Among other things that the Modi effect was expected to do was to revive the sentiments in the overall real estate market and experts felt that while the real effect on the ground may only be visible over the next year or two with sales rising, projects getting completed and cheaper source of funding becoming available to them, the share markets have already discounted the expected revival in real estate.
Even as the benchmark Sensex at the Bombay Stock Exchange has risen by 7.6 per cent in the month of May, the BSE realty index rose the highest and has jumped by 33 per cent in the month of May alone leaving behind the power, capital goods and the banking indices that were major beneficiaries in the recent rally.
While it may only be natural to get attracted towards such high returns, one must not forget the issues of high debt levels, unsold inventory and financing issues that have crippled a number of companies in this sector and therefore the entry into a company in the real estate sector has to structured around the merit of the company’s operations and financial health.
WHO GAINED WHAT AND WHY?
In terms of financial performance the listed real estate companies have not had a sweet run but they did witness a spike at the stock markets recently. While the realty index gained significantly, it was not a homogeneous movement for the constituents within the same. It was the beaten down stocks that led the march as they rose between 25 and 70 per cent. The biggest gainer over the last one month has been Unitech that saw its share price rise by 70 per cent from Rs 15.8 to Rs 27. DLF has been the other major gainer with a 45 per cent jump in its share price. Other major gainers include Indiabulls Real Estate, HDIL and Parsvnath Developers.
However other companies that are relatively less leveraged and have a stronger balance sheet such as Godrej properties, Mahindra Lifespaces, Oberoi Realty have had a muted or more rational run at the stock markets with their share prices rising between 8 and 12 per cent. Experts say that the share prices have risen on the enthusiasm around government getting a clear mandate and hope of economic revival that may benefit the real estate industry too.
“The companies that were heavily leveraged had witnessed downgrades and their share prices corrected significantly. With revival of sentiments in equity markets, shares of beaten down companies have jumped more whereas those that were doing relatively better have seen a more rational investor behaviour,” said a fund manager with a mid-sized mutual fund.
Experts say that the balance sheets of the companies in the sector are not in the pink of their health. While their profits have been on a steady on a decline over the last few years, their debt situation has only worsened. “At the time of the global financial crisis, the aggregate debt of top 15 listed entities in the sector stood at around Rs15,000 crore. However since then it has trebled over the last seven years and now is around Rs 50,000 crore,” said Shashank Jain, executive director, PricewaterhouseCoopers India.
This means that even as the overall incomes and profits for these companies are not growing, the interest burden is only on a rise and a major part of their operating income is going towards servicing of debt. “Interest cost for the top 15-20 companies in the sector make up to close to 50 per cent of their aggregate EBITDA,” said Jain. This has been at a time when the companies have lost out on their traditional source of funding i.e. the banks and have been forced to look out at fund raising avenues that are more expensive — be it private equity, funding from HNIs etc.
While the stock markets may have reacted sharply and pushed the stocks significantly higher, experts feel that the overall situation of these companies may not see a turnaround in the near term.
There are few things that have to happen for the sector to take off—demand / sales have to pick up, unsold inventory has to be absorbed, cheaper source of funding has to be made available to the sector and projects need to be completed in time. But all that may not happen at one go.
“The problem is so deep rooted that it can’t get rectified in couple of quarters. It will take atleast 2-3 years to clean up the balance sheet of a number of companies operating in the sector,” said Jain.
There may not be much for investors in the near-term but betting on companies that have the ability to clean up their books and have good projects in the pipeline could pay-off in the long term — at least three to five years.