Operating margins for real estate companies have been under pressure.
Realty stocks have taken a beating this year. While the BSE Sensex is down around 26 per cent, the BSE realty index has lost nearly 57 per cent. Some of the stocks have recovered from their lows, but the performance of the sector in the quarter ending June 2008 has been nothing to write home about.
Analysts are concerned that companies are piling up debt —- the net debt has increased by 19 per cent to Rs 28,400 crore for a sample of six companies that brokerage CLSA covers. In particular, DLF and Parsvnath have seen their borrowings increase sequentially while Puravankara reported a lower net debt position.
Companies have resorted to borrowings mainly to make payments for land though some of it is understood to have been used for working capital. Given that the demand, especially for residential property, is slackening, it’s possible that developers may reduce prices to push sales. While that will no doubt ease their debt burden, it could put pressure on their operating margins as well.
Already, operating profit margins for tneh six companies were under pressure in the June 2008 quarter leading to just a 16 per cent rise in their operating profits.
On the whole, however, most companies have posted a satisfactory 22 per cent increase in revenues compared with the June 2007 quarter, with Puravankara being the only developer to have posted a sequential rise in revenues. Higher interest rates took their toll as the profit before tax was up just under 10 per cent.
If the increase in net profits has been higher at 23 per cent, it is because the effective tax rate has been lower. Except for Sobha Developers, all others provided a smaller amount for taxes.
Industry watchers believe that with interest rates rising, developers could find it difficult to raise resources. As a result, projects could get delayed. Construction is also getting delayed because of a shortage of labour and rising material costs.
While there is clearly a long-term opportunity for developers, there are challenges in the near future with the number of transactions having slowed down significantly over the last six months. Unless demand picks up, realty firms will find it hard to protect their margins.
