Beaten, not lost
Feb 20 2013 , Mumbai
Big developers have managed to rein in bad fortunes and post third-quarter profits on the back of new launches and sale of non-core assets. Experts predict the situation will improve further
While India’s largest listed real estate developer, DLF, chose to offload non-core asset and repay debt to bring down its interest costs, companies such as Godrej Properties, Oberoi Realty and Puravankara Projects drove profits through new project launches at lucrative prices.
Developers are hard pressed today to maintain their net profit margins as rising interest and other input costs, such as land and labour, in addition to the ever-increasing costs of raw material, continue to constrain them, and they have not been able to pass these to consumers due to slackening demand. Experts say the sector has performed above expectation as they managed to report profits despite all hurdles.
DLF reported a 10.2 per cent rise in net profit at Rs 284.8 crore in the October-December quarter, helped by a one-time gain from the sale of non-core assets. In November, DLF concluded the sale of a 17-acre plot in Mumbai to private developer Lodha for Rs 2,700 crore. The company’s sales were nearly 36 per cent down at Rs 1,310 crore in October-December, 2012.
Rajeev Talwar, group executive director, DLF, told FC Build, “Profits are not as per our expectations and the sector has the potential to perform much better.”
“Going forward, the sector has bright outlook because there is shortage of housing in the country, and it can do as well as the economy,” Talwar adds.
Profits of companies like Godrej Properties, Oberoi Realty and Puravankara Projects were driven mainly by new project launches during the festive season.
Oberoi Realty’s consolidated net profit was up 31.73 per cent from a year ago to Rs 134.46 crore in the October-December quarter. The consolidated net sales of the company were up 53.34 per cent from a year ago to Rs 284.79 crore.
Surojit Pal, an analyst at Elara Capital, said, “Realty companies like Oberoi Realty, Godrej Properties and Puravankara have reported profits in the quarter due to new project launches.”
Pal says only if the government announces few measures to boost growth of the sector, it might trigger a revival, or else, in the short-term, funding-scenario remains tight for the sector, and companies will have to rely on volumes to maintain profit.
Ready-to-move-in inventory and new launches boosted Puravankara’s consolidated profit by 101 per cent to Rs 64.41 crore in October-December, 2012. The company’s revenue grew 60 per cent from a year ago to Rs 311 crore.
Ravi Puravankara, chairman and managing director of Puravankara Projects, said, “Ready-to-move-in inventory and new launch sales helped us report profits. Our new launch pipeline in both, Puravankara and Provident, will keep this momentum going.”
The company expects to record sales in excess of three million sq ft by the end of March 31, with significant contribution coming from Provident Sunworth and Purva Sunflower. Additionally, five more projects are expected to be launched during January-March.
“The Provident Sunworth launch announcement in December 2012 was followed by the opening of the units in January. This has been met with a massive response from the market with 700 units being sold in less than 10 days. Project enquiries continue to increase on a daily basis and we are confident of completing phase-I sales of 1,440 units in the ensuing quarters,” Puravankara adds.
Further, the company has also launched a project in Mangalore totalling 420,000 sq ft this month. Provident’s Selavapuram project at Coimbatore totalling 520,000 million sq ft will be launched by March, according to Puravankara.
During the quarter, the company achieved highest sales ever with about 900,000 sq ft sold, of which, Puravankara accounted for around 73 per cent, and the remaining 27 per cent was contributed by Provident and associates. The company had Rs 750-crore worth of unsold stock at the end of the third quarter (October-September 2012) and expects to sell it within the next six months.
Godrej Properties’ net profit increased 23.97 per cent from a year ago to Rs 35.48 crore in October-December, 2012, mainly on improved sales resulting from new projects. The company’s net sales for the third quarter increased 68.6 per cent from a year ago to Rs 241.1 crore.
“The sales numbers have improved mainly on the back of new projects that we launched during the quarter. Despite flat sentiment in the overall real estate market, we received good response for our launches,” Pirojsha Godrej, managing director, Godrej Properties, told FC Build.
During the quarter, the company launched four projects across key markets of Mumbai, National Capital Region and Bangalore, he says.
“We expect to launch few more projects in Mumbai, Kolkata and Pune in the fourth quarter (January-March 2013). But these launches are subject to certain approvals we are awaiting,” Godrej adds.
The company is planning to launch a commercial project this quarter in the Bandra-Kurla Complex (BKC) in Mumbai, which is a joint venture project with Jet Airways.
The company recorded total bookings of Rs 672 crore at 11.04 million sq ft in volume terms in the third quarter. Further, Godrej said the company’s foray into the redevelopment segment as a development manager, wherein, Godrej Properties receives certain percentage of revenue of the project as fees, is significantly contributing to its income.
Pankaj Kapoor, chief executive officer of Liases Foras, said developers seemed to have already touched the bottom. “The situation is expected to improve. They managed to report profits in the quarter mainly on the back of sales from new projects during the festive season, mostly offered with some discounts. Developers who have managed to reduce their interest cost are in a better position, but companies with high debt have to be cautious,” says Kapoor.
Kapoor cautions that although big developers have managed to report profits, it is not the case with all developers. “Since funds are not easily available, companies are mostly relying on sales of new project launches.”
Ganesh Vasudevan, chief executive officer of an online real estate portal, said there has been significant improvement in demand in the National Capital Region, Chennai and Bangalore. “Demand in the western part of the country continues to remain subdued. Companies have mainly reported profits due to attractive pre-launch offers and discounts offered during the festive season and year-end sales.”
Vasudevan added margins of developers were likely to remain stressed in the near-future as they were unable to pass on the increase in costs to consumers. Also, liquidity conditions continued to be tight for the sector. However, in the long-run, the sector is expected to perform well due to shortage of housing in the country.
Although real estate companies managed to report profits on the back of new launches, total launches in 2012 remained lower than 2011. According to a recent Knight Frank report, about 50,500 units were launched in 2012, which was an 8 per cent drop from 2011. The report said that 2012 saw absorption levels almost equal to those in 2011, heralding a potential reversal in the downward trend. This is largely due to the fact that developers who are under pressure to deleverage their balance sheets and create liquidity have been more open to negotiating aggressively by reducing prices. Till very recently, the developer fraternity has been averse to reducing rates upfront, but cracks are beginning to show as sporadic cases of price softening have been observed.
In the short-term, however, demand is likely to remain subdued as the market continues to bottom out in the backdrop of a sluggish economy. On the flip side, the government’s effort to usher in next generation of reforms and get us closer to fiscal consolidation along with a drop in interest rates following reduction in policy rates by the Reserve Bank of India should aid demand and help keep prices buoyant, adds the report.