Business Standard

Higher costs cloud realty firms

Related News

While and raw material costs could put profitability of companies under pressure, a steep rise in borrowing costs is likely to hurt demand.

The fell 11 per cent over the last month and eight per cent over the week as real estate companies reported margin pressures in the September quarter. To add to the problems, the Reserve Bank of India (RBI) toughened stance on rising asset prices. Also, doubts are being expressed about a pick-up in volume due to high prices.

“A drop in volumes due to high prices could lead to working capital issues for some players”, said an analyst. The RBI’s measures – lowering the loan to value ratio and higher provisioning for luxury home and teaser loans –are likely to have a minor impact, say analysts. The sector also faces spiralling costs, which have dented the profitability of India’s largest listed players. High land prices, construction costs and muted sentiment could hurt plans of companies such as which are looking to come out with initial public offers (IPOs).

New woes
Though the credit policy was negative for the sector, some realty experts, such as Sanjay Dutt, CEO, Business, Jones Lang Lasalle Meghraj, believe it will have a moderate impact. According to them, most conservative financial institutions and banks have already become cautious on home loans. Analysts say key urban markets such as Mumbai and Delhi will be impacted by higher provisioning for home loans of Rs 75 lakh and above.

Given the price increase and higher construction costs (due to labour shortage and rising cement and steel prices) and lower sales in markets such as Mumbai, the norms will be an additional burden for the builders.

With developers withdrawing the 10:90 (10 per cent upfront and the rest on possession) schemes, analysts believe they are likely to bring down the size of the houses or look at lowering prices. While banks have not yet raised rates, analysts believe home loan rates may rise 50 basis points, increasing the borrowing cost. Overall, higher prices and rising costs could hurt demand.

According to analysts, Mumbai-based developers (Orbit etc) and others such as DLF, and will be impacted given their exposure to premium housing.

Cost pressure
High raw material costs and paucity of labour have led to spiralling of expenditure for leading developers. Unitech and DLF, India’s top realty players, saw raw material costs double year-on-year in the September quarter, while consolidated revenues rose 26.5 per cent and 39 per cent, respectively, for the duo. Construction costs were up 38 per cent for on a sequential basis.

In Rs cr Sales % chg Ebitda (%) PAT % chg P/E (x)** 
DLF 4,813 21.0 38.5 1,747 1.1 20.5
Unitech 3,253 1.1 37.2 770 16.0 19.4
HDIL 2,182 45.0 53.3 865 51.0 12.2


25.7 190


Sobha 1,522 34.8 25.0 190 42.0 10.6
Financial figures are FY11 estimates; % change is y-o-y; *Loss to profit; **FY12 estimates
Source: Analyst reports

DLF, which saw earnings before interest, depreciation, tax and amortisation margins drop 900-basis points on a sequential basis to 42 per cent in the quarter, says the drop on account of variation in the product mix is temporary and the company is likely to end the year with margins in the 45-50 per cent range.

Developers say cost pressures are likely to stabilise, but higher land prices and subsequent pricing are the key concerns. Analysts say developers that have outsourced projects with fixed contracts or whose projects are nearing completion will be less impacted as compared to those which are yet to start their projects. They say developers are no longer chanting the affordable housing mantra and are focusing on premium or luxury projects which, given high land prices and construction costs, make more sense. However, volume holds the key and needs to be monitored.

The stock prices of realty companies could see more downward pressure if volumes don’t take off. In addition to higher sales volumes, successful listing of some big-ticket would reflect interest in the sector, said analysts. While Oberoi Realty and Prestige Estates managed to raise Rs 2,200 crore recently, Emaar MGF’s IPO would be closely watched, given that this would be the company’s fourth attempt to list.

While most analysts are bearish on the sector per se, they advice a selective approach. In terms of picks, analysts are putting their faith on DLF, Sobha (26 per cent upside each) and Anant Raj Industries (39 per cent).

Read more on:   

Read More

Planning for retirement through pension plans?

A combination of EPF, PPF, NPS along with equities will be a good option

Quick Links

Market News

Odisha's Potato Mission to cost Rs 267 crore

Expenditure finance committee to appraise the scheme

Markets cheer ECB stimulus; Nifty ends above 8,800

The 30-share Sensex ended up 273 points at 29,279 and the 50-share Nifty surged 74 points at 8,836

Markets scale record highs fourth straight day

he 30-share Sensex provisionally ended at 29,262.63 up 256.61 points and the 50-share Nifty gained 60.15 points at 8,821.55.

Paushak zooms 20% as Q3 profit doubles

The company reported net profit Rs 3.04 crore in December quarter against Rs 1.43 crore in a year ago quarter.

Guargum sheds 1.4% on selling pressure

Traders offload positions on increased arrivals in the physical markets from growing belts


Back to Top