Real estate: Ground realities

Indiabulls extends its Singapore issue, a sign that money is not easy to come by.

Real estate stocks have been seeing a sell-off for some weeks now: on average, the bigger real estate stocks are off anywhere between 45-65 per cent off from their January highs.

The DLF stock crashed to a six month intra-day low of Rs 522 on Thursday"" below its issue price of Rs 550. But the sector's problems are not over. Indiabulls Real Estate has been forced to postpone its $265 million issue on the Singapore exchange""the stock lost about 2 per cent to close at Rs 405.

In the first place, most property stocks didn't deserve the kind of adulation and prices they were getting from investors. Now almost all of them are quoting way below their estimated net asset values(nav)""-DLF's nav, for instance, is estimated at between Rs 650-700, while Indiabulls' nav is estimated at Rs 700-Rs 750.

While current prices are now at much lower than the discounts of 10-15 per cent that analysts believe property stocks should trade at, they could yield further ground before they move up again.

That's because with the economy slowing down demand for homes has been flagging and transaction volumes are down sharply as reflected in falling home loans.

A recent report by Credit Suisse notes that despite developers' assertions that prices remain at all time highs, recent land auctions, discounts being offered by developers, cancellations and prices in the secondary market all point to an impending price correction.

Besides, construction costs are up: increased operational expenditure in the March 2008 quarter resulted in a 240 basis points fall in the operating profit margin for Sobha Developers to 22.8 per cent: the q-o-q fall was even sharper at 420 basis points.

DLF too had seen a sequential fall in margins in Q4FY08 of 500 basis points to 65 per cent driven by a shift in the sales mix and a higher share of mid-income housing. Analysts are also worried about higher leveraging: Sobha, for instance, has about Rs 1,700 crore of debt and a debt-equity ratio of close to 1.7.

Moreover, property firms are not recovering their dues quickly enough. DLF's debtors, say analysts have risen to Rs 7,900 crore at the end of March 2008.

If they cannot mop up funds, whether through equity or debt, it could slow down execution. Before Indiabulls, DLF delayed its Singapore listing. Omaxe, say industry watchers, may not be able to execute projects on time.

NTPC: Not electrifying

NTPC generated many more units and also realised more for them in FY08. As a result, net sales rose 13.7 per cent to Rs 37,050 crore, though that was lower than the 22 per cent top line growth in FY07.

However, India's biggest power producer saw better operational efficiencies at its plants, recording a higher plant load factor of 92.24 per cent up from 89.43 per cent in FY07. Despite this, however, the company's operating profit margin declined 55 basis points to 30.3 per cent for the year.

That was mainly thanks to higher employee costs which were up 150 basis points on account of more provisions for wage arrears. A forex loss of Rs 370 crore resulted in its net profit (without adjustments for one-off items) going up by just 8 per cent to Rs 7,415 crore.

NTPC's total capacity was 29,394 MW at the end of FY 08: it is in the process of adding an additional 22,430 MW capacity by the end of FY 12. To ensure that it has enough fuel for its plants, the company is taking up coal mining : it plans to mine 2.3 million tonnes of coal in FY10 and scale it up to 14 million tonnes a year by FY12. It is also planning to enter into contracts for the supply of gas.

NTPC should post stand-alone net sales of about Rs 38,500 crore in FY09, while the net profit should grow to approximately Rs 8,500 crore.

However, rising operating costs, like a higher wage bill could continue to put pressure on the company's margins over the next few quarters. At Rs 167, the stock trades at about 16.5 times estimated FY 09 earnings and should perform in line with the market.