Expectations from real estate firms have been running low for some time, and the markets had factored in a sharp decline in sales and profit in the quarter ended December.
But when industry leader DLF Ltd reported late last week that pre-tax profit fell to one-third of the profit it generated in the September quarter, the news was much worse than what the markets had bargained for. In the next two trading sessions, its share price fell by an additional 25%, taking it to a record low of Rs131.50.
The company now has a market capitalization of Rs22,600 crore, only 1/10th of what it was worth a little more than a year ago. A lot has changed since, and while the markets had foreseen the sharp decline in fortunes, it’s only now that the financials of real estate firms are attesting to this.
In the first two quarters of the current fiscal year, DLF’s revenues grew by 20% and pre-tax profit was maintained at year-ago levels. In the December quarter, revenues and profit have slumped 62% and 70%, respectively.
Thanks to the fall in financial performance, owners and managers of realtors are now being more forthright about the slowdown in their sector. Till recently, most put up a brave front, many even holding property prices, assuming it would be a temporary slowdown.
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DLF, for one, is now saying that sales to DLF Assets Ltd, a group company, will be insignificant for the next few quarters. For the past many quarters, sales of commercial property to DLF Assets had propped up the firm’s books. But now, with demand for commercial property having come off sharply and with receivables from DLF Assets already having mounted, sales to the group company would be much lower.
DLF Assets owes Rs5,500 crore to the company and a large chunk of this depends on its ability to get a private equity firm to invest in it.
These linkages have no doubt had an adverse impact on the DLF stock.
So far, DLF has funded these receivables by further borrowing. While DLF is among the least-leveraged realty firms, it has had to take on debt of nearly Rs6,000 crore in the past one year.
Meanwhile, the outlook for generating cash continues to be bleak, with demand having all but disappeared. The company says that in the mid-income housing segment, sales have come off by 90% and volume growth is expected only after six-nine months. As far as commercial space goes, clients are waiting and watching, and the firm expects marginal cancellations. A number of new launches have been postponed.
There are some positives, such as the fact that the company has paid for 96% of its land resources, which places it at a relatively better position than its peers. Besides, it’s better off in terms of leverage. It’s for this reason that the stock gets a valuation of at least 8.5 times annualized earnings of the December quarter.
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Graphics by Paras Jain / Mint