Dubai Sinks And Everything Grand Goes Down With It!

Dubai World May Renege on $ 60 Bn Of Debt, Reminds The World that the Ghosts of Bear Stearns, Lehman and Goldman Sachs are still around.

Dubai's Bust-Up like the Tequila Bonds of Mexico will push stocks of Indian entities with sizeable operations under the scanner-these would include L&T, Voltas, Punj Lloyd and PSL. Maybe warning shots for now, but surely signs of the times to come that massive debt brings in.

Just a year after the global downturn derailed Dubai's explosive growth, the city is now so swamped in debt that it's asking for a six-month reprieve on paying its bills - causing a drop on world markets Thursday and raising questions about Dubai's reputation as a magnet for international investment.

The fallout came swiftly after Wednesday statement that Dubai's main development engine, Dubai World, would ask creditors for a "standstill" on paying back its $60 billion debt until at least May. The company's real estate arm, Nakheel - whose projects include the palm-shaped island in the Gulf - shoulders the bulk of money due to banks, investment houses and outside development contractors.

In total, the state-backed networks nicknamed Dubai Inc. are $80 billion in the red and the emirate needed a bailout earlier this year from its oil-rich neighbor Abu Dhabi, the capital of the United Arab Emirates.

Markets took the news badly - with the Dubai woes and the continued fall of the U.S. dollar giving investors twin worries.

In Europe, the FTSE 100, Germany's DAX and the CAC-40 in France opened sharply lower. Earlier in Asia, the Shanghai index sank 119.19 points, or 3.6 percent, in the biggest one-day fall since Aug. 31. Hong Kong's Hang Seng shed 1.8 percent to 22,210.41.

Wall Street was closed for the Thanksgiving holiday and most markets in the Middle East were silent because of a major Islamic feast.
"Dubai's standstill announcement ... was vague and it remains difficult to discern whether the call for a standstill will be voluntary," said a statement from the Eurasia Group, a Washington-based research group that assesses political and financial risk for foreign investors interested in Dubai.

"If it is not, Dubai World will be going into default and that will have more serious negative repercussions for Dubai's sovereign debt, Dubai World and market confidence in the UAE in general," the statement added.

Dubai became the Gulf's biggest credit crunch victim a year ago. But its ruler, Sheik Mohammed bin Rashid Al-Maktoum, had continually dismissed concerns over the city-state's liquidity and claims it overreached during the good times.

When asked about the debt, he confidently assured reporters in a rare meeting two months ago that "we are all right" and "we are not worried," leaving details of a recovery plan - if such a plan exists - to everyone's guess.

Then, earlier this month, he told Dubai's critics to "shut up."

"He needs to produce a recovery plan that will be respected by those who want to do business with Dubai," said Simon Henderson, a Gulf and energy specialist at the Washington Institute for Near East Policy. "If he does not do it right, Dubai will be a sad place."

After months of denial that the economic downturn even touched the glitzy city-state, the Dubai government earlier this year showed signs of trying to deal with the financial fallout that has halted dozens of projects and touched off an exodus of expatriate workers.

In February, it raised $10 billion in a hastily arranged bond sale to the United Arab Emirates central bank, which is based in Abu Dhabi.

The deal - seen by many as Abu Dhabi's bailout of Dubai - was part of a $20 billion bond program to help Dubai meet its debt obligations. On Wednesday, the Dubai Finance Department announced the emirate raised another $5 billion by selling bonds - all taken by two banks controlled by Abu Dhabi.

Abu Dhabi's ruling Al Nahyan family has been more conservative with its spending, investing oil profits into infrastructure, culture and state institutions. During Dubai's real estate bonanza, the Nahyans saw their flashy neighbor race ahead with development plans and tourism plans that had plenty of hype but few details on how they would be pulled off.

Some did materialize. The more than 2,600-foot (800-meter) Burj Dubai is scheduled to open in January as the world's tallest building. But many other projects, including a tower even taller than the Burj Dubai and satellite cities in the desert, are still just blueprints.
Last week, Sheik Mohammed demoted several prominent members of Dubai's corporate elite and replaced them with members of the ruling family, including his two sons, one of whom is Mohammed's designated heir.

Businessmen who fell out of favor were closely associated with Dubai's phenomenal success. They include the head of Dubai World, Sultan Ahmed bin Sulayem, and Mohammed Alabbar, the chief of Emaar Properties, developer of the Burj Dubai and hundreds of other projects.

"He is trying to shake things up," said Christopher Davidson, a lecturer on the Gulf at Britain's Durham University and an author of two books on the UAE.

However, Davidson added, Mohammed's decision to replace those who helped put Dubai on the world map with his relatives might be "read as an increase in autocracy which does not look good internationally."

