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« Govt Looks for Measures to Boost Real Estate Demand | Home | Job Insecurity Keeps Youngsters Away From Realty Purchase »

Industries Connected to Real Estate Bear the Brunt of Low Demand

Demand dynamics in one large industry decide the fortune of its ancillary industries. For example, in the past, Indian auto component makers gained from the booming domestic auto sales and higher demand from global auto majors. Now with the global economic downturn and sagging automotive sales the world over, the outlook of auto component industry is in doldrums. In the same way, the ups and downs of the real estate market have implications for companies whose future is linked to housing demand in India. The companies at risk straddle a wide spectrum of industries including furniture, granites, ceramic tiles, paints, power cables, glass and electrical equipments among others.

Our current sample includes 15 large companies (arranged in the order of largest to lowest FY08 sales) namely Asian Paints, Havells India, Pidilite Industries, Kansai Nerolac, Finolex Cables, Bajaj Electricals, Berger Paints, Asahi India Glass, Nilkamal Plastics, Nitco, Century Plyboard, Greenply Industries, Hindustan Sanitaryware, Kajaria Ceramics and Zicom Electronic Systems. The past high growth rate in the topline fell phenomenally in the Dec ’08 quarter while profitability suffered as both operating profit and net profit showed negative growth. This also pulled down the trailing four quarter performance ending Dec ’08. However, the performance when compared to the frontline real estate players was anytime better.

In addition to factors like fragmentation and cheap imports, the subdued growth in the topline is also due to the fact that majority of the revenues depend on the discretionary spending by existing consumers whose disposable incomes have been affected since last several months. For example, the three paint companies, which form over 36% of the total revenues of our universe, witnessed a 4% growth in revenues y-o-y in Dec ’08 quarter. Further, second largest company in the list, Havells India, saw a decline of 9% in revenues while fourth largest, Pidilite saw a muted growth of 4%.

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