Reliance Money has come out with report on various key sectors of Indian Economy. Here is the one pertaining to Real Estate.
Slowdown visible in Topline
Negative macro factors have taken a toll on the real estate sector. Except Akruti and
Phoenix mills all the other companies reported negative growth in topline (QOQ) in
the range of 2% to 16%. Companies in our universe reported negative growth of 1%
and 8% on YoY and QoQ respectively. Lower volumes were realized by most of the
developers because of increase in home loan rates and high price points. Companies
like DLF launched mid income housing (lower margins) which received a positive
response. Companies like Puravankara and Omaxe are planning to develop 64,500
and 10, 00,000 affordable house units in medium to long term.
Input cost pressure dents profitability
Higher input cost clearly impacted margins. Companies in our universe reported
negative EBITDA growth of 11% on QoQ basis and 2% on YoY. Except Phoenix, Akruti
and Peninsula all companies reported negative EBITDA growth QoQ. EBITDA Margins
remained flat YoY and declined by 200 bps on QoQ.
Bottomline under pressure
The current low volumes, rising input cost and tight liquidity has lead to a decline in bottomline. Liquidity crunch in the global and domestic market impacted the sector
adversely. Drying out of funds from all sources has lead to rise in cost of debt to 15% for most of the companies. Interest cost increased significantly by 123% from Rs.
1295 mn in Q2FY08 to Rs. 2889 mn in Q2FY09. With recent measure like reducing
CRR, Repo rate, & SLR by government to reduce interest rates most of the banks has
responded positively by reducing their PLR. PAT reported negative growth of 500 bps
YoY and 200 bps QoQ. PAT margins for top two real estate i.e. DLF and Unitech
declined 1000 bps and 400 bps YoY.
We beleive there is a close relationship between the economic growth and the prices
of commercial (office) market and retail demand. Demographic factors determine
the prices of housing segment though the interest rates in the economy also plays
important role in price discovery of housing segment. The BSE real estate index has
slipped by over 85% from its high of 13848 on 08th Jan 2008. Liquidity crunch in the
economy has badly hit the sector in the last quarter. Fund flow from the primary
market and private equity (PE) has dried out and therefore real estate companies are
in need for more debt. Raising debt has become difficult due to global liquidity crunch in the international market and ECB restrictions. Banks continues to postpone leading decision, despite sanctioned limits to the sector. As per various media reports property prices have corrected in the range of 15% to 35% from its peak depending upon the location and region. Most of the developers which were confident of sales picking up in the diwali festival season were wide of the mark.
Sector Outlook
Drying up of volumes, liquidity issues along with rising input cost is a curse to real estate companies. Inspite of these issues developers are not ready to reduce the list price. However indirect reduction in prices through discounts and freebies are part of the transaction. Real estate companies are taking several cost cutting measures to improve their margins in the face of the global economic turmoil. Most of the developers are now focusing towards Lower Income Group (LIG) and Middle Income Group (MIG)housing segment (Affordable housing). Also the focus has shifted from accumulating land to execution of current projects. Most of the developers are keeping away from launching of new projects. Malls rental rates are also expected to rationalize. In commercial space focus has shifted from IT/ITES commercial development segment to non IT/ITES commercial development as slowdown is expected in the sector. It’s time for the developers to recalibrate and reprice their products. On the other side buyers are in “Wait & Watch Policy” and are in no hurry to entry any transaction. We expect Q3FY09 will be tough ride for real estate sector. Decreasing commodity prices and interest rates will help the sector get rid of dark clouds in medium to long term. However atleast for the next 12 - 18 months, real estate companies are likely to face rough weather.
Thursday, 20 November 2008
Sunday, 16 November 2008
Bad news from earnings' season
India Inc. Profit, Growth Continues to Slip
Morgan Stanley has pointed out in its India Strategy report that Corporate India’s growth and profits continue to be south bound reflecting the Indian Economy scenario amid global financial crisis.
Here are our key takeaways from the recently concluded September 2008 quarterly earnings season:
• Corporate India (represented by a MS sample of 105 companies) reported a 29% fall in net earnings for the quarter ended September 2008 – an alltime low. This compares with a trailing five-year quarterly average growth of 28%.
