The Dubai crisis could have major ramifications similar to the global credit turmoil last year.
The debt crisis triggered by the Dubai government's request for deferment of its debt led to a 645 point intra drop of the BSE Sensex on Friday. The benchmark, however, rebounded later which led many to think that the markets might have over reacted to the development. But, that, if experts are to be believed, doesn't seem to be the case.
On the contrary, analysts say that there could more pain in the days to come. Also, the event shows that the global credit crisis, which was thought to have blown over, may still have some legs. “It will be pretty serious because if Dubai has to default, that could start a wave of defaults in other areas,” says Mark Mobius, executive chairman, Franklin Templeton Investments in an interview to Bloomberg.
Crisis II?
Dubai's debt crisis is similar to the global credit crisis faced last year, wherein the value of underlying asset (real-estate) has fallen dramatically on one hand, and the ability of the borrower (Dubai World, Dubai's main investment and holding company) to repay debt has been impacted on the other hand. “These are genuine concerns and it might take some more time before things get clear as more reactions might come later on from the world community,” says Raamdeo Agrawal, director, Motilal Oswal Financial Services.
The recovery in the later hours of trading was considered to be on account of the positive cues from the European markets. On Friday, European markets opened and most of the banks like HSBC, RBS and Standard Chartered, which have large exposure to Dubai-based entities, traded in positive territory. Analysts believe that investors who had short positions in the market could have covered them, as they would like to see how the emirate reacts to the situation.
“My sense is that the crisis is not very big. However, since there is a holiday in Dubai, one will have to see how the Dubai government reacts and tackles the situation in the coming days. If the problem is not tackled, this could lead to further market correction as investors might book profits. The dollar carry-trade might reverse,” says Gopal Agrawal, deputy CIO & equity head, Mirae Asset Global Investments.
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What should investors do?
Analysts mention that in case of a larger problem on this count, sectors such as financials, real estate and commodities would be among the first to get affected. However, as Agrawal says, “investors can use the correction and invest in good companies.” It is also believed that in case of changing risk appetite and adjustment in the flow of capital the markets might be volatile. “Capital might flow towards safe haven assets like US treasuries, but once the dust settles, the medium-term story of capital flows into emerging markets will continue. In our view investors should utilise any sharp correction in equity markets to buy rather than panic and sell out,” says Ashutosh Datar, strategy analyst, IIFL.
Read on to know the likely impact on the three key sectors and companies within.
| RISKY ASSETS? | ||
| Companies | Exposure | Comment |
| BANKS | ||
| ICICI Bank | $6-7 bn | Primarily to Indian companies |
| SBI | $4 bn | No major impact given its low exposure |
| Bank of Baroda | $9 bn | Sizeable, payments due from 2011 |
| Axis Bank | $350 mn | Primarily to Indian companies |
| IOB | $15-16 mn | Marginal Impact |
| CONSTRUCTION (In Rs crore) | ||
| Nagarjuna Cons. | 3,600 | Rs 1,000 crore exposure to Dubai |
| L&T | 5,700 | Marginal exposure to Dubai, into power T&D |
| Voltas | 3,100 | Do not have exposure to Dubai |
| Punj Lloyd | 4,600 | Do not have exposure to Dubai |
| Simplex Infra | 2,300 | Marginal exposure of Rs 220 crore to Dubai |
| REALTY (In Rs crore) | ||
| Omaxe | 48 | Its direct exposure might have an impact |
| BSEL Infra | 1,762 | Its direct exposure might have an impact |
| Source: These are rough estimates provided by analysts and companies and could change | ||
ENGINEERING & CONSTRUCTION
Nagarjuna Construction
According to analysts, Nagarjuna Construction has projects of about Rs 3,600 crore in West Asia, including Rs 1,000 crore in Dubai (Rs 170 crore exposure to real estate projects). This is significant compared to its current order book of Rs 14,300 crore. Analysts also believe that given the debt crisis and slowdown in Dubai's real estate market the company may now find it difficult to raise more funds here to fund its projects. “Nagarjuna Construction has been the hardest hit by the news flow. However, we believe its Dubai exposure has long been discounted in valuations. Strong order inflows and now, attractive valuations make the company a good pick in our view,” says Nimit Shah, analyst, Religare Hichens Harrison.
Larsen & Toubro
Fears about the company's exposure to West Asia saw the share price of L&T fall 6.7 per cent intra-day on Friday. However, the stock covered some of the lost ground and closed at Rs 1,586.5 or 2.71 per cent lower than its previous day's close. The company has exposure to the West Asian market and has $20 million outstanding, which is receivable from Nakheel Properties, Dubai World's troubled real-estate subsidiary.
