Cash flows and rising debt levels to be an overhang for the sector.
There’s more pain in store for the rate cyclicals, given that the interest rate cycle is not turning around anytime soon. But within the rate sensitive sectors, real estate is probably the worst hit. In the second quarter, 14 listed real estate companies posted a mere 3.1 per cent year-on-year growth in revenues but a 22.7 per cent fall in profits, says Edelweiss Financial Services. Rising input costs and interest burden are the main culprits.
Given that the chances of interest rates, margin pressures and debt levels are unlikely to abate in the second half of this year, most analysts continue to remain underweight on the sector. Only companies with strong balance sheets and exposure to high visibility rental assets are expected to do well.
The combined net debt of at least 11 real estate companies stood at Rs 40,300 crore (excluding Oberoi Realty/Jaypee Infratech), at the end of the second quarter. This represents a 19 per cent annual and five per cent sequential rise in net debt. This implies that maintaining positive operating cash flows after paying for cash, may be difficult. Although asset sales could prop up cash inflows of some companies, debt levels are expected to remain elevated, analysts say. In the second quarter, DLF also reported a 295 basis points year-on-year dip in PAT margin in spite of a 700-basis points surge in Ebitda margin. One of the deals to watch out would be the closure of the Aman Resorts deal by DLF, the sale of which is estimated to be in the region of Rs 2,000 crore. However, receipts from other asset sales of Rs 1,000 crore in the second half may only bring back net debt to first quarter level Rs 21,500 crore.
While the impact of high interest rates and input costs is evident in Q2, the pain emanating from slowing sales will come home to hit these companies in the third and fourth quarter if the tide does not turn. Current trends show that while the developers based in the south are faring well in terms of sales, developers in the rest of India are faced with rising inventory as buyers hold out. In case the interest rates don’t peak the regulatory environment does not become conducive again, there will be additional pressure on developers to reduce prices.