsoft’s dominance in the desktop market. With concepts of SaaS getting more prevalence, buying getting-obsolete-soon software may not find many takers, if google comes up with their offerings in a big way. This would seriously affect Microsoft that has held the PC market with its software for decades now.

Some changes are happing in the Microsoft’s front as well. Applications like CRM are finding their way on the Microsoft network on the web. Windows live is an initiative in that front. An interesting article on this move can be found here

The dealbook on New York Times gives an interesting perspective of what the deal can be. It can be read here

Interestingly, google founders Larry Page and Sergey Brin had offered Yahoo to buy it out, while the former was a startup, it was refused. The cyber world today would have been so different, had the deal got through. This is a juncture where the history of the Internet will be rewritten, and whatever happens, the Internet will not be the same again.

Candor anyone?

Yesterday we had a so-called “all hands meet”. There were people from the client side, and the honchos of the particular account tried to make a good show, despite all their gaucherie. but when it came to the so called human capital, they were asked to be present only to display the interest and dedication for the client and the local management. The usual presentations were followed by rounds of Q&A session…but no one tried to speak! I tried my hand at some of the so called future prospects, but it appears that my pointed questions were too blunt for their digestion. Then what is the objective of participation? Nothing but a facade of zeal.

Two days back someone told me about a meeting that was supposed to cushion the layoff blow; when rumors were prime that some shakeout was on the cards. But candid questions on the fairness of the selection were stifled at the root. Not a very nice thing to do: but so it happens.

Call it a cultural effect or a fear of getting reprimanded, I find this feature exemplary of lack of candor. Currently I am reading Jack Welch’s book on Winning, and he identifies lack of candor a serious impediment in the growth of any organization. Unfortunately the lack of candor is strongly celebrated in the environment where I am posted. There is always a majority speaking behind the backs, but are unable to put up in front of the bosses.

Why does the majority prefer keeping mum? Because that’s what has been taught to us since childhood. We should not call someone ugly, or fat or ineffective or … (include any negative word). We should be nice to others so that they can be nice to us. That’s quite a deal! It might help in the social set up, but definitely not in the corporate world, where your every action is accounted for.

It happens in big organizations, it happens where there is a legacy. But can it be changed? A difficult job, but a change agent can do it, if he/she gets a good deal of support. Unfortunately, those on the top do not like to hear what the junta has to say, so it can be a tough nut to crack!

volatile times

The stock market is being, and has been viewed akin to gambling. There are those who like to take risks: short term traders, traders in the F&O segment et al looking for a killing when they presume they can predict the trend. What they forget is to keep their personal downsides in control, or hell will break lose.

The stock market is a gamble to those who are lured by the growing numbers (the indexes, not the corporate results). Technical analysts tend to outperform the fundamentalists (if one would like to call them). But going by the tenet of Warren Buffet, looking for long term investments that have intrinsic value (and not value derived from the crazy bull run) gives the foundation to the stock.

It hardly makes sense to buy when the stock is on a peak, just as it is beyond commonsense to buy a depreciable item when it is expensive. But we humans, steered by greed and fear (both of which are vices as per the bible) lose all our common sense when it comes to making money.

I know there would be people around me who would say "I knew that, so I don't like to dabble in the stock market". Stock market is not necessarily bad; ideally it should reflect the performance of the companies. When it does not (remember the rising price earning multiples), the disaster is about to happen.

The largest IPO in the history of corporate India saw just too many takers; for they were driven not be logic or fundamentals (there isn't much to speak of), but by the fact that others are buying, so listing gains are as sure as the long term India economy. But they forget that when too many people are looking in the same direction, it can spell trouble. Yesterday, I came across a nice article that compared the unjustified valuation of Reliance Power with its competitors: NTPC and Tata Power. Its there in my previous entry.

In conclusion, I would say that invest in companies are out of favor in the market (contrarian approach), but have strong fundamentals. Trust the performance of the company, not the scrip.

RELIANCE POWER IPO ANALYSIS.