Not everyone is upset at Dubai Inc.'s transformation into a family business, analysts say.
Mohammed's latest moves may have pleased Abu Dhabi more than the foreign investors, but it is Abu Dhabi that still has the strongest incentives to save Dubai from its financial misery.

"By shifting the power base back to the family things are as they should be as far as Abu Dhabi is concerned," said Mohammed Shakeel, a Dubai-based analyst for the Economist Intelligence Unit.

After an expensive adventure in doing things the Western way, it's "going back to basics" for Dubai, Shakeel added.

Lanco Industries BUY (cmp : 43Rs)

Owned by Electrosteel Castings, Lanco Industries manufactures about 180,000 tpa of ductile steel pipes that are primarily used for the transportation of drinking water.

Backdrop: Water-related demand – thrust should continue We believe water and irrigation offers a very strong business opportunityfor Indian pipe manufacturers, in addition to the opportunity from the energy sector. A combination of greater government focus on irrigation,higher multilateral lending for water-related sectors and enhanced private sector participation in water supply projects increase the potential for rise in demand from this segment

Key focus area for the government according to 11th plan Irrigation remains a key focus area for the government and more so for the state governments due to the politically sensitive nature of the investments. Combined with water supply and the sanitation segment, which is essentially driven by the government plan for Jawaharlal Nehru National Urban Renewal Mission (JNNURM) projects, this segment is thesecond-mostimportant focus for the government after the power sector as perthe 11th five-year plan. The 11th plan envisages ~US$83bn of investments in irrigation and wate supply and sanitation over FY08–12.Bharat Nirman programme – significant addition of 5.9m hectares of irrigation potential in four years Under the irrigation component of Bharat Nirman (the flagship programme ofthe government of India to improve infrastructure in rural areas), there was a four years target (FY06–09) to create additional irrigation potential of10m hectares. This was planned to be met largely through expeditious completion of identified ongoing major and medium irrigation projects in addition to minor irrigation schemes through surface flow and ground wate development. Irrigation potential added in five key states The programme succeeded in creating additional irrigation potential of 5.94mPradesh, Maharashtra, Gujarat and Rajasthan leading the way, creating 66% of the additional potential among them. However, there still remains a deficitof 34.6m hectares irrigation potential in India. India’s estimated irrigation potential is around 139.9m hectares; after the four-year BharatNirman plan, the irrigation potential could be 105.3m hectares.

Andhra Pradesh remains the leader in providing thrust to irrigation investments the re-elected government in Andhra Pradesh has plans to double spending on irrigation over the next five years. This could also lead to higher irrigation spending by neighbouring states such as Maharashtra and Madhya Pradesh. Urban Infra – rapid approval of projects augurs well for order inflows Investments in Urban Infra tend to be much in doubt given the fiscal scenario of state governments and urban local bodies. However, significan Jawaharlal Nehru National Urban Renewal Mission (JNNURM) projects have been approved during the past year, with project approvals having increased to Rs494bn from Rs270bn a year ago. The major positive is the increase in assistance released by the government of India (GOI) in the past year; that assistance has gone up almost three-fold from Rs29bn to Rs74bn. Water supply/sewage projects contribute 76% of total project Water supply, sewage and drainage projects account for 76% of all project approvals. The mass rapid transport system (MRTS) and roads follow with contributions of 10% and 7%, respectively. The top six sectors accountfor 97% of all the approved projects.32% of government’s contribution already disbursed – expect surge in order flows.

The total contribution of the central government is Rs234bn, representing 47% of the total project cost. The central government has already releasedRs74bn under the first instalment for 461 projects in 21 states and Union Territories. We view the release of funds by the government of India as a proxy to progress on the ground because funds are only released for specific projects for which detailed project reports (DPRs) have been approved. Given the strong activity on the ground, we expect a surge in orders in the areas of water supply, sewage and drainage during the next 6–12 months.

The Rs 650 crore entity had a reasonably good FY09, withafter tax profits at Rs 18 crore, that work out to Rs 5 in EPS. For the Q1to June 2009, Lanco Industries has reported a 24 per cent increase in Revenues to Rs 169 crore (Rs 136 crore), with after tax profits of Rs 9.8crore-a qoq jump of 50 per cent. With cost key raw material inputs having come down and rupee appreciation actually making imported coke cheap the margins of the corporate are looking up. At a prospective EPS of Rs 10 for FY10, Lanco Industries is the cheapest stock in the ductile pipes space. A reasonable PE for this type of business would be 7 to 10 giving the scrip a 12 month prospective price target of Rs 70 to Rs 100.