The gloom over the realty sector is reflected in the stock prices of many companies. BSE Realty Index has been the worst performer so far in 2008, having shed more than 68.5% from its January peak. Analysts expect further erosion in valuations of realty stocks with the sector facing a slowdown, input costs rising, and little hopes of interest rates softening.
The sharp correction has led industry leader DLF to announce a buy-back as the management believes the current price does not reflect the intrinsic value of the shares. The company has earmarked eleven hundred crore rupees for the buyback at six hundred rupees per share.
Prabhudas Lilladher, brokerage, said, “Over the last few months, real estate developers have been caught in a vicious circle of sluggish demand and rising cost of capital. Availability of finance has been a problem with rising cost of debt and drying up of equity funding. There have been instances of developers borrowing at interest rates ranging between 24-36 % against 500% collaterals. The lack of liquidity is likely to impact deliveries, leading to project delays as well as postponement of new launches”.
According to Religare Securities, the realty market has witnessed a slowdown in registration volumes in a few cities on account of spike in property prices over the last six to eight months. Owing to this, most companies have fallen short of their sales targets for the quarter.
On a positive note, foreign direct investment flows witnessed a CAGR growth of 615% from financial year 2006 to financial year 2008.
Inflows in financial year 2008 stood at Rs 8,750 crore with the likes of Blackstone Group, Goldman Sachs, Emmar Properties, Pegasus Realty, Citigroup Property Investors, Lee Kim Tah Holdings, Salim Group, Morgan Stanley and GE Commercial Finance Real Estate making an entry.
In a situation where availability of finance is a key concern, brokerages remain positive on companies with large cash balances and have their funding requirements in place, thus enabling them to complete projects on schedule as well as take advantage of declining land prices. However, their view on the overall sector remains cautious.
Religare estimates a 35.3% rise in DLF’s first quarter net profit from a year ago, while HDIL is expected to post a mere 4.1% rise in the same period compared to last year.
Religare sees Peninsula Land posting 26.5 % revenue growth for the June quarter from last year with EBITDA margin of 28.1%. On the other hand, Prabhudas Lilladher expects Peninsula Land’s revenue to grow 70% YoY with EBIDTA margin of 54%. The growth in revenue will largely be backed by commencement of construction at Peninsula Business Park, where 50% has been pre-sold.