Smaller realty players manage a quicker comeback from slump

Size is an advantage in many sectors, but not, it appears, in real estate development. Smaller realty players have fared better than the national giants in pushing their sales numbers back to pre-slump levels, in the latest fiscal.

Players such as DLF, Unitech or HDIL may boast of massive land bank or assets but it is the mid-sized ones such as Oberoi Realty, Mahindra Lifespace Developers or Prestige Estates Projects that have reported higher sales in fiscal 2010-11 compared to the boom year of 2007-08.

It is now three years since the realty downturn and only a half of the sample of 30 listed stocks analysed managed to move past the sales they posted in 2007-08.

Yet to climb back

Sales of players such as Parsvnath Developers, Unitech, DLF for 2010-11 are still a good 22-33 per cent below the levels in fiscal 2008.

For the realty sector as a whole, sales for 2010-11 is 17 per cent below the peak of 2007-08. It is the large players and the very small developers who have suffered the most setbacks in this period.

Contrary to belief that geographic diversification and presence across every segment – residential, commercial and retail – would help the larger players during a downturn, it is the mid-sized players who have enjoyed a quicker comeback, by staying in familiar territory and holding on to their price segments.

Entry into too many regions and delays in project launches/execution due to local issues, were some of the key reasons for the poor topline growth for large players despite demand picking up.

DLF for instance had stated in its analyst presentation that ‘project approval delays' have become a bigger impediment to growth especially in the second half of FY-11. Some of the large projects planned in phases by these players also mean longer time to build and slower revenue flow.

The slow progress on projects has meant relatively slower delivery for some. DLF for instance delivered 7 million sq. ft in FY-11.

A much smaller Bangalore-focussed Prestige Estates Projects (whose stock is one-eight the market cap of DLF) on the other hand delivered a whopping 16.6 million sq ft. Players such as Prestige resumed where they left off in familiar territory, instead of approaching new markets after the hit.

Profits way down

While half the listed companies managed sales growth for 2010-11, two-thirds of them failed to expand profits. Even while companies hobbled back to normalcy in terms of volumes, higher raw material and input costs swallowed up much of revenue generated.

Operating profits of the 30 companies were still 42 per cent below 2007-08 levels, while net profits were a whopping 62 per cent lower compared to the boom year, thanks to mounting interest costs, without higher revenue generation.

On profits too, it was a handful of mid-sized companies including Oberoi Realty, Godrej Properties and Peninsula Land that overtook their FY-08 profits by a good margin.

Input costs in recent times, have impacted the two large players DLF and Unitech more than the mid-sized players. DLF for instance overshot its budget for input costs by Rs 475 crore, pertaining to various earlier periods resulting in charging the same in the March quarter.

Unitech's construction costs as a proportion of sales climbed 8 percentage points in the last one year.

Oberoi Realty on the other hand, kept its operating costs to sales ratio intact, backed by higher yields from some of its leased assets.

In all, the mid-sized players are beginning to demonstrate that concentration in select regions and focus on limited projects can be a good strategy to work with.

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