Realty sector likely to see a subdued Sep quarter

Analysts say the cash-flow situation of realty firms has not improved and debt costs haven’t come down
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First Published: Fri, Oct 12 2012. 11 29 PM IST
A continuing slowdown in demand and project launches in most property markets, including Mumbai and the National Capital Region, are expected to have affected both revenues and margins of large real estate developers. Photo: Mint
A continuing slowdown in demand and project launches in most property markets, including Mumbai and the National Capital Region, are expected to have affected both revenues and margins of large real estate developers. Photo: Mint
Updated: Fri, Oct 12 2012. 11 47 PM IST
Bangalore: Real estate firms are expected to have had a subdued September quarter but macro trends such as the nod for foreign investment in multi-brand retail and an anticipated interest rate cut may cheer up the sector in the months to come, said analysts.
A continuing slowdown in demand and project launches in most property markets, including Mumbai and the national capital region (NCR), are expected to have affected both revenues and margins of large real estate developers.
India’s largest developer, DLF Ltd, and the second largest, Oberoi Realty Ltd, are estimated to post lower year-on-year (y-o-y) profits in the fiscal’s second quarter, according to a Mint poll of five brokerages.
After a prolonged slowdown in project launches, Mumbai is likely to see a pick-up in project approvals in the coming months with the Maharashtra government assuring developers of speedy clearances and quick resolution of issues, Edelweiss Securities Ltd analysts said in a report.
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Bangalore developers, on the other hand, continue to see robust launches and good sales, both in the affordable and the premium categories.
BSE Ltd’s realty index has gained 1.37% in the past year, much slower than the 10.12% rise in the benchmark Sensex.
Real estate firms will announce their second-quarter earnings in the coming weeks.
On average, real estate analysts expect DLF to post a 32% drop in net profit to Rs.372 crore for the September quarter, and a 15% drop in revenue to Rs.2,577 crore, largely due to a lack of fresh launches, lower sales bookings and higher interest expenses.
During the quarter, DLF concluded the sale of 17 acres of prime mill land in Mumbai to Lodha Developers Ltd for Rs.2,700 crore as part of its divestment strategy to help it reduce debt. The firm got an advance payment of Rs.500 crore and will get the remaining Rs.2,200 crore in October.
Debt is expected to be flat quarter-on-quarter as DLF will use the advance payment to finance negative operating cashflows, analysts at Emkay Global Financial Services Ltd said in an earnings preview.
DLF said in August it expected to close sales of three assets, including the Mumbai mill land, by the end of this fiscal year and that this would help it pare debt by about Rs.5,000 crore. As of June, its debt stood at Rs.22,000 crore.
“DLF’s performance in the remaining two quarters is expected to be much better, because traditionally its launches and sales have been skewed towards the end of the year,” said Sandipan Pal, assistant vice-president at brokerage Motilal Oswal Securities Ltd.
Pal said DLF’s divestment may not gather any significant momentum in the immediate quarters.
Mumbai-based Oberoi Realty is expected to see a drop of 13.6% and 16.1% in its net profit and revenue, respectively, according to analysts.
The developer’s second-quarter results, too, are expected to be lacklustre because of subdued sales bookings and a lack of fresh launches. Analysts said the July-September period was an uneventful quarter for the firm, with three of its projects in the pipeline in status quo.
“With no new big launch, the revenues are only coming in from regular construction-linked income,” said Vineet Chandak, associate vice-president, IDFC Securities Ltd.
On the overall state of real estate firms, Chandak said the cash-flow situation has not improved and debt costs haven’t come down. “Sales have been slow and since launches weren’t picking up, many developers slowed down construction as well. As a result of which, incremental cashflows are also not coming in for some firms,” he said.
But the government’s recent decision to allow foreign direct investment (FDI) in multi-brand retail is expected to trigger development of stores and malls. Besides, there’s wide expectation that the central bank will reduce interest rates to aid economic growth, which could boost demand for homes.
“There is a hint of larger economic reforms such as FDI in retail and softening of interest rates that have brought some positive impact on the sector, even though balance sheets of real estate firms continue to be stressed,” said Param Desai, research analyst, Nirmal Bang Equities Pvt. Ltd. “However, banks continue to be hesitant to lend to developers, who have over-leveraged balance sheets.”
DLF is expected to post a 16% sequential drop in net profit and a 2.8% dip in revenue. Oberoi Realty, however, is expected to post a marginal 4.7% and 8% rise in its revenue and net profit, respectively.
On a y-o-y basis, another Mumbai real estate firm, Godrej Properties Ltd, is expected to see a rise in revenue and net profit, although from a low base, on good sales across projects. The margin on earnings before interest, taxes, depreciation and amortization, however, is expected to be muted, IDFC Securities said in its report.
While Bangalore-based realty firms are expected to fare well in the September quarter on the back of good demand and healthy sales, Sobha Developers Ltd is expected to outperform its local rivals, analysts indicated.
According to a report by brokerage Prabhudas Lilladher Pvt. Ltd, Sobha launched two significant projects in the quarter and both received good response. Sales are expected to be good not just from fresh launches, but also on account of stocks being released from earlier projects, the report said. Sobha’s Gurgaon project is seeing good sales though it increased prices.
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First Published: Fri, Oct 12 2012. 11 29 PM IST
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