Sunday, September 2, 2007

India real estate market and U.S. Subprime crisis - 6

Why FIIs are buying into the India growth story

Ridham Desai, MD & co-CEO, India Strategist, JM Morgan Stanley, says FIIs’ risk-appetite has gone up and they are willing to look at small and mid-cap companies, who can grow their profits faster in a fast-growing economy. "Growth gets better down the cap curve as companies get the benefit of operating leverage," says Desai.

To understand what he means by operating leverage consider the hotel business, where you have high fixed costs. Now, if you have 10-storey hotel, you may not make any money if only six floors are occupied. You could break even when you sell the seventh floor. When you sell the eighth floor, the returns start to double; with the ninth floor, you get super returns. If you can sell the tenth floor, returns touch astronomical levels. "Once revenues exceed fixed costs, every additional rupee you earn goes straight into profits," explains Desai.

Source: Sanjeev Bhalla, Hedge Funds India.

RBI cautious on Hedge Funds

The Reserve Bank of India (RBI) today expressed concern over investments by hedge funds in the stock markets and raised questions over the longer term sustainability of such investments worldwide.
At present, hedge funds cannot invest directly in the Indian markets. However, they could invest through PNs issued by Sebi-registered FIIs.

As per official data, the PNs account for 35 per cent of FII inflows. In 2007 thus far, the FIIs have invested a net Rs 42,954.20 crore ($10.2 billion).Market estimates, however, say more than 40 per cent of the FII money come through PNs. No official data on hedge funds’ contribution to PNs is available.

“The hedge funds industry is passing through a tough time. Indian companies as well as investors are not aware of investment strategies of these pools of money, whose source is not known. Following the quick appreciation of Rupee, the Indian markets’ attractiveness for these players could go up as they may chose to hedge their risks in these markets. The RBI has given a timely warning regarding this,” Bhaskar Ghosh, managing director, IndusInd Bank said.

Source: Sanjeev Bhalla, Hedge Funds India.

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