• Excluding the Energy sector, growth was 11% YoY – a five-year low compared with a trailing five-year quarterly average growth rate of 30%.
• Our coverage universe surprised negatively versus MS analysts’ expectations. MS analysts’ were expecting net profit growth of 3% for our coverage universe (12% ex-energy).
• Given that F2009 earnings were revised down for nine out of 10 sectors and for market aggregates at the end of the season, it could be said that the quarterly earnings disappointed consensus. Downward revisions outstripped upward revisions 2:1 at the end of the season versus where earnings were at the start of the season.
• The Sensex constituents grew earnings 5.5% YoY on an aggregate basis, behind MS analysts’ forecasts and its worst performance since June 2002.
• Broad market earnings (sample of 1,038 companies) continued to show weak performance with earnings falling 7% YoY.
• Notably, four out of the 10 sectors reported 20%-plus growth in profits.
• At the sector level, the best performances came from Utilities and Technology. The laggards versus the aggregate numbers were Consumer Discretionary, Energy, and Healthcare. Save for Technology and Financials, all sectors reported a slippage in operating margins YoY.
• Versus MS expectations, the biggest positive surprises came in Consumer Discretionary and Financials while the negative surprises came in Energy and Healthcare.
• Excluding the volatile Energy sector, revenue for our sample rose 26% YoY – a seven-quarter high and a strong performance considering the macro environment, explained in part by high inflation.
• EBITDA margins fell 720bp YoY and 122bp YoY excluding the Energy sector. This took EBITDA growth to a two-year low of 26.6% for the sample Ex-energy and to a 5½ year low of 14.6% for the aggregate sample.
• The key problem for net profit growth was the declining share of net financial income in pretax earnings and the rising depreciation expense. Other income fell YoY whereas interest costs rose at their fastest pace in history.
Morgan Stanley has pointed out in its India Strategy report that Corporate India’s growth and profits continue to be south bound reflecting the Indian Economy scenario amid global financial crisis.
Here are our key takeaways from the recently concluded September 2008 quarterly earnings season:
• Corporate India (represented by a MS sample of 105 companies) reported a 29% fall in net earnings for the quarter ended September 2008 – an alltime low. This compares with a trailing five-year quarterly average growth of 28%.
• Excluding the Energy sector, growth was 11% YoY – a five-year low compared with a trailing five-year quarterly average growth rate of 30%.
• Our coverage universe surprised negatively versus MS analysts’ expectations. MS analysts’ were expecting net profit growth of 3% for our coverage universe (12% ex-energy).
• Given that F2009 earnings were revised down for nine out of 10 sectors and for market aggregates at the end of the season, it could be said that the quarterly earnings disappointed consensus. Downward revisions outstripped upward revisions 2:1 at the end of the season versus where earnings were at the start of the season.
• The Sensex constituents grew earnings 5.5% YoY on an aggregate basis, behind MS analysts’ forecasts and its worst performance since June 2002.
• Broad market earnings (sample of 1,038 companies) continued to show weak performance with earnings falling 7% YoY.
• Notably, four out of the 10 sectors reported 20%-plus growth in profits.
• At the sector level, the best performances came from Utilities and Technology. The laggards versus the aggregate numbers were Consumer Discretionary, Energy, and Healthcare. Save for Technology and Financials, all sectors reported a slippage in operating margins YoY.
• Versus MS expectations, the biggest positive surprises came in Consumer Discretionary and Financials while the negative surprises came in Energy and Healthcare.
• Excluding the volatile Energy sector, revenue for our sample rose 26% YoY – a seven-quarter high and a strong performance considering the macro environment, explained in part by high inflation.
• EBITDA margins fell 720bp YoY and 122bp YoY excluding the Energy sector. This took EBITDA growth to a two-year low of 26.6% for the sample Ex-energy and to a 5½ year low of 14.6% for the aggregate sample.
• The key problem for net profit growth was the declining share of net financial income in pretax earnings and the rising depreciation expense. Other income fell YoY whereas interest costs rose at their fastest pace in history.
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