Realty companies’ fourth quarter results will look robust compared with a year ago. Most companies will report a robust rise in revenues and profit margins both at the operating and net level.
However, analysts estimate that growth will be flat on a sequential basis, raising a few doubts about the sustenance of the recovery in this sector. The real estate sector had fallen into an abyss in the second half of fiscal 2009, as a liquidity crisis, falling demand and excess supply came together to hit real estate companies. Rising interest costs further added to their woes. Residential property prices fell by 20-25% in key metro markets as sales came to a standstill. The high growth in the March quarter, compared with the year ago period, will be due to the low base effect, even after considering the rise in volumes and prices in fiscal 2010.
More importantly, market leaders such as DLF Ltd and Unitech Ltd tapped capital markets in 2009 to retire high-cost debt. Moderation in interest costs, too, helped boost net profit growth while better liquidity enabled companies to step up project execution. That has led to better billing and revenues. A few companies such as Sobha Developers Ltd also monetized their land banks to bring in liquidity for execution. But the main concern for investors should be whether sequential volume growth is tapering.
A report from Alchemy Share and Stock Brokers Pvt. Ltd states: “With peak volumes (from pent-up demand) mostly behind us we expect revenues to be flat on a q-o-q (quarter-on-quarter) basis but grow over +76% y-o-y (year-on-year) for the sector due to easier comparisons.”
Graphic: Ahmed Raza Khan / Mint
Does this mean that property sales in the fourth quarter have slowed compared with the third? Analysts believe so. Front-line players such as DLF and Unitech have shifted focus from premium and luxury segment to “affordable mid-segment” housing projects, which absorbed pent-up demand in the third quarter. “Besides, developers were quick to increase prices in Mumbai, Delhi and some other cities, which has dampened buying sentiment,” says an analyst with a Mumbai-based broking firm. Overall, demand is reckoned to be lower than in the preceding two quarters. But one could see a divergence in prices between the Delhi National Capital Region and Mumbai, which are just 10-15% away from the peak prices in 2008, and the south especially Bangalore, where prices are moving up with a lag.
On the margins front, the fourth quarter will see an expansion in operating profit margin and net profit margin both on a sequential and year-on-year basis. In the year-ago period, low operating leverage and high interest costs hit profit margins of almost all players in the sector. There will be a reversal on both counts in the fourth quarter. Sequentially, too, margins will be better as cost increases that were seen in the third quarter will not be visible in the next.
Share prices of realty stocks have moved in line with rising housing unit sales and prices. But large companies have underperformed the Nifty. What could bring real estate stocks back into the list of favourites is a steady sequential rise in unit volumes. Analysts believe that this may be visible only from the second and third quarters of fiscal 2011, when there is more clarity on the job market and direction of interest rates.