At a time when the real estate business is facing weaker sales, the debt of realty firms continues to pile up and weigh down their balance sheets. Outstanding debt of key private real estate companies as on the first half FY16 amounted to nearly Rs 59,070 crore. The aforementioned key companies include Indiabulls Real Estate, DLF, Sobha, Prestige, DB Realty and others part of the real estate benchmark index, BSE Realty.
In line with the expectations of most economists, the Reserve Bank of India (RBI) in its monetary policy on Tuesday, brought down its benchmark interest rate by 25 bps or 6.5%. The BSE Realty index declined 2.59% or 32.52 points, closing at 1224.59 points. Key private real estate players like Indiabulls, Sobha, DLF, Unitech, HDIL fell in the range of 3%-6.5% during the day’s trade.
However, the indices regained slightly over 9 points or 0.76% on Wednesday and closed at 1,233.86 points.
DLF reported an outstanding debt of Rs 22,431 crore, while Indiabulls Real Estate showed an outstanding debt worth Rs 5,453 crore as on September 2015. Prestige, Sobha, DB Realty, Phoenix Mills reported a total debt ranging between Rs 2,900 crore-8,600 crore. According to experts, the rate cut of 25 bps is too small to help refinance or restructure total outstanding debt reported by these companies.
According to Sandipan Pal, analyst, Motilal Oswal Securities, “Any rate cut is an easing to the cost of capital or cost of borrowing to the company but given the kind of existing stress for these companies, the rate cut is very small. It is not only the balance sheets but also the operations which pose more risk than the financial risk. Main factor of the sector will be how the operational turnover happens, as it will be a better contributor to the sector, helping the clearance of outstanding debts.”
“If your operational risk- in terms of sales or profitability growth is reduced, the financial burden automatically will look lower. A better way to refinancing or clearing outstanding debt is an improvement in the overall balance sheet than a rate cut”, Pal added. DB Realty reported a 17.6% lower revenue in FY15 compared to its previous year, while DLF reported a 7% drop in its revenues. DLF has been trying to monetise its assets to bring down debt, however the sale of its properties hasn’t significantly helped in bringing down the company’s debt burden.
The interest rate sensitive stocks dragged down the Sensex which plunged 2.03% or 516.06 points and the Nifty slumped 155.6 points or 2.01% the indices closed at 24,883.59 points and 7,603.2 points respectively on Tuesday post the rate cut announcement.