The plight of realty firms is going from bad to worse with each passing quarter. That’s reflected by the BSE Realty index, which has plunged 53% in the past one year, more than the Sensex, which fell around 17%.

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Indeed, small is beautiful in the realty space, which seems to defy the fundamentals of economies of scale. Firms which have a smaller regional presence, such as Mahindra Lifespace Developers Ltd, Oberoi Realty Ltd, Godrej Properties Ltd and Sobha Developers Ltd, will display better cash flows, healthier balance sheets and return on equity, compared with large pan-Indian players such as DLF Ltd and Unitech Ltd.

Large firms are in a tight spot with high debt, and the consequent rising interest costs will continue to suck out cash flows. For example, DLF’s interest costs are expected to reach nearly 20-23% of sales in the quarter as the firm’s contemplated asset sales to reduce debt have not happened because of poor prevailing demand and asset prices. Besides, the impact of spiralling costs on operating profit margin will be less intense in the September quarter, when compared with the preceding two quarters.

The sector is expected to register a 5-10% drop in net profit when compared with, both, the year-ago period and the preceding quarter. A Motilal Oswal Securities Ltd report says, “a 2008-like adverse impact along with economic turmoil would lead to a price cut, but a relatively better situation could lead to a time correction." The prevailing stubbornly high property prices, especially in Mumbai and parts of Delhi, and the high mortgage rates seem to indicate a price correction in assets is imminent. The widening “bid-ask" gap (buyers’ and sellers’ price) is also a pointer to the forthcoming dip in asset prices. Analysts believe this trend could drive sales volumes in future. But the lacklustre performance by most firms and the strained profitability is expected to continue in the next few quarters, too, which along with poor transparency in the sector, will keep investors away.