Bangalore: Realty firms continued to see an improvement in sales in the December quarter but analysts are asking whether the high volume recovery will sustain.
Their forecasts for India’s largest real estate company by market value, DLF Ltd, point to a steep decline in profits despite higher home sales, in part because of a slump in commercial leasing.
Most realtors in the past two quarters have seen a spurt in home sales along with some momentum in commercial leasing but the recovery has been largely localized in Mumbai followed by New Delhi, said analysts.
Most of the recovery between October and December has been in affordable, mid-market properties. Analysts said 2010 will be a deciding year for realty firms to see if they want to stick to the high-volume, affordable-price model and its thin margins, than the earlier high-price, low-volume business.
Graphics: Yogesh Kumar / Mint
“The overall outlook for the real estate sector is positive because new projects are getting launched, and because of pent-up demand, sales have also happened in cities like Mumbai,” said Ajay Parmar, analyst, Emkay Global Financial Services Ltd.
Parmar said the commercial and retail segment will remain lukewarm, but other analysts see a short-term monetary rebalancing, higher residential volumes and a pickup in commercial office space leasing.
India’s top developers will announce their quarterly results over the next two weeks.
A Mint poll of five brokerages estimates DLF would post an average 40% year-on-year drop in net profit to Rs409.08 crore for the quarter ended 31 December. Revenue is set to rise 16% to Rs1,585.3 crore.
Over the second quarter, DLF’s net profit is seen down 19% on a 14% fall in revenue.
Analysts said the drop in profit is primarily because DLF has suspended sales to DLF Assets Pvt. Ltd (DAL), a firm owned by the founders of DLF.
DLF used to sell its completed commercial assets to DAL but is now absorbing the firm into itself. DAL accounted for up to 40% of the listed realtor’s revenues until December 2008.
As for Unitech Ltd, India’s second largest developer by market value, analysts estimate an average 22.6% year-on-year rise in its third quarter revenue to Rs600 crore and a 38.2% increase in net profit to Rs188 crore.
Over the second quarter, profit and sales may have risen by 22.44% and 36.64%, respectively. The company’s Ebitda (earnings before interest, taxes, depreciation, and amortization) margins may, however, decline owing to higher contribution from mid-income housing projects, brokerage Motilal Oswal Financial Services Ltd said in a recent report.
Nomura Financial Advisory and Securities Indian Pvt. Ltd points out in a 4 January report that with a targeted focus and sale volumes of 20 million sq. ft in the current fiscal, Unitech will continue to generate high volumes through its affordable projects.
Housing Development and Infrastructure Ltd (HDIL), India’s third largest realty firm, is estimated to post a net profit of Rs193.1 crore on a revenue of Rs411 crore—a rise of 4.4% and 31%, respectively, over a year ago, as per an average of two analysts’ forecasts.
HDIL’s revenue is likely to be driven by the sale of transfer of development rights (TDR) and land, said Kejal Mehta, an analyst with Prabhudas Lilladher Group.
Slum TDR is a tradable paper issued by state governments in exchange for free development of slums by builders, who use the paper to develop other sites.
HDIL will announce its results on 20 January.
Analysts also expect the debt levels of real estate firms to reduce further. For most realty firms, their debt-equity ratio has improved after they successfully raised and repaired balance sheets.
Unitech, for example, has raised almost $1 billion (Rs4,570 crore) in equity through two qualified institutional placements, issues and warrants, enabling a repayment of Rs2,400 crore of loans.
DLF, on the other hand, will see its debt increase by Rs2,200 crore to Rs16,200 crore following the DAL merger.
The Bombay Stock Exchange’s realty index has risen about 131% over the past year, outpacing the benchmark Sensex’s 94% rise.