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Saturday, November 15, 2008

Real Estate: Dust To Dust, Ashes To Ashes

Mosl(Cutting Estimates):Sector is in a mess with highly leveraged players like HDIL and Unitech the most vulnerable. However, while the industry has resisted so far, but existing properties are to fetch discounted price while new launches are likely to be deferred by all entities especially Purvankara, Omaxe, Parsvnath.

Delay In Launches: Most of the real estate (RE) companies have indicated that they have decided to hold back or go slow on new project launches, while some companies such as Omaxe and Puravankara have indicated that they have frozen all new launches indefinitely.Given the current slump in volumes in the RE industry across verticals, we have considered lag in development for all projects across segments and companies. This in turn would result in delay in the cash flows and revenues from these projects.

Financial Impact: Puravankara and IBREL are the worst hit, with FY09E net profitbeing lowered by 37% and 56%, respectively. Unitech takes the next big hit, with FY09E net profit lowered 11%.

Realization assumptions:We expect list prices of residential and commercialproperties to drop across the country. While this would negatively impact the valuations and revenues from new projects, we feel list prices of existing projects are also vulnerable.

Company impact:Almost all companies would be affected by lower realizations
across cities and verticals.

Construction cost assumptions:We expect construction cost for RE companies to
moderate, primarily due to decline in raw material prices such as steel (down by 30%
YTD) and cement. Several RE companies have indicated a possibility of lower
employee cost as a result of salary cuts and moderation in employee base.

Company impact:Almost all companies would be impacted.

Others:We expect leverage for RE companies to increase in the medium term, due to weak sales/demand. Further, we expect the cost of borrowing for RE companies toremain high in the medium term, in spite of proactive measures by RBI. As a result, the profitability of RE companies could be negatively impacted on account of higher interest cost.

Company Impact:Highly leveraged companies like Unitech and HDIL would be most affected as major portion of their debt has been raised in the recent past.

Regards,
ARUN
I can be reached at:arunanalyst@rediffmail.com

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