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Vidya Bala

The September quarter results of 25 listed realty companies suggest that the sector’s recovery is painfully slow. Only nine realty companies managed an expansion in sales on a year-on-year basis.

Sales of the top-listed players such as DLF and Unitech are still a good 50 per cent down compared with the 2008 numbers. Net profits for the 25 companies declined by 61 per cent over the year-ago figures.

However, the sequential numbers offer some hope with sales and net profits for the 25 companies increasing by 18 per cent and 40 per cent respectively over the June quarter. Almost all the companies in the list managed to grow sequentially over the last two quarters suggesting that the worst may be over for the sector.

A shift in focus towards mid-income/budget homes over the last one year and a sharp decline in home loan interest rates offered by banks have enabled an uptick in property demand.

Players’ fund-raising through the qualified institutional placement route has provided ample funds for the execution of recent launches. An expansion in sales on a year-on-year basis would, however, be a clear indicator of whether the sector benefits from the above moves.

Mahindra Lifespaces, Peninsula Land, Puravankara Projects and Orbit Corporation are some of the prominent companies that managed to up their sales significantly over their year-ago numbers. Barring Puravankara, the rest of the companies are key beneficiaries of the relatively early recovery in the Mumbai property market.

For bigger players Unitech and DLF, while a number of their projects are under execution, revenue flows may come with a lag, once the projects witness a certain stage of completion.

Real estate companies have also bucked the general trend of Corporate India expanding its profit margins on the back of a reduction in raw material and interest costs. The contraction in operating profit margins (OPMs) is a clear trend visible in most realty companies; OPMs have declined from an average 53 per cent in September 2008 to 42 per cent now. This can be attributed to a decline in realisation as a result of the alteration in the business strategy of almost all the players from ‘high margin’ luxury homes to ‘volume driven’ mid-income housing.

Going forward, a sharp increase in OPMs is unlikely, unless the companies once again shift focus to high-margin projects. Companies such as HDIL and Ackruti City may, however, be exceptions to this trend as their ‘Transferable Development Rights’ (TDR) sales model may work in their favour what with the price of TDRs showing an uptrend in Mumbai.

The quarter also saw at least seven realty companies, including Unitech, Parsvnath Developers, Orbit Corporation and Sobha Developers, raising anywhere between Rs 150-3000 crore through QIPs. A few smaller players have currently proposed to raise money through a similar route. This fund-raising has not only helped many of the companies reduce their borrowings to comfortable levels but also eased their tight working capital position. HDIL, for instance, retired close to Rs 1,000 crore of debt reducing its debt-equity ratio to a comfortable 0.5.

The RBI’s recent move of increasing banks’ provisioning for real estate lending is being perceived as a negative for realty companies for two reasons: one, it could increase the cost of borrowing; two, banks may choose to lower lending to real estate companies. While this threat could affect a recovery, the recent spate of QIPs raised by real state companies is likely to meet their funding requirements over the medium-term. If demand, especially on the residential side, sustains and home loan rates remain benign, there may yet be hope for volume pick-up — a key to improve realty players’ cash flows.

More Stories on : Real Estate & Construction | Financial Performance

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