The Hindu Business Line : Strong Q1 show from realty, despite concerns

Concerns over correction in property prices and high interest rates did not hold back real estate companies from coming up with strong numbers for the quarter ended June 2007.

Our analysis of 20 prominent realty companies (excluding recently listed companies that do not have comparable quarterly numbers) reveals that revenues and reported profits grew by 65 and 119 per cent respectively over the previous year. Operating profits surged by 147 per cent over the same period. The sector appears to be enjoying super normal profits; attributable to a good number of companies having locked into low-cost land in earlier years.

flat revenues

Quarterly earnings, however, may not be representative of the full-year prospects for real estate and construction companies, as they book revenue based on the progress of the projects, rather than units sold. Revenues as well as margins, therefore, tend to be lumpy. Companies such as Mahindra Gesco Developers and Ansal Properties & Infrastructure have reported flat revenues for the quarter. Bigger players such as Unitech, Parsvnath Developers and Anant Raj Industries witnessed sharp increases in their operating profit margins (OPMs), either aided by low-cost land or a move into high-end projects. On the other hand, Peninsula Land and Mahindra Gesco Developers witnessed a decline in OPM as a result of flat sales.

Strategies

The players are meanwhile, adapting their strategies to a possible slowdown in demand. A few bigger players, who run the risk of slow down in demand for their high-end (and high priced) housing projects have already forayed into middle-income housing. DLF has announced that its focus on middle-income housing would start showing up from the next quarter. Unitech has also stated that it is looking at developing mass housing to tap into this segment. With bigger players moving from the luxury to the middle-income segment, margins may be lower in the coming quarters, even if companies manage to clock higher volumes.

Interest rates impact

That realty companies are facing pressures from higher interest rates was visible from the two-fold increase in interest costs in the June quarter of 2007 over the previous year. This follows a similar expansion in 2006-07. Interest costs as a percentage of sales rose from three per cent for the June 2006 quarter to 4.5 per cent now. Bigger players, with ambitious plans, appeared to be more hurt than mid-sized players in this front. Unitech, Parsvnath Developers and Ansal Properties were among those companies where the impact was significant.

These companies may have been hurt after the Government banned the external commercial borrowing route for integrated township projects in May this year. Among the mid-sized companies, Prajay Engineers Syndicate has shown relatively more consistent growth than peers in that segment. Other income grew by 20 per cent; but was not driven by forex gains, which bolstered profits for many other sectors this quarter.

Despite the sterling show on earnings, realty stocks continued to be under pressure on the bourses, with concerns over the domestic interest rate scenario and the US sub prime market occupying centre-stage, rather than the quarterly numbers. While stocks of large companies hardly gained in response to quarterly earnings, smaller companies such as Prajay and Vijay Shanthi Builders witnessed some appreciation.