Out of the total order book of Rs 81,600 crore, the company's exposure to the West Asian region is to the extent of Rs 5,700 crore, mainly in the power T&D sector and largely to other countries. Thus, analysts believe, investors need not panic .
Voltas
West Asia is a large market for Voltas. Out of the total order book of Rs 4,400 crore, 70.4 per cent is accounted for by this region. However, the company is of the view that its exposure to Dubai is limited to the Burj Tower project, which will be executed over the next 3-4 months. Analysts believe that if the problems are not large and restricted to Dubai, then there could be only some impact on the future flow of business to the company.
Punj Lloyd
Punj Lloyd has a major exposure to these markets; about Rs 4,000-4,500 crore of its order book is from the region. However, about 13 per cent pertains to the hydrocarbon sector, and about 1 per cent each is from the infrastructure and real estate sectors. More importantly, a majority of its exposure is in Qatar and Saudi Arabian markets, which means that there is no major concern for the company so far.
BANKING
In the past, many Indian banks have gone overseas, including to Gulf countries, and expanded their business. However, most Indian banks lend only to India-based corporates operating in the international markets. Also, these banks typically have been targeting NRI remittances from Indians residing in these countries, implying that the impact for them would be very limited. Nevertheless, the Reserve Bank of India is yet to assess the situation and has sought information from Indian banks about their exposure.
Meanwhile, among banks, Bank of Baroda (BoB) has the highest exposure (10 branches) of about Rs 10,000 crore from the UAE market including Rs 4,000 crore coming from Dubai. It also has exposure to the troubled Dubai World, from whom the payment is due only from the year 2011. Considering these facts, analysts prefer to be cautious about any new investment in BoB's stock. Others like Indian Overseas Bank also have exposure of about $15-16 million to these markets.
ICICI Bank is estimated to have an exposure of about $6-7 billion. However, most of its exposure is limited to Indian companies. Similarly, State Bank of India (SBI), which has around $50 million exposure to Dubai World, is cautious about its lending in these regions particularly to the real estate sector. Thus, analysts say that there would not be much impact on these two banks.
REAL ESTATE
The impact of the crisis would not be major on the Indian real estate market, which is largely driven by domestic fundamentals. However, “there are three ways to look at the impact on Indian real estate companies. First, companies having direct exposure to these markets could get hit. Second, investments (or investors money) from these regions into the Indian real estate market might get impacted and finally, overall negative sentiments could distort the outlook of other markets, including the Indian real estate market,” says Abhisek Goenka, real estate analyst, BMR Advisors. Additionally, Anuj Puri, chairman and country head, Jones Lang LaSalle Meghraj believes, “It is conceivable that the RBI may take a cautious approach in terms of liquidity in the real estate sector, which would not be good news in light of the fact that FDI norms for Indian real estate are on the verge of being relaxed.”
Among companies, Delhi-based Omaxe has exposure to the Dubai market as it has bought two plots from Nakheel Properties. The company has made payments to the tune of about Rs 40 crore and had plans to invest about Rs 2,850 crore in Dubai. However, the company is now exploring exit options from these projects.
BSEL Infrastructure is another company which is building a waterfront project and six towers in the Emirates City at a cost of Rs 1,762 crore. It is estimated that the current crisis might have an impact on its performance as the management believes that the turnover could decline by 10-15 per cent.
| THE MELTDOWN IMPACT |
| * The global credit crunch and the steep fall in property prices (40-50 per cent over the last one year) resulted in unsold inventory and drop in inflows into Dubai's economy which is heavily dependent on foreign investment. |
| * With liquidity drying up and projects under construction across the region, property developer Nakheel is having a hard time servicing its obligations. It is negotiating to extend maturities including the $3.52 billion of Islamic bonds, which are due on December 14. |
| * Nakheel's parent, Dubai World, a conglomerate controlled by the Dubai Emirate, has total liabilities of $59 billion. Including Dubai World's liabilities, the Dubai emirate owes $80 billion to various agencies. |
| * The debt rollover request by Dubai World has prompted ratings agency Moody's to cut to below investment grade the ratings for Emaar Properties, the UAE's biggest developer, Jebel Ali Free Zone, an operator of business parks , DIFC Investments and Dubai Holding Commercial Operations Group. |
| * The ratings for DP World, West Asia's biggest port operator and a subsidiary of Dubai World, and Dubai Electricity & Water Authority were lowered to Baa2, two levels above junk. |