The state of the financials of India’s real estate companies has worried analysts and investors alike in the last few months. In the wake of the fraud at Satyam Computer Services Ltd, when investors and analysts asked questions about accounting methods, fingers were pointed at realty firms with charges of opacity in disclosures flying thick — especially on how high financing costs actually were at these firms.
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Macquarie Research, an arm of Sydney-headquartered Macquarie Bank, in a report earlier this month sought to answer this question analysing India’s top-listed realty companies and the overhang of debt on their operations. Unitech Ltd, India’s second largest realty firm by market value, for instance, according to Macquarie analysts, has just three times interest cover —a key metric defined as the number of times a firm’s gross profit (measured by earnings before interest and tax payouts) covers its interest expenses in a given period of time.
Still, in the broader Asian context, Indian firms fare better than peers, say, in Taiwan, Singapore or Malaysia. Gearing or debt as a percentage of equity capital for firms here has dropped to 40% from 155% a year ago. This is partly because the number of firms covered in the Indian sample has gone up from two (DLF Ltd and Unitech) to seven this year; some of the newcomers have significantly lower levels of debt.
Ironically, while gearing levels have become healthier, interest cover has dropped, pointing to a bigger squeeze on cash flows at a time housing and commercial realty demand is waning. Interest cover has deteriorated sharply from 13 times to eight times. This could partly be because borrowing costs in the economy soared to seven-year-highs earlier this fiscal year. But even with such costs falling in recent months, shrinking gross profits (earnings for most realty firms this fiscal year are expected to be lower than in fiscal 2008) on the back of sharply lower realty demand will only put more pressure on operations.
The high level of receivables—as much as 82.83% of projected revenues this fiscal year for Indiabulls Real Estate Ltd and around half for DLF and Ansal Properties and Infrastructure Ltd—too, could be a cause for concern in the coming quarters and years.