Real estate companies, which are battling falling sales and high debt, are unlikely to see significant improvement in their profits and revenue anytime soon.
On an average, net profits of real estate companies are expected to fall 20 per cent, while net sales may rise three per cent in the first quarter of the current financial year, according to data by brokerages such as Motilal Oswal Securities, Kotak Securities, Edelweiss Securities, Prabhudas Lilladher and Emkay Global.
The estimated fall is being attributed to slow demand and fewer launches in the first quarter by many companies in the sector, including DLF and Unitech. In the quarter ended March, unit launches halved in regions such as Mumbai and the National Capital Region (NCR), according to realty research firm PropEquity. Analysts expect the trend to continue in the quarter ended June.
Q1 estimates for top two players
|Source: Brokerage houses
According to data culled by BS Research Bureau, net profits of the top 12 property companies showed an average decline of 15 per cent in the fourth quarter of 2011-12, while net sales fell 12 per cent.
“Sequentially, incremental launches have not happened in the first quarter, as there was an inventory pile-up and approvals were relatively slow in markets such as Mumbai,” said Rikesh Parikh, vice-president (equities), Motilal Oswal Securities.
“Debt levels are expected to see a marginal dip, primarily helped by sale of assets. We expect developers to give cautious sales guidance for the next six to nine months, given the slow demand and high mortgage rates,” Bank of America Merrill Lynch analysts Abhishek Kirana Gupta and Gagan Agarwal stated in a recent report.
According to research by property consultant Knight Frank, developers in Mumbai are sitting on an inventory of 80,000 units, valued at Rs 1,05,000 crore. Owing to high prices and the slowdown in the economy, the absorption of homes in Mumbai fell 35 per cent to 45,000 units in 2011-12, compared to the previous year. Compared to the boom period of 2007, it dropped about 60 per cent. In the NCR, too, absorption fell about 50 per cent in 2011-12, shows data from PropEquity.
The earnings before interest, tax, depreciation and amortisation (Ebitda) margin of real estate companies is expected to fall by 450-500 basis points in the quarter ended June, primarily due to the high interest outgo. DLF, the country’s largest developer, is expected to pay interest of Rs 590 crore in the quarter, 19 per cent higher than what it paid in the corresponding quarter last year. “High interest payments have also eaten into the Ebitda margin of the company,” said Parikh.
Analysts say developers in regions such as Bangalore are likely to fare better due to better traction there. “Bangalore-based developers are expected to record better performances, compared to those in Mumbai and NCR, who could continue to feel pressure on margins,” said Akshit Shah, research analyst with SBICAP Securities.
Bangalore-based Sobha Developers sold 0.84 million sq ft of new space, valued at Rs 479 crore, in the quarter ended June, marginally higher than new space sold in the quarter ended March.
In contrast, DLF is expected to report sales of 2 million sq ft in the quarter ended June, against 6.7 million sq ft in the previous quarter, states a recent report. The company is expected to record average net sales of Rs 2,478 crore in the first quarter of the current financial year, 1.3 per cent higher than the average net sales in the year-ago period. The company’s net profit is likely to decline 40 per cent to Rs 215 crore, owing to the high interest outgo, while its Ebitda margin is expected to stand at about 40 per cent. Analysts feel the company’s debt would remain at the current level of Rs 16,824 crore, as it did not carry out any non-core asset sale in the quarter.
Oberoi Realty, which does not have any debt on its books, is expected to record a better performance compared to its peers. The company’s net sales are expected to jump 38 per cent to Rs 223 crore in the quarter ended June, while its net profit is expected to rise 31 per cent to Rs 137.4 crore. Its Ebitda margin is estimated at 60 per cent.
Many brokerages believe the real estate industry would fare better in the second half of the current financial year, owing to expected cuts in interest rates, stable prices and the resultant improvement in absorption. “The sentiment in the Mumbai property market seems to have improved compared to previous quarters. We expect absorption to increase in the second half of 20112-13,” SBICAP’s Shah stated in a recent report.
“Despite an improvement in operating cash flows, we expect meaningful success in debt-reduction plans of leveraged developers like DLF and HDIL to be visible only in the second half of 2012-13,” said analysts at Motilal Oswal.