Got the following message from Tips4Trade. Interesting

---------- Forwarded message ----------
From: Tips4 Trade < tips4trade@gmail.com>
Date: Jan 22, 2008 11:45 PM
Subject: RELIANCE POWER IPO ANALYSIS.
To: Tips4Trade <Tips4Trade@googlegroups.com>

Now for all who have invested in the i PO... something to read !
Reliance Power Limited IPO

Opens: 15th January 2008.
Closes: 18th January 2008.

Price Band: Rs 405 to Rs 450.
Price Band for Retail Investors: Rs 385 to Rs 430. (Rs 20 discount).

Number of shares offered to public: 22,80,00,000 (22.8 crore).
+ Number of shares to be subscribed by promoters: 3,20,00,000 (3.2 crore).

Total new shares issued (sum of above two) = (26 crore)

Number of shares for retail investors: 6,84,00000. (6.84 crore).

Issue size (public) = (22.8 - 6.84) X 450 + (6.84 X 430) = 7182 +2941.2

= Rs 10123.2 crore.

Number of shares outstanding pre-IPO: 200 crore.
Number of shares outstanding post-IPO: 226 crore.

=======================================

Retail Investors and NII can apply with Rs 115 margin per share. (The details of this have already been discussed in earlier posts).

Maximum application possible in retail category = 225 shares.

=======================================

Already, a lot has been discussed about Reliance Power and its business (which will be there a few years from now).

This is an extremely rare case where SEBI has allowed a company with almost 0 revenues, to raise money via an IPO.

If this was an IPO by some smaller group, it would have been 100% rejected by SEBI for having no business.

=======================================

Business:

The company claims that it will be developing power generation projects of 28200 MW over the next decade.

According to the IPO RHP, some of the projects that it will be developing are:

Rosa-I (to be commissioned in March 2010) - 600 MW - Coal based.
Butibori (to be commissioned in June 2010) - 300 MW - Coal based.
Rosa-II (to be commissioned in September 2010) - 600 MW - Coal based.
Shahpur Gas (to be commissioned in March 2011) - 2800 MW - Gas based.
Shahpur Coal (to be commissioned in December 2011) - 1200 MW - Coal based.
Dadri (to be commissioned in March 2013) - 7480 MW - Gas based.
Krishnapatnam (to be commissioned in September 2013) - 4000 MW - Coal based.
Urthing Sobla (to be commissioned in March 2014) - 400 MW - Hydropower based.
Tato II (to be commissioned in March 2014) - 700 MW - Hydropower based.
MP Power (to be commissioned in July 2014) - 3960 MW - Coal based.
Siyom (to be commissioned in March 2015) - 1000 MW - Hydropower based.
Kalai II (to be commissioned in March 2016) - 1200 MW - Hydropower based.
Sasan (to be commissioned in April 2016) - 3960 MW - Coal based.

If

everything goes as planned, capacity of Reliance Power at end of each year till 2016 will be:

2008: 0 MW.
2009: 0 MW.
2010: 1500 MW.
2011: 5500 MW.
2012: 5500 MW.
2013: 16980 MW.
2014: 22040 MW.
2015: 23040 MW.
2016: 28200 MW.

=======================================

Other Similar Companies:

I can think of two companies in the power generation sector that Reliance Power can be compared with:

NTPC and Tata Power.

NTPC has current capacity of 28000 MW and has target to achieve 66000 MW by 2017. ( See this thread on NTPC).

Tata Power has current capacity of 2300 MW.
It will be adding 10000 MW of capacity more by 2012. Thus, it will have a capacity of around 12300 MW by 2012 end.
The additions will all be coal based.
-Mundra Ultra Mega Power Project -4000 MW.
-Power plants in Maharastra - 3000 MW.
-Captive power plants for Tata Steel - 2000 MW
-Maithon Power Plant at Jharkhand - 1000 MW.

Tata Power also has other smaller business and also wants to enter shipping and logistics. Besides that Tata Power has investments valued at Rs 400+ per share of Tata Power. This works out to be Rs 10000 crore.
Around 2012 - 2013, both Tata Power is expected to have similar capacity as Reliance Power.

The interesting thing is at current price of Rs 1457, Tata Power is valued at just Rs 30000 crore. Remove Rs 10000 crore of investments and you can have it only for Rs 20000 crore.

