The real estate sector seems to have regained its footing, particularly with a notable emphasis on affordable housing, and this growth is expected to reflect positively in the June quarter results of various companies. This strategic shift has resulted in increased sales for numerous firms; however, it has simultaneously exerted pressure on profit margins. The crux of the issue lies in the nature of mid-segment housing, which operates as a high-volume, low-margin business.
It is worth noting that recovery appears confined to the residential market, with the commercial and retail segments continuing to experience significant stress.
Focusing on the performance of the listed companies, both Orbit and Indiabulls Real Estate (IBREL) are anticipated to report a slight uptick in sales. Orbit, despite a significant plunge in property prices prevalent in the luxury segment, has managed to achieve a 5% increase in sales. Conversely, Parsvnath is projected to experience the steepest decline, with an alarming 70% Year over Year revenue drop. DLF and Unitech are expected to follow suit, suffering declines of about 60% and 54%, respectively. In an effort to enhance liquidity for operational undertakings, both companies have divested from non-core assets and exited less viable projects, a strategic move aimed at ensuring the completion of ongoing developments. Additionally, several large Special Economic Zone (SEZ) projects have been put on hold as a consequence.
In response to the ongoing market dynamics, many firms have initiated new residential projects within the affordable housing segment. While the costs of construction are expected to be lower, the expected decline in property prices may lead to a reduction in EBIDTA margins by an average of 5-10%. Nevertheless, companies such as Unitech, DLF, HDIL, and Sobha, which have successfully raised funds, have fortified their balance sheets and subsequently reduced their overall financing costs. The average EBIDTA margin for June 2009 is projected to be 39%, compared to 43% recorded in March 2009. Peninsula Land is likely to witness a promising margin owing to the limited number of its projects, resulting in lower leverage.
In spite of the prevailing adverse conditions, there are signs that the real estate sector may experience a slight recovery in margins. The overall Profit After Tax (PAT) margins for the June quarter are forecasted to be 26%. While the real estate sector significantly contributes to the overall profit growth for Indian corporates, this figure remains notably lower than the past PAT margins, which typically ranged between 35-40%. Nevertheless, as alternative funding sources become more accessible, builders are successfully enhancing their cash positions. Loans have been restructured, leading to a reduction in interest liabilities, and developers like Mahindra Lifespaces, IBREL, and Peninsula Land are expected to report PAT margins exceeding 30%.