Downturn Bites Builders

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[<p>For real estate companies, it has been an unusually bad year. Poor sales, few new launches leading to poor ‘booking' income, and a race against time to reduce high debt have defined the year. In case of some of the big realtors such as DLF, even while total income increased in FY 2011, net profit declined on poor margins and high input costs.<br><br>DLF reported a consolidated total income of Rs 10,144 crore in 2010-11, up from Rs 7,851 crore in the previous financial year. However, net profit fell 4.7 per cent to Rs 1,640 crore from Rs 1,720 crore in the previous year. For the past quarter, net profit fell 19 per cent to Rs 345 crore as the company adjusted Rs 475 crore towards "one-time cost reset due to input price inflation". The company admitted sales volume had declined 20 per cent to 10 million sq. ft in FY 2011 from 12.5 million sq. ft in the previous year.<br><br>For Unitech, too, total income rose 9 per cent to Rs 3,187 crore for FY 2011, but net profit slumped by over 16 per cent to Rs 581 crore from Rs 695 crore in the previous year. Another big Delhi realtor, Omaxe, pushed up consolidated sales from Rs 1,001 crore to Rs 1,522 crore through FY 2011, but net profit plummeted nearly 18 per cent to Rs 93 crore from the previous year's Rs 113 crore. Mumbai-based realtor HDIL performed marginally better. The group's annual top line grew 24 per cent to Rs 1,900 crore, while net profit went up 45 per cent to Rs 823 crore for the year ended 31 March.<br><br>The fourth quarter has proven to be the biggest drag with a slowdown in sales volumes and high input costs squeezing margins. According to an Enam Securities report on the Q4 performance of realtors, revenues for the January-March quarter of 2011 for most developers (with the exception of Godrej Properties and Indiabulls Realty) declined 10-30 per cent due to slowdown in sales. <br><br>Simultaneously, high input costs hit margins in the range of 2-10 per cent. DB Realty, whose credibility has taken a knock with its promoters Shahid Balwa and Vinod Goenka jailed for their role in the 2G spectrum scam, saw its Q4 profit-after-tax sink to just Rs 8 crore on sales of Rs 392 crore for the quarter. <br><br></p> <table style="width: 200px;" align="right" border="0" cellpadding="5" cellspacing="5"> <tbody> <tr> <td><a href="/businessworld/system/files/WEAK-FOUNDATION_pu.jpg" target="_blank"><img src="/businessworld/system/files/WEAK-FOUNDATION_200x139.jpg" style="float: right; margin: 5px;" width="200" height="139"></a></td> </tr> <tr> <td>Click here to view enlarged image</td> </tr> </tbody> </table> <p><br>Interestingly, there has been some spin-off effect from the slowing realty sector on engineering, procurement and construction (EPC) companies, which came under severe earnings pressure in the latest quarter. An analysis by Angel Broking of construction companies showed that except for Sadbhav and MPL, which showed robust growth in net profits, most others including Simplex reported a fall in net profits. "Margin pressure due to high commodity prices and spiralling interest cost resulted in disappointing earnings despite decent top-line growth," the report said.<br><br>Investor confidence, or the lack of it, has been ahead of the results. In the past 18 months since January 2010, the BSE Realty Index has plunged 44 per cent, compared to a 5 per cent rise in the BSE Sensex. "The market was expecting capital infusion from operations would help improve the financial health of real estate companies. But failing to sell sufficient stock has led to a poor show by these companies," says Varun Goel, head of equity-PMS at Karvy Private Wealth. Property pundits feel the paralysis in the market may pan out over another 3-4 quarters before sales begin to move. "There is sufficient demand in the market, but property buyers are waiting for a 15-20 per cent correction in prices, while sellers aren't willing to bring down prices," explains Goel. Governance issues have now become evident after a string of scams, and that has further eroded market confidence.<br><br>(This story was published in Businessworld Issue Dated 20-06-2011)</p>