Earth, Lights and Money

The night lights of the world, India and parts of Asia look like these (click images to enlarge):

I was surprised to see India pretty well lit up and not looking too bad on the world slate. I now know why the BJPs India Shining political campaign did not work on terra firma – since it you can see this only from extremely high altitudes and politics is all about keeping your ear to the ground. To me Japan looks the brighest and USA a very close second. Africa is truly the dark continent. Given what is now being said about Nigeria and Ghana, I guess they’ll light up in the decades to come. South Africa, as expected stands out and so does the Nile channel in Egypt. Western Europe, is aglow with the prosperous lumens that dissipate quickly as one moves eastward eventually following the path of the Trans Siberian Railway. If the natural earth glow is filtered out, I’d have missed Australia completely. And finally, China is well lit on its eastern side. The fact that the eastern sides of largish land masses are better lit than the western side is striking. The US east coast, China’s eastern provinces, Australia, the African continent, South America, the sliver of light that is Japan, UK, the Meditteranean Coast – all have brighter eastern sides. Why? The exception seems to be India. Its east side is darker.

From personal aerial experience I know for sure that Mumbai shines the brightest of all Indian cities. I guess it’s got to do with two factors – A) density of population in an area and B) the degree of urbanization. The latter is more important, I think since while Mumbai has the world’s largest slum, the slum lights will fade out if seen from such high an altitude. These are closely placed street lights (the streets lights in Hyderabad are not closely placed at all) and residential light fixtures. Highway lights again, would get too diffused, I think. But just take a look at the Indus basin. No wonder the rich alluvial soil and the 5 rivers spawned the Indus Valley Civilization 5000 years ago. The Punjab provinces (both Indian and Pakistani side) seem to be bathed in white! On the other hand, you just cannot make out the path of the Ganges at all. Beats me. Also, if you follow my eye, you can almost see the lights carving out the combined boundary of Maharashtra and Andhra Pradesh. Leaving out Orrisa, Chattisgarh, Madhya Pradesh and Jharkhand in the dark. It’s almost as if the previous two states had dotted light beacons along their perimeters. Is there a correlation between insurgency and electricity consumption? The problem of naxalism seems to be hitting states that are darker at night. And therein lies the answer – light up these areas and the arms that hold the guns will pick up laptops instead. Alas! If wishes were horses, beggars would ride – read my latest tweet on our Government crazy Robin Hood logic. Agreed, that the income disparity amongst states needs to be reduced. But don’t do this by making the richer states poorer! The New Delhi think tank is tackling the problem of runaway food inflation in the agrarian states of India (Punjab, West Bengal, etc.) by increasing the procurement price of food stuff. Their logic is if food prices are increasing (it’s c20% in these states), lets give more money to the farmers so that they can afford to buy more. How can you fight inflation by increasing prices?

Leaving bumbling babus behind, I panned out to look at Asia and peg the two big neighbours against each other. The electricity consumption in India is quite less as compared to China. Now, while China has a much larger land mass, much of China is in its east. Also, the land masses of eastern China and India are almost equal in size. So what explains the fact that despite the higher consumption of electricity by China it does not appear brighter than India? China seems to consume 3,650 TWH of electrcity per annum (a neat 10 TWH per day!) as compared to just 568 TWH/yr for India. So, eastern China should appear 6 – 7 times as bright, right? I guess whats happening is that almost all of the incremental electricity (as compared to what India eats up) is being used to fire the foundries that line up the dragon’s belly.  This article from China Daily sheds some light on the issue. Are the Chinese producing too much too soon. Maybe they should slow down.

This sudden reading up on lights, lighting and night lights came about when I was contemplating a company called MIC Electronics – they’re the LED solutions company that’s lighting up stadia, streets, festival venues, the Commonwealth Games, village lanterns, railway coaches, airports etc. They’ve got a nice banner on their website and the spooky thing is that this company is also from Hyderabad! God knows whats wrong with me – Shakti Met Dor, Hyderabad Industries (contemplating) and now this! It’s a nice city ok, perhaps a bit sleepy but investing like this is crazy. I’ve taken up a small position in this company so that I don’t lose track of it and am reminded that I need to think more about it. I read a reseach report about it sometime back but as yet I am not fully convinced that it has the power to light up my portfolio. My first issue with this company is that it currently shows up at rank 33 when I search for “LED lighting india” in Google. Which is not that bad considering that A) they are largely B2B and that B) this website itself shows up at rank 58 in a google search on Kaushal! And no, I have not heard of search engine optimisation – but maybe the MIC guys have? Actually doesn’t matter since they largely sell to people like Indian Railways and other assorted organisations who don’t really need Google to find out about them.

