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« Realty Sector Stocks in Death Spiral | Home | Security Analysts Criticise Real Estate Companies »

60-65% Drop in Real Estate Earnings

The downturn has hit the real estate company the hardest. The volume of the fall of realty stocks has surprised everyone. Toplines have declined from anywhere between 60-70% for most of companies and this decline is not only year on year but even quarter on quarter. The companies’ bottomlines have declined further by 60-95% in most cases. The last property down cycle took four years to turn around, so that is one cause of worry. Post earnings, most brokerages have downgraded earnings by 60-70% and that’s probably the reason realty stocks are under pressure and are correcting.

Rajiv Singh from DLF said that he doesn’t expect much revenues coming in from DLF Assets (DAL), which, till the Q2 had contributed to about 50% of PBT. However, he is bullish on mid-income housing picking up by the second half of the current calendar year but, he added that was not a very high margin business. Margins only come from the commercial or retail side of the business where these rentals are higher and that adds to the company’s bottomline and the profitability. So, DLF’s margins are declining to 30% from earlier levels of 50-70%. For smaller companies, it will be very low and maybe single digit in some cases. One cannot rule out losses in some of the companies going forward.

Last quarter, there were a lot of companies facing payment problems for their loans, which were rescheduled. But in some case the payments will again be due in six months time and things are not looking great, volumes have fallen by 90% and banks aren’t going to lend to real estate companies. In most cases the downgrades in earnings will be about 60-65%. If India’s major real estate company has a 70% earnings decline, we can only imagine what a Parsvnath or an Omaxe will have.

Earnings will just vanish in the current fiscal and the downside will continue to be sticky. The next two fiscals too are expected to be very subdued and very difficult for real estate companies. Their high leveraged balance sheets are another concern, they are unable to borrow and may therefore have to go for some kind of equity dilution, which in current market doesn’t make sense. It’s not going to be great for the NAV’s of these companies. So that’s another concern for the real estate companies and debt servicing is one area where a lot of problems are expected to arise.

An India Infoline report says that the next payments due in the 12 months are much more likely than the revenues that most of these companies generate. So that’s also a concern of how these companies are going to arrange for liquidity; if they go for asset sales it would result in NAVs coming down.

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