BackReal estate debt remains a worry with weak 2014 sales forecast
Analysts say further debt reduction not expected soon as debt of 11 listed firms reaches `42,000 crore
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Bangalore: Top real estate developers may find it tough to reduce debt significantly this year as sales forecasts remain dismal, leading to concerns that weak cash flows may, in fact, cause more debt to pile up on their books.
Higher bookings and operational cash flows will be key to maintaining debt at a manageable level in 2014 for most real estate companies, which in 2013 focused on reducing debt by selling assets and other strategies, analysts say.
A slump in economic growth to 4.5% in the last fiscal year, the slowest pace in a decade, and high borrowing costs have hurt consumer sentiment and dented sales of residential and other real estate. Economic growth is forecast to stay below 5% for the second year in a row in the year to 31 March.
While the aggregate net debt of 11 listed real estate companies rose only marginally, by ₹ 1,000 crore, quarter-on-quarter to ₹ 42,000 crore in the quarter ended December, further debt reduction is not expected in the near term.
That’s because the sales momentum is expected to be weak in the first half of 2014-15 and companies would be scaling up execution of projects launched in 2012-13, said a February report by HDFC Securities Ltd, a brokerage.
The 11 companies include DLF Ltd, India’s largest listed developer, with net debt of ₹ 19,926 crore as of 31 December, which it had planned to trim to about ₹ 17,000 crore this fiscal year.
The Gurgaon-based developer recently this month sold its luxury hospitality chain Aman Resorts for $358 million (around ₹ 2,230 crore) and got a refund of ₹ 675.8 crore from the Delhi Development Authority (DDA) for returning a piece of land in the Dwarka neighbourhood. It intends to use the proceeds to pare debt.
To be sure, DLF’s consistent debt-reduction efforts have boosted investor confidence, but analysts said it’s time that the firm also showed healthy cash flows and profitability from its residential portfolio to maintain these debt levels.
“Debt isn’t a huge worry for DLF but because cash flows from its (residential) development portfolio haven’t been strong due to subdued sales in the NCR (national capital region) market and need to improve," said Sandipal Pal, analyst at brokerage Motilal Oswal Securities Ltd.
While selling assets or asset monetization to reduce high debt is fine, if operating cash flows remain negative, then debt will rise, Pal said.
DLF’s management, in a call with analysts after its fiscal third quarter earnings, said that its next milestone of reducing net debt to ₹ 10,000 crore may be reached in four years instead of three, given the economic situation.
The management also indicated that the qualitative aspect of debt is fast improving, and once its under-construction shopping mall in Noida, on the outskirts of New Delhi, becomes operational, healthy rentals will start coming in.
Revenue bookings for most real estate firms in the December quarter showed no improvement despite being a seasonally strong quarter of execution with performance of Bangalore developers being an exception. “Sales forecast for both NCR and Mumbai metropolitan region (MMR) is low and therefore no one will be able to considerably further reduce debt," said Adhidev Chattopadhyay, analyst, HDFC Securities.
Mumbai-based Housing Development and Infrastructure Ltd (HDIL), with net debt of ₹ 3,640 crore, aims to bring it down to ₹ 2,500 crore in the next six months, said Hari Prakash Pandey, vice-president, finance and investor relations.
“Debt reduction was our main focus in 2013, and that continues, but this year we also plan to launch two large projects that will bring in 50 million sq. ft of saleable area," he said. Pandey said that while home sales in Mumbai have moved from being frozen to subdued now, a few green shoots are visible with sales in the city’s distant outskirts picking up, owing to the affordability factor.
Another Mumbai developer, Godrej Properties Ltd, saw its net debt increase by ₹ 270 crore quarter-on-quarter to ₹ 1,530 crore in the December quarter largely owing to high land or FSI (floor space index) payments and approval charges for project launches.
High capex on ongoing office projects also impacted cash flows while cash collections have been slow owing to lack of new launches, said a JP Morgan report based on the Godrej analyst call.
However, the firm has a strong launch pipeline ahead and pre-sales are expected to see a significant jump FY 2015-16. Bangalore developers such as Sobha Developers Ltd, whose debt to equity ratios are comparable to their Mumbai or Delhi counterparts, score higher only because they maintain a good balance sheet with cash flows improving every quarter, said Motilal Oswal’s Pal.
Prestige Estates Projects Ltd (PEPL), for example, has seen a continued rise in consolidated net debt levels to ₹ 2,290 crore, up ₹ 490 crore in the nine months of 2013-14 due to capex and land acquisition, but the Bangalore developer continues to report a strong operational performance with healthy sales bookings and a robust pipeline of projects across South India, indicate analyst reports.
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