At Rs 900, Reliance Power will have market value of 200000 crores....6.67 times that of Tata Power. .

========================================

Financials:

With 2300 MW capacity, Tata Power made standalone profit of Rs 700 crore in FY 2007.

With 28000 MW capacity, NTPC made standalone profit of Rs 6900 crore in FY 2007.

Lets assume Reliance Power turns out to be much more efficient than these two companies. Add to that increased power rates.

With 28200 capacity, assume Reliance Power makes Rs 15000 crore of net profit in 2016-2017. Power companies are considered as utilities and worldwide trade at 10-15 times their earnings.

Lets assume 15 times ratio for Reliance Power in 2016.

What will be its market value?

15000 X 15 = Rs 225000 crore or Rs 995 per share.

This is an optimistic view:
-there will be no further equity dilution till 2016.
-assuming nearly twice as much efficiency as NTPC.
-that all projects will be completed before 2016 end.
-the company would have paid back all debt by then and interest costs would be in similar range as NTPC.

(NTPC already has established 28000 MW capacity and comparatively much lesser interest costs. (NTPC's P&L account states Rs 1800 interest cost for FY 2007).

So what about the debt?

The RHP mentions estimated cost of six projects Rosa I, Rosa II, Butibori, Sasan, Shahpur Coal, Urthing Sobla as Rs 30000 crore+.

Analysts estimate that Reliance Power will need Rs 70000 crore of debt to finance its projects which are estimated to cost 100000 crore+.

Rs 70000 crore of debt is not going to come at 2% interest rate. Even a 6% interest would mean an annual interest cost of Rs 4200 crore. Only in 2013, the company's capacity will cross 10000 MW. Thus, I do not expect any major debt repayment before 2014. If things don't go as planned, the debt burden will make a mockery of the balance sheet.

With Rs 12000 crore raised in equity and Rs 70000 crore of debt, these whole business will become a high-risk venture.

Any unforeseen delay/derailment of plans may create major problems for this company.

========================================

Reliance Power - The Overlooked Fact:

Is Reliance Power just "Reliance Power"?

No.

It is actually "Reliance Power Limited" - a limited company.

 So what does this mean for Reliance Power Limited?

It means if in the rare case, the calculations of the management go wrong and the company somehow goes to insolvency, none of the shareholders will lose anything expect the value of the shares.

If you are a share holder of Reliance Power and it goes into insolvency (unable to pay back debts), what do you stand to lose?

Rs 430 per share.

Lot of money....right?

What does Anil Ambani's AAA Project or REL lose?

Both of them had got their 45% (post-IPO) stake for Rs 1000 crore each. Plus they will each subscribe to 1.6 crore shares each at Rs 450 in the IPO......which works out to be Rs 720 crore.

Thus, AAA Project will be getting 101.6 crore shares of Reliance Power for Rs 1720 crore and REL will be getting 101.6 crore shares of Reliance Power for Rs 1720 crore.

Little less than Rs 17 per share.

This is what both the promoters are risking in this project.... Rs 17 per share ; while investors will be risking Rs 450 per share.

This is exactly the reason why Reliance Power was created.

First, by contributing just Rs 1720 crore each to Reliance Power, the promoters have shifted all risk to investors.

Second, by getting 45% stake (in REL's projects) to AAA Project for a mere Rs 1000 crore, AAA Projects (and Anil Ambani) have created wealth out of thin air.

Anil Ambani's Rs 1000 crore investment will be worth Rs 100000 crore when Reliance Power lists at Rs 900.

If the gamble works, the promoters (holding 90% stake in Reliance Power) will be worth billions of dollars.

If the gamble doesn't work, the promoters will lose Rs 1720 crore each and investors will lose Rs 10000+ crore which they will be paying for a mere 10% stake in Reliance Power.

What a way to create wealth...!!!....I don't have words to describe the brilliance of Anil Ambani's plans... .

========================================

So what will I do with this IPO?

Firstly, I will subscribe to it,

not because I think it is a good company or is offering great value at Rs 430,

but because I am in this market to make money.

The markets are in such a frenzy, nobody bothers about valuations anymore........not even QIB and other institutional investors.

