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Dec 14, 2012, 06.31 PM IST | Source: CNBC-TV18

Expect cost of land acquisition to go up by 50%: M&M

After the Union Cabinet cleared the land acquisition bill on Thursday, CNBC-TV18 spoke to Arun Nanda, director of Mahindra & Mahindra for his views on the bill. Nanda expects the cost of land acquisition to go up by 50 percent.

The land cost will go up by probably about 50-60 percent or maybe 100 percent for the compensation to the farmers

Arun Nanda

Director

M&M

After the Union Cabinet cleared the land acquisition bill on Thursday, CNBC-TV18 spoke to Arun Nanda, director of Mahindra & Mahindra for his views on the bill. Nanda expects the cost of land acquisition to go up by 50 percent.

“The cost of land acquisition will go up because if you are looking at an industrial project, land costs are typically between 20-25 percent of the project, they are not 100 percent,” Nanda adds.

Below is an edited transcript of Arun Nanda's interview on CNBC-TV18

Q: What are your initial thoughts on the land acquisition bill as the official bill is not yet on the PRS website?

A: This 80 percent worries me, because in our experience 10-15 percent people are not traceable at all because they have either migrated or the land records are not clear. On top of that, there are people who wait for an opportunity that we will play the decent role and then blackmail you into getting good prices. In a non-public private partnership (PPP) situation to get 80 percent consent from farmers, forget the cost part, is a cause of concern. 80 percent is a non-starter.

Q: Focusing on the cost part because there are initial brokerage reports estimating that now the cost of projects can rise by 50 odd percent. By what amount can the cost rise?
 
A: The cost of project will not go up by 50 percent. The cost of land acquisition will go up because if you are looking at an industrial project, land costs are typically between 20-25 percent of the project, they are not 100 percent. In a real estate situation, land cost is a primary cost. There are three elements of cost; the first one is to get a good deal for the farmers.

The farmers who held this land for generations need a good price but the other costs that are going to be added to it and since we don’t know the contents of the bill, there is a rehabilitation cost and there is a cost of people. The unfortunate part is that the benefits do not necessarily go to the farmers because the moment a project is announced, middleman land aggregators come in and do power of attorney or agreements to sell with the farmers and they are the ones who make money out of it. That is one thing the government should primarily try to get rid of because they are the ones who blackmail the industry to get extract prices.

The land cost will go up by probably about 50-60 percent or maybe 100 percent for the compensation to the farmers but the indirect costs, we have not been able to estimate which is the cost of rehabilitation and other things which is going to be significant.

Q: To what extent can the land cost in the overall plant whether it is power or any other infrastructure unit or an automobile plant go up? Rehabilitation is an old issue, the bill has only put it into law, but were you not doing it anyways?

A: Yes, we have been doing it but it’s been more of a social thing. With reference to your first question, I do not think there is one size that fits all; in a power project land will be a very significant portion because land required for a power project will be much larger. Generally in a manufacturing setup, land costs are around 10 percent because equipment is a larger portion of the cost. When you get into projects which require huge land, like power has huge storage areas for coal or steel plant, there the land costs will be much higher because of large area of land that is required.

M&M stock price

On December 19, 2014, Mahindra and Mahindra closed at Rs 1222.35, up Rs 8.15, or 0.67 percent. The 52-week high of the share was Rs 1421.00 and the 52-week low was Rs 847.00.


The company's trailing 12-month (TTM) EPS was at Rs 58.92 per share as per the quarter ended September 2014. The stock's price-to-earnings (P/E) ratio was 20.75. The latest book value of the company is Rs 270.60 per share. At current value, the price-to-book value of the company is 4.52.

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