A squeeze and an opportunity
While the sectoral headwinds (note ban, GST, RERA) have squeezed out smaller players, there has in fact been an opportunity for larger players to increase their top-line growth and acquire projects at attractive rates. Sales of larger listed players have grown 29 per cent as compared to 2 per cent fall for the real estate
sector in the June quarter, say Murtuza Arsiwalla and Samrat Verma of Kotak Institutional Equities. Even in the September quarter, barring a couple, most large real estate companies have reported a 20 per cent-plus growth in sales. Given the higher growth, the market share of the top listed players has gone up to 39 per cent in June 2018 as compared to 21 per cent a year ago, says the brokerage.
In a post-result call with investors, Vikas Oberoi, chairman and managing director of Oberoi Realty, indicated that this (NBFC crisis) is a positive for the company as there is less resistance/competition when it is looking at buying land parcels. Analysts say as has been the case with other sectors, the organised segment will benefit by taking market share from smaller players who are stuck with inventory and high working capital requirements.
Leverage in focus
While there has not been a significant improvement in demand outlook, the Street is expected to give a premium to developers who have a lighter balance sheet. While most listed large real estate players have a healthy balance sheet and good sales growth, which should help improve their market share, companies with the lowest leverage include Oberoi Realty, Suntech Realty and Mahindra Life.
Even for large realty majors, such as Sobha, which are leveraged with net debt to equity at 1.15 times as of September 2018 quarter, sales growth has been on an upward trend and cost of funding is coming down. Sobha has maintained a project launch guidance of 18 million square feet, which is a combination of new and existing projects, enabling it to achieve its FY19 annual sales guidance of 3-4 million square feet. On the debt side, the company indicated that NBFCs accounted for only 14 per cent of its borrowings, with a majority coming from non-convertible debentures and bank loans. Its overall cost of borrowing, which has been declining for the last 13 quarters, is pegged at 9.3 per cent.
Analysts at SBICAP Research have singled out Sobha as their top pick in the real estate sector due to its steady execution and high earnings visibility, driven by new launches and strong order book in the contractual segment. Brokerages are also bullish about prospects for the largest domestic real estate player DLF, which has reported a cash flow breakeven in the September quarter helping it to maintain a flat debt on a sequential basis. DLF says it will be a zero net debt company by the end of the fiscal year on the back of fund infusion by promoters and raising fresh capital. Given the better than expected new bookings in the first half of the fiscal, the company believes it can beat the Rs 20-Rs 22.5 billion new booking annual guidance.