Everyone knows that Reliance Power will list at a premium and thus everyone will apply....valuations can wait for some other day.... .

Everyone should wait till last day and apply for it. Just check the subscription levels by 11 AM on last day.
========================================

What will I do post-listing?

For bigger IPO's like Power Grid and Mundra Port, I have followed a sell-half-keep-half strategy.

Assuming listing at Rs 900, for Reliance Power, I will follow sell-all-keep-none strategy.

First, other companies are much cheaper.

Why should I keep a company valued at Rs 200000 crore -

when another company (with similar capacity by 2013) is available at Rs 30000 crore with much smaller debt burden and Rs 10000 crore worth of investments ...........referring to Tata Power.

If Reliance Power (at Rs 900) is available for Rs 200000 crore, why not buy NTPC for a similar price......Rs 225000 crore. NTPC plans to have a capacity of 66000 MW in 2017, while Reliance Power will have 28200 MW capacity in 2016.

Second, the risk is higher than other existing companies.

With marginally cash flows for next 5 years and Rs 70000+ crore of debt, the risk for Reliance Power is high. Tata Power and NTPC have existing cash flows to handle expansions....Reliance Power does not.

Third and the biggest factor is....the valuation of the company doesn't make much sense.

Why should Reliance Power be valued at Rs 200000 crore, when in highly optimistic scenario, it will not make more than Rs 15000 crore of profit in 2016 ? Even if it touches that figure of Rs 15000 crore, its market value in 2016 will not be much more than 225000-300000 crore. (if given a 15-20 times multiple).

A fixed deposit will make more money than that in 8 years.....and that too without any risk.

Also, I got the optimistic Rs 15000 crore figure by assuming two times margins as NTPC.

The fact is..... at least till 2014, Reliance Power will still be carrying most of its Rs 70000 crore debt and its interest costs will squeeze margins to a large extent.

========================================

Final verdict:

Apply.

I will be selling all shares at 9:55..........not even waiting for a better price.

If you want to try for a better price, hold at your own risk.

The level of insanity in the markets is at a high...

Value and risk mean nothing today..... price and profit are the keywords.

Who knows.....the stock may got to Rs 1100 or more.

========================================

Addendum:

Reliance Power may win more projects in the future.

However, it is unlikely that any new project that Reliance Power gets will be commissioned before 2012. Additional projects will also bring additional costs too.

It doesn't make much sense to consider future projects before they are actually won.

Also, Reliance Power is winning projects by offering very low rates - another factor that will decrease margins and increase risks for the company.

For example, in case of Krishnapatnam Ultra Mega Power Project, Reliance Power won with a bid of Rs 2.33 per unit.

L&T had bid Rs 2.69 per unit and Sterlite had bid Rs 4.19 per unit. Such aggressive pricing may backfire if costs rise due to some unexpected factors

--
Thanks
Tips4Trade Team
www.tips4trade.com

Reliance Power

What happens when faith defies logic? The situation can be nothing less than crazy. With global interest shooing away from the stable economies to emerging markets, it’s the liquidity that plays.

Reliance Power has been the biggest IPO in the history of corporate India with Rs 7.52 lakh crore being thown in for a Rs 11,700 crore offer. In fact, it has made a world record. BSE Sensex, the bellwether index of the Indian economy tanked 1713 points, while investors were keeping themselves cash ready for the investment.

So bullish is the sentiment for a company that has not even started its operations! In addition, it plans to further raise capital from institutional investors, diluting the stake. The offer opened at a price band of Rs 420 – 450, with retail investors being shown the opportunity to invest with the maximum allowable amount by just paying 25% of the value. Further, they had an offer of a discount of 20Rs per share, as icing on the cake.

The NDSL and CDSL saw some 10 lakh demat accounts being opened in 5 days, again an unprecedented event. The offer was oversubscribed some 20 times in the retail segment, and how many would get allotted is anybody’s guess.

Why this euphoria behind the POWERful offer? In the recent times, the group has come up with IPOs like Reliance Communications and Reliance Petro; the latter being under construction at the time of the issue. Both managed to draw investors like a swarm of bees; and suddenly everybody has an interest (read:stake) in Reliance. Fundamentally speaking, the valuation cannot be justified without the presence of existing operational assets. Upon listing, the volumes will push the price levels to 900 or even 1000. One cant even look at the PE levels, since the E part is 0. Such is the faith on Anil Ambani’s management; he is already the 3^rd richest Indian.

