Realty firms blame rising costs for performance slippage

The net profit in the June quarter is down for all major listed real estate companies, though most have claimed their respective performances show they’re doing well. The top managements have blamed the poor show on a challenging operational environment, citing high interest rates and elevated input cost.

The net profit of DLF Ltd dipped by 13 per cent, that of Unitech by 45 per cent, HDIL by 21.5 per cent, Parsvnath Developers by 19 per cent and DB Realty by 33.5 per cent.

Analysts said construction costs had gone up by 30 to 40 per cent in the first quarter of 2011-12. This is mainly due to a sharp rise in costs of labour and raw materials. The increase in lending rates by the central bank has increased the borrowing costs of developers, they said.

Developers are likely to post even lower profits in the second quarter, on the back of slow sales growth and rising interest costs, said Suman Memani, real estate analyst with PINC Research. Kaustuv Roy, executive director at Cushman & Wakefield, the real estate consultancy, says he agrees, for similar reasons. And, Unitech vice president (corporate planning), R Nagaraju, said, “We are keeping a watch on the effect of interest rates and actively taking steps to maintain sales.”

The first quarter’s revenue trend was a mixed story. While DLF and HDIL showed an increase in year on year sales, the other major developers registered a dip. Parsvnath recorded sales worth Rs 217 crore versus Rs 257 crore in the corresponding quarter of last year. It maintains this is in line with its strategy of fast-tracking deliveries, rather than launching new projects.

There have been slippages in deliveries, too. Unitech could deliver just 0.2 million sq ft area by June 30 of the total deliverable area of 19.1 million sq ft for the projects launched after March 2009. DLF handed over just 1.9 million sq ft this quarter, while its target this year is 12 million sq ft.

Slippage reasons 
Roy of Cushman attributed the delay in deliveries to the scale of projects. “The scale taken up by DLF and Unitech is humongous, compared to their earlier projects. Second, there is a shortage of skilled labour,” he said. He also says key construction companies such as HCC and L&T had their hands full due to the infrastructure development all over the country, thereby delaying deliveries.

As for expenditure, DB Realty has shown an increase by 45 per cent, while for DLF Ltd, it was up by 25 per cent. DLF’s interest charges went up 28 per cent in the first quarter of 2011-12 to Rs 496 crore, as compared to Rs 388 crore in the first quarter of 2010-11. Its cost of land and development rights went up 34 per cent in the June quarter to Rs726 crore, as compared to Rs 541.5 crore in the first quarter of 2010-11. Similarly, for Bangalore-based Puravankara, its material and contract costs have almost doubled to Rs 84 crore in the first quarter of 2011-12 from Rs 42.5 crore in the same quarter last year. Its other operating expenses have also doubled.

“Interest charges have gone up as the cost of financing has increased. If you look at the preceding quarter, construction costs have fallen, as companies keep maximum provisioning for cost overruns in the fourth quarter of every financial year. Year on year, they have gone up,” said Memani of PINC Research.

DLF is strategising to concentrate on plotted development, saying it would enable them to mitigate the current inflationary environment and accelerate cash flows. “With plotted development, there is less risk on construction cost, and even in this challenging environment, the demand for this category remains buoyant,” said Ashok Tyagi, chief financial officer.

On interest rate rises, Roy said the Reserve Bank of India’s aggressive stance in raising rates to curb inflation was creating problems. “The successive hikes increase the cost for people buying homes. If housing gets compressed, it is a worrying factor,” he said. He said real estate activity in the country was healthy for the Indian economy, due to its multiplier effect on jobs and housing.

As for net debt, DLF’s went up from Rs 21,424 crore on March 31 this year to Rs 21,524 crore by June 30. Unitech’s gross debt fell Rs 203.7 crore to Rs 5,647 crore. The company did not state its net debt. For Parsvnath, net debt was Rs 1,200 crore, which the company is targeting to reduce to below Rs 1,000 crore by the end of the financial year.

“To reduce the debt, the company will raise Rs 2,000 crore over the next one year, through preferential issues or qualified institutional buyers,” said Pradeep Jain, chairman.

“Developers need funds and they have not done any significant launches in the first quarter. They are not able to sell their non-core assets as planned,” said Memani.