Low-cost home projects may save the day for realty

Low-cost home projects may save the day for realty
The Economic Times, October 22, 2009, Page 14

Sept Show Likely To Be Poor Y-o-Y, But Seen Better Than June Quarter Results

Supriya Verma Mishra ET INTELLIGENCE GROUP

DLF and Unitech, the two biggest real estate developers, are poised to lead the sector in reporting that profits plunged in the September quarter as sales were lower than a year ago due to high prices. But earnings may be better than the June quarter as sale of lowpriced homes brought in hopes of revival, which may fizzle out if developers keep raising prices.

Many real estate firms which were teetering on the brink of collapse a few months ago, have come back to life as they used the record stock market rally last quarter to raise equity funds and cut their debt which almost ruined them during the credit crisis.

“Developers such as DLF and Orbit will gain from the launch of city-centric projects at aggressive price points,” said a report from brokerage Edelweiss Capital. Unitech and DLF have sold over 7 million sq ft and 4 million sq ft of space, respectively, from their new launches during the current fiscal.

DLF may report that its net profit crashed 75% to Rs 491 crore and its cross-town rival Unitech may say earnings nearly halved to Rs 191 crore, analysts’ forecast shows.

“Significant revenue contribution is expected from DLF’s West Delhi project where the company has recorded sales of Rs 16 billion following a 30% q-o-q rise in unit sale prices,” said a CLSA report.

The industry’s focus on buyer affordability with smaller and functional homes helped it cut down inventory and arrest a sharp decline in sales. On a y-o-y basis, however, the industry revenue is expected to shrink 19% during the quarter. But it will be an improvement from declines of 30% and 70% in June 2009 and March 2009 quarters respectively.

Some are also improving their stretched balance sheets by selling non-real estate assets such as wind power and hotel businesses. Those sale of assets also helped them generate enough cash to complete under construction projects at a time when presales had completely vanished.

DLF sold its wind energy business and hotel properties which helped it to improve cash flows. Similarly, Unitech sold a couple of its hotel projects.

“Thus the average debt-to-equity of key real estate companies is expected to decline significantly from 1x in March 2009 to 0.4x in September 2009,” said a report by Motilal Oswal Securities.

Improved liquidity coupled with new launches of low-cost budget homes has lowered construction costs for most developers, reducing EBIDTA margins by as much as 10 percentage points. Some exceptions like Mumbai-based HDIL may report an improvement in operating profit margin, thanks to a 15% gain in transferable development rights. Average EBIDTA margin for September 2009 will be 27% as against 39% for June 2009.

However, net margins will show some gains because of lower debt and fund raising through share sales. This new fund flow has helped many developers to lower their leverage and thus save on interest cost. The overall PAT margins for the September quarter will be 300-350 basis points higher than June 2009 PAT margin of 26%.

Seeing the demand pick up, builders have been quick to increase prices. However, this will have a dampening effect on demand as well as buyer confidence. Out of the three segments, it is only the residential market that has seen a recovery. Commercial and retail segment are still under stress.