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Buying Property

Some time back Sushanta had asked me to write something about buying property. As luck would have it I was contemplating buying a house in Mumbai at around that same time, but dropped the idea. Not because the price was outside my comfort zone but mainly due to the fact that it clashed with my firm belief to buy houses only after they are nearly complete. I haven’t purchased any house which is “under construction” or “proposed construction” till date. I personally know of friends and colleagues who have been stuck with housing loans where they have started paying the interest component on the loan but the building is far from getting completed. This is the worst possible situation one can be in since the principal stands as it is and you only service the interest component. Many young families give in to the lure of booking property the moment it is conceived on the drawing boards of the architects since these are usually offered at a discount to the current market prices prevailing in the locality. The rate in one of Mumbai’s suburbs where I stay is c 10,000 /per sq feet ( ~1 lakh /sq.m ~USD 2,500/sq.m) and in this particular case I was being offered a flat @ 8,000 psf which would get ready in end 2012. The builder would have to be paid in installments (as and when the plinth, slabs, etc.) get ready. The builder is well known, location of the property is sexy and the future piece was being offered at a discount of 20% to current prices. I would effectively be giving a loan to the developer. Assumming that prices in that area escalate by 10% per annum (they have actually compounded up ~15%  in the past couple of years), it would mean a completion price of c 12,000 psf. I pay 8,000 today and get back 12,000 in 2 years time! I would effectively be lending money to the builder at > 22%! (It’s actually greater than 22% since I would paying for the flat in installments). Makes you wonder what kind of loony builder is this? Well, not quite for I think that Pareto’s rule applies in the housing construction acitivity as well. Close to 80% of the actual costs of a building are incurred during the last 20% of the construction acitivity. Fittings, lifts, floor work, workers wages, permits etc. are what consume up a lot of cash but are needed much later – therefore the builder enjoys the float till that time.

Anyways, given my personal situation I figured out that I’d have to take out a loan for 50% of the amount ( = 4,000/-). and shell out an interest @ Rs. 40 psf. Moreover there is always a chance that the builder over leverages himself and is unable to complete a project (or cuts corners). Idea dropped – I would be happy to deploy that capital in the capital markets and expect a modest 15% annualised return instead. At least I’d have near instant liquidity and can always withdraw in case the need for a house becomes a painful obsession later.

Here’s my two cents worth regarding home buying: 

  1. Decide if you want to rent or buy. pre-tax rental yields are in the range of 2% – 4% in the suburbs of urban India (my hunch). Which means its a pretty stupid business to let out flats which logically means that it must be quite smart to rent. But young families need to build assets and there’s tremendous social pressure to own a house, and therefore we feel the need to move down the list.
  2. There are three main things that one should consider when buying property. These are A) Location, B) Location and C) Location.
  3. Stay within your means. Do not extrapolate salaries into the future and do not overextend in the present. Who knows the tide might just turn and all outsourced jobs might get sucked back into the countries of their origin.
  4. Do not buy property which you cannot touch and see. Period. The risk of promises being broken is high.
  5. If you are a young family and are renting it – then buy a house subject to above 4 constraints.
  6. If you are a young family and are staying with your parents and have no house of your own – then buy (again subject to points 2 – 4 above)
  7. If you are any kind of family and already own houses (my category) buy your next one at outright cash as far as possible and only for portfolio diversification. Which means you’d already have mountains of wealth in other asset classes (not my category!). Unless of course, you can afford the additional leverage.

Taking point 7 forward, I’ve never been too much of a fan of the adage, “make money on Wall Street and bury it on main street”. Many of the visitors to my site would never have made enough money on Dalal Street anyways.

In case you get stuck at point 1 above and keep staying in rented places (many people I know do this), then please ensure that the notional excess of cash at hand is deployed wisely. Hard nut to crack for most. Especially for young Indians whose parents come from the boring mileau of the license raj and Hindu rates of growth. The earning generation’s distinguishing identity seems to be today’s conspicous consumption habits. If you have the fortitude to resist the temptation of “keeping up with the Junejas” and deploy the money in (>> inflation) longer term, boring occupations, then please – do drop off the list at point 1 itself.

An extension of point 2 above is a heads up: just because you have to buy a house, do not pick one up in too remote location/city however attractive the price would be. The risk of buying houses/land in remote cities and localities is that prices remain stuck for ages and the trigger may not come in the current generation (i.e. yours). Can you say with certainty where your kids will be once they are old enough to understand website posts like this? And that they will not curse you for buying assets which they have no interest in at all.

Another problem many non-native families to Mumbai (or any other city for that matter) face is their aversion to taking up residence at the periphery of the city center or further away from their workplaces. It may be difficult forgoing easy accessibility of all the interesting sights and sounds and tastes but the outwardly radial move is well worth it – you save money. Beyond a certain point the convenience factor of being in the center of the city is taken for granted and the irritation of staying in an outpost starts to wane. Logic would dictate that a cannily chosen outpost would appreciate faster than a much discovered nerve center. Something like mid-caps vs. large caps.

Does that mean that I do not personally prefer being long on property (other than the one where I reside)? I do – that’s the reason why I’ve sunk in some amount of money in Godrej Industries Ltd. (though not directly into Godrej Properties)

ctrl, SHIFT, delete

I am squeezing in a quick obligatory post since The Third I opens (i.e. has new posts) every 3rd day….

Shifted to Hyderabad – yesterday. New work. New chapter. At first glance, the city seems good….but to me, personally, the Maximum City is just that – max. Always.

Will be staying alone, so cooking, cleaning, etc get added to my resume! I do not have unfettered access to the internet to start off with, therefore this pathetic looking first post from a new city. Hope to get regular quickly. Got to go….need to find something to eat. Then to find someplace to stay.

BTW, have not even as much glanced at whats happened to the markets since Monday. Unless the floor has given in I think I’m good. It’s a virtue to develop – especially if you are deeply long equities. To develop the ability to breathe normally if one is shut off from the tickers for an extended period of time. And yet sleep blissfully. Learning that money should be driven by you and not the other way around.

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