Monday, April 28, 2008

Slowing demand may not reflect in results of realty companies

Although the demand for new homes has slowed and resulted in lower prices in some overheated markets as loans became more costly, real estate companies are unlikely to take a hit in earnings just yet, say analysts.

For the future: Real estate companies may not see the impact of declining demand on their results for two or three quarters, say analysts.

For the future: Real estate companies may not see the impact of declining demand on their results for two or three quarters, say analysts.

The impact of a downturn will show only after two or three quarters, they said. India’s large developers, such as DLF Ltd, Unitech Ltd, and Indiabulls Real Estate Ltd, will report fourth quarter earnings on 30 April. “It will take time to see an impact on earnings,” said Nitin Khankar, senior vice-president of research at Keynote Capitals Ltd. “We believe March earnings would be robust, even though in the later part of the quarter, real estate prices started coming off their peak levels.”

Since accounting in the real estate industry is done on a “percentage of completion” method, recognizing revenue and profit is difficult, said Unmesh Sharma, an analyst with Macquarie Capital Securities (India) Pvt Ltd.

This method recognizes profit on a long-term construction contract as it is earned gradually during the construction. “The thing (therefore) to watch out for is to see whether cash sales are happening or not,” he said. “That will indicate a slowdown in the sector.”

DLF posted a profit of Rs2,145 crore on sales of Rs3,651.25 crore for the third quarter that ended on 31 December. Analysts expect the company to post a net profit of Rs2,000-2,500 crore during the fourth quarter.

According to a report by Macquarie Research, DLF is likely to see its revenues increase to Rs3,814.3 crore.

“With DLF, it is hard to estimate their net profit because of the sale of assets to DLF Assets,” said an analyst with an international financial services group who did not wish to be named. DLF sold about Rs1,850 crore worth of properties to DLF Assets Ltd during the December quarter and booked profits for the entire amount. “The estimate (on a net profit of Rs2,000-2,500 crore) that we have made is based on the sale of the company’s stake in some projects to Indiabulls Real Estate and DSP Merril Lynch Ltd,” the analyst said. In the third quarter, DLF attracted private equity investment of Rs1,675 crore from Merrill Lynch and Brahma Investments in various residential projects in the country.

In January, the company also sold its 50% stake in Kenneth Builders and Developers Ltd to its equal partner in the joint venture, Indiabulls Real Estate.

Kenneth Builders is building a high-end residential project in Okhla, a prime south Delhi locality.

Unitech had reported a net profit of Rs525.78 crore on sales of Rs1,165.11 crore for the December quarter. In the March quarter, the company is likely to see its net profit increasing to Rs576 crore on sales of Rs1,256 crore, according to Macquarie Research. More construction is driving the growth, the report says.

Realty firm Ansal Properties and Infrastructure Ltd is expected to post a net profit of Rs55.1 crore compared with Rs41.5 crore during the quarter a year ago, showing a growth of 33%, according to Macquarie’s estimates. The company’s revenue is expected to increase by 10% to Rs279 crore from Rs253.9 crore during the same period a year ago.

“While we will not see an impact of the slowdown this quarter, we do need to keep track of the recent deals in the real estate industry to see if real estate valuations have come down,” said an analyst with a domestic financial services company, who declined to be named.

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