Only a pickup in sales can help realty firms
Cost-cutting and such measures have run their course and higher sales are now needed to maintain cash flow
The performance of realty firms in the March quarter is unlikely to enthuse investors. Although January to March is seasonally a good quarter, most firms are likely to show a contraction in net profit. Some like Sobha Developers Ltd and Prestige Estates Projects Ltd that have higher exposure to the southern markets may buck the trend.
The key development that investors need to watch out for is a steady pickup in home sales. Prices could be misleading since in some regions they may be holding out with very few deals materializing.
Rising prices and high interest rates of home units have lowered affordability for the past few quarters.
Moreover, a DSP Merrill Lynch Ltd report says there were hardly any new project launches as most developers pushed new launches to the first half of 2014-15 after the new government takes charge. So the March quarter is likely to see dampened single-digit sales growth compared with the preceding three months, and in many cases, a fall from the year-ago period.
Sales momentum is more critical now than in the last few quarters. Companies have already derived maximum benefit from cost-cutting in the last few quarters when the going was tough. Developers have also cut some debt and sold stakes in non-core businesses. To some extent, this has helped improve balance sheets.
However, high interest payments continue to be a drag on profits. Data of the S&P BSE Realty index firms shows aggregate interest charges have remained sticky since the quarter ended September 2011. Aggregate interest cover (operating profit to interest cost) ratio is at 1.5 and has been steadily falling in the past three-four quarters in spite of falling debt. Thus it is clear that cost-cutting and such measures have run their course and higher sales are now needed to maintain cash flows.
So far, improved operating cash flows have just been enough to retire small amounts of debt after paying interest charges. Hence, only a substantial jump in sales will help alleviate the situation. In addition, higher pace of execution and project completion will help realize revenue under the new accounting guidelines. This will help revive the real estate cycle.
For now, investor confidence is weak. This is mirrored in the stock performance. The S&P BSE Realty index contracted by 17.5% through 2013-14 when the benchmark S&P BSE Sensex rose by 18.9%. Even the recent rally riding on a wave in broader markets in the past three months will sustain
only if there are cues of a revival in sales.
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