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Realty sector still at crossroads

Realty sector still at crossroads
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First Published: Mon, Jul 18 2011. 11 45 PM IST
Updated: Mon, Jul 18 2011. 11 45 PM IST
Since April, the realty index has fallen by around 10% as the overall environment remains weak. Rising interest rates and realty prices have hit demand for homes and the inflation-driven rise in construction costs continues to pose a challenge to real estate developers.
According to a report by Antique Stock Broking Ltd, the absorption levels of residential projects—or the kind of demand a new project elicits—are down compared with the year-ago period.
Also See | Sectoral depression (Graphic)
The performance of companies in the June quarter may be varied, in line with regional disparities in sales. In the National Capital Region and Mumbai, prices scaled previous highs. The southern market—where residential prices are still at a 10-20% discount to peak rates—displayed better resilience with steady sales. So, while pan-India developers such as DLF Ltd and Unitech Ltd could post subdued revenue growth, regional and niche firms such as Sobha Developers Ltd, Oberoi Realty Ltd, Phoenix Mills Ltd and Purvankara Projects Ltd are likely to register a reasonable upside in revenue.
Still, the industry is jittery about the near-term outlook. Delays in approvals and execution are likely to see fewer-than-expected launches of new residential projects. Though, new commercial lease rentals will remain stable, as economic activity improves, particularly in the southern region.
The quarter will see profitability of most firms hit by higher interest costs, despite the fact that many have lowered their debt-to-equity ratio over the past several quarters. Some analysts estimate that 1 percentage point increase in interest rates could lead to a 4-7% reduction in earnings per share.
Analyst Parikshit Khandpal from Karvy Stock Broking Ltd says in a report: “We forecast aggregate earnings degrowth of 16% for our coverage universe on account of higher interest outgo and muted revenue growth.” Cash flows of leading firms could be under stress for the next few quarters as the sector bears the brunt of tight liquidity conditions.
The BSE Realty Index has contracted around 36% over the last one year, even as the benchmark Sensex has returned about 4%. The stocks of most companies are trading at huge discounts to their net asset values, but this hasn’t enthused investors to buy into the sector.
Interest rates and inflation are the big movers of stock sentiment for the sector. Unless these two parameters cool off to herald better affordability for consumers, realty stocks may continue to languish in the markets.
Graphic by Sandeep Bhatnagar/Mint
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First Published: Mon, Jul 18 2011. 11 45 PM IST