IPOs in the recent times have been popular only because of the listing gains. REPL has no different story. Analysts caution that the absence of any operating history does not justify the current valuation levels, and should be used primarily for making money on day 1.

Valuation is yet another area of concern. “We are unable to accord any definite valuation to the company since it has no operational assets,” says Emkay. The brokerage adds that valuations are stretched based on an individual project-based DCF approach. Equitymaster believes that “other listed power generators are available at much attractive levels than REL Power (where there is no underlying business to calculate the valuations!)”.

This week’s fall is expected to be made up upon the share allotment and listing. I haven’t invested myself, for I preferred making good use of the fall and investing in the blue chips at lower levels.

The poster boy has an excellent marketer. Using dabbawallas for sending IPO forms has been unheard of. I happened to see IPO forms being available outside Churchgate station in Mumbai, but this attempt to reach the masses is an attempt to arouse investor (or consumer) interest.

We are waiting for the listing..But the patriarch must be smiling up there.

The Nano is here

Tata’s small car Nano has raised too many voices and too many inquisitive glances. It was a truly ambitious project, and a prototype itself has taken all the media attention since the opening day of the auto expo; currently on at Pragati Maidan.

What amazed me is the extent to which it has been able to be on the top of the minds of the junta. Last weekend, we had been out to Taki, a tourist spot at the Bangladesh border; and a (mostly) rural area. My blue Wagon R caught the attention of the folk; not because of the color or the fact that it is new: because it resembles (!!) the Nano!! I was awestruck when I heard someone talking if this car was a nano (which automatically implies that they have never seen a Wagon R before, and probably would put the same question on every hatchback that comes their way). They had no idea that the Nano is still to reach the market, or the bookings are yet to start; or even that it is much smaller; or it comes only in white, yellow and red. Initially I was disappointed to hear the people comparing my Wagon R (which is about four times the price) with the 1 lakh Nano; but ultimately I was simply amused, to say the least.

Tata’s are known to show the way; they did set up the first private sector steel plants in the country when India was still under the British rule. The Indica was the first diesel hatchback; giving stiff competition to Maruti and Hyundai. Ratan Tata would retire at the top of his career; and he would surely be remembered in the years to come.

About the economics now: everyone is talking about the little Nano. Its too cute in looks as well as price. It is encouraging the Indian mass to get a four wheeler; but at what cost? Jagdish Khattar commented that this car has opened up a new segment. It definitely has, and a migration from two wheelers to four is expected soon; leaving bike companies in despair. Undoubtedly, Rajiv Bajaj has made a smart move to join the bandwagon with a sub $3000 car. Maruti is also expected to come up with innovations that will compensate for the expected shortfall of revenues from Alto and 800.

For an individual jumping into the foray of a 1 lakh car, what other factors does he need to look into?

One time costs: Rs 130,000 (including insurance and road tax)

Monthly cost:

Garage: Rs 1000 [Parking on the road is an alternative, but the volumes are surely going to make the metropolitan authorities disallow such nuisance. Noida already has this rule]
Fuel: Rs 1500 [600 km / month; 20 kmpl; Rs 50 / lit – Fuel prices are set to rise, thanks to $100 barrel]
Maintenance: Rs 500
Driver, strongly applicable in non self driving place like Kolkata: Rs 2500

Total: Rs 5500.

Do we expect everyone to be able to afford this? Seems unlikely.

The major concerns are infrastructure and environmental. Without an adequate infrastructure in place, it would get very difficult to sustain this system. Road tax and registration are sure to fill up coffers; but without a good initiative to utilize the money, we are planning for an urban nightmare.

Some people like me would stop using cars for work if there is a good public transportation system.

Thomas Friedman rightly said in his New York Times article that India must not blindly copy the developed world.

Only time will tell what will happen once the Nano is out in the market. But rest assured, it will surely bring in quite a lot of excitement not only in India, but also in the world where the Nano would be exported.