Margins, cash flows likely to remain under pressure.
Overleveraged realty firms now face the threat of fresh downgrades as slowdown has locked up cash in projects and financial institutions have turned wary of lending to developers.
Profit margins, credit matrix and cash flow of property companies will come under constant pressure owing to slowing sales and large debt, feel credit rating agencies.
"Developers today have few options in terms of financing. Either they have to slow down construction or reduce property prices to catalyse demand,'' said Akash Deep Jyoti, head (corporate and Infrastructure ratings), Crisil. Crisil has assigned non-investment grade ratings to some of the developers, indicating weak financial profile of these companies.
Developers such as Unitech, HDIL, Omaxe, Orbit Corporation, Sobha Developers have borrowed aggressively in the last three years to support their ambitious expansion plans.
"Realty companies are either rolling over their loans or refinancing to pay their existing loans, which is increasing their debt levels. Today their debt levels are same as it were in March 2008,'' said Sandeep Mulik, an analyst with Fitch Ratings.
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A re-rating means that their ability to borrow at competitive rates is further hit.
Rajendra Shah, chief financial officer of Akruti City, agrees that times are indeed tough for developers. "It is very difficult to achieve financial closure now. We may postpone the launch of three projects till we tie up for funds,'' Shah says.
On October 15, credit rating firm Fitch downgraded Delhi-based property developer Omaxe's long-term borrowings to 'A -' from 'A' earlier, indicating relatively lower credit quality of its borrowings. ''Liquidity risk is accentuated by a slowdown in the overall real estate market and the increasing reluctance of financial institutions/ banks to fund real estate developers,'' Fitch said.
Fitch has also downgraded borrowings of realty firms such as Parsvnath Developers, Sobha Developers, Purvankara Projects in the last few months, indicating lower credit quality of their borrowings.
Another rating firm Crisil had forecast a credit crunch in the property sector in its report last year. The agency has assigned 'AA' rating which denotes high safety category to borrowings of realty firm DLF while borrowings of few other developers have been rated in the BBB category, indicating moderate safety.
The debt-to-equity ratios of realty companies, barring a few, are rising even after they sold shares to bolster their equity base (see table). For instance, Bangalore-based Sobha raised Rs 570 crore last year by selling shares in an initial public offering. The sale helped the company cut its debt to 1.06 times its equity in the financial year ended March 2007 from 3.19 times its equity a year earlier. Still, the ratio climbed further after the realtor borrowed additional money to fund projects. Its debt-to-equity ratio rose to 1.30 times its equity in the financial year ended 2008.
Similarly, Mumbai-based HDIL's debt-to-equity ratio has moved up from 0.63:1 in FY07 to 0.80:1 in FY08. This is despite the company raising Rs 1,485 crore from an initial share sale in July 2007.
Slowing property sales in the current financial year and higher lending rates may skew the debt-to-equity ratio again, analysts say.
Realty companies claim that the sharp spurt in debts was in tune with their expansion plans and are backed by assets. Most of them say they have already borrowed funds to meet their current requirements and will not launch any new projects till the liquidity scenario improves.
HDIL, the country's third largest developer, has raised Rs 3,000 crore in the first half of this year, mainly for its airport rehabilitation project in Mumbai. The company had a debt portfolio of Rs 3,800 crore as on June 30 this year.
"When we raised funds, we were aware that situation will not be favourable in the coming months. We will not require funds for the next six months as we have already tied up all our needs,'' said Hari Pande of HDIL.
To maintain a balance and correct the debt-to-equity ratio, some property developers are taking corrective measures and repaying part of the debt. Pande said they had reduced their debt by 10 per cent in the second quarter of the current financial year.
| REOUND REALITY | |||||||
| Total Debt (Rs crore) | Debt-equity ratio | ||||||
| Mar ‘06 | Mar ‘07 | Mar ‘08 | % chg* | Mar ‘06 | Mar ‘07 | Mar ‘08 | |
| Orbit Corporation | 1.57 | 21.37 | 332.86 | 21101.27 | 0.04 | 0.09 | 0.59 |
| HDIL | 196.46 | 375.69 | 3112.75 | 1484.42 | 1.12 | 0.63 | 0.8 |
| Unitech | 688.75 | 3607.17 | 8119.46 | 1078.87 | 2.55 | 3.1 | 3.55 |
| Ansal Properties | 99.85 | 240.82 | 834.21 | 735.46 | 0.96 | 0.32 | 0.54 |
| Sobha Developers | 423.11 | 583.68 | 1763.05 | 316.69 | 3.19 | 1.06 | 1.3 |
| D S Kulkarni Dev | 104.2 | 131.37 | 321.5 | 208.54 | 2.96 | 0.76 | 0.65 |
| DLF | 3013.92 | 6769.29 | 8386.4 | 178.26 | 3.54 | 7.54 | 1.27 |
| *over March ‘06 | |||||||
Some companies such as Sobha are mostly banking on equity markets to meet their fund requirements. The company has announced a rights issue of Rs 350 crore and going ahead with its plans.
"There is no denying that developers must bring down debt levels to be in the business,'' said JC Sharma, managing director of Sobha Developers Sobha recently got $20 million PE funding.