Interest payment dig a hole into realty companies’ pockets

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Interest payment dig a hole into realty companies’ pockets
The Financial Express, February 12, 2009, Page 4

Kakoly Chatterjee, New Delhi

The interest payment as part of total income of real estate companies has gone up dramatically in the current financial year. It has witnessed a four-fold increase during the third quarter of the current financial year. In financial year (FY) 2007-08, third quarter income as a percentage of total income stood at 6.5%, while it rose to an astonishing 25.92% for the current financial year. It can be attributed to the fact that income has plunged by half, while the expenditure on interest payment has more than doubled.

In the current financial year for the quarter ending December, the total income of all realty companies stood at Rs 2,516.56 crore, while the total expenditure on interest payment stood Rs 652.28 crore in comparison with the corresponding quarter of FY07-08 where the total income of companies was Rs 5,898 crore while expense on interest payment stood at Rs 362.53 crore.

For the quarter ending September, interest payment as a part of total expenditure almost tripled. From 5.14% in FY 07-08 it rose to 14.85% during the same period of FY 08-09. With piling inventories and low sales, this number started rising from the first quarter itself when it doubled from 5.13% during the last financial compared with 12.21% during this financial year.

“With lack of growth in the top line, realty companies are feeling the pressure as the interest cost continues to grow. We are, however, hoping that things will look up in the fourth quarter as property price is sliding and interest cost is coming down,” Amitabh Chakraborty, president (equity) at Religare Securities said.

During the third quarter of this financial year when the income of the country’s largest real estate player—the Delhi-based DLF Ltd—came down to Rs 694.16 crore, its interest expense stood at Rs 210.19 crore. This means 30.28% of the income goes towards interest payment. In the corresponding period of FY 07-08 DLF’s income stood at Rs 1812.59 crore while its interest payment was Rs 130.12 crore, 7.18% of its income. Currently, its interest payment burden has become more than fourfold as compared to its income.

The impact of rising interest burden compared to income started getting accentuated from the second quarter of this financial year for DLF. Interest expense as a part of income stood at 13.74% with income being Rs 1362.86 crore and interest expense Rs 187.26 crore. In FY 07-08 interest expense as a part of income was 4.49% with income at Rs 1299.74 crore and interest payment at Rs 58.36 crore

Some developers have already started working on decreasing the interest payment. Delhi-based Parsvnath Developers chairman Pradeep Jain said, “We have paid off some of the principal amount during the third quarter of this financial year to reduce the expense on interest cost.”

Cumulative income of the first three quarters of Parsvnath and Unitech has gone down by 45% and 9.3%, respectively, during FY 08-09 compared with the previous financial year. During the same period cumulative interest expense for Parsvnath rose 153.72% and Unitech’s by 65.12%.

The scenario is expected to improve in the next quarter with the vote on account expected to boost this sector through tax breaks. With a few public sector banks bringing down interest rates to as low as 8%, enquiries from customers has already started picking up. Realising the importance of bringing in movement to the sector realty firms are reducing prices of properties. This additional cash flow will help the fourth quarter to look up as income is expected to rise.

Meanwhile, many realty firms are converting their short-term debts into long-term ones. This would raise the interest expenditure component of the realty firms. “Realty firms are converting short-term debts into long-term ones. As a result, the amount to be repaid is increasing. In a scenario where it is quite impossible for them to pay the principal amount, this burden continues to rise. A little movement in the sector is not going to help until volumes pick up,i summed up Shobhit Agarwal, MD, Capital Markets, Jones Lang LaSalle Meghraj.