Go for Realtors with Strong Cash Flows
With the increase in policy rates by the central bank on Tuesday can impact the financial performance of the real estate sector. Increase in policy will have much lower impact on the realtors with strong cash flows. According to a Citibank study, the upward revision in the increase cost will have much lower impact on the balance sheets of companies in this fiscal year, since the debt-equity ratio of real estate companies are much better in March’11 compared to March’10.
The impact of the increase in the interest cost is much higher in companies with an integrated business model such as DLF,Unitech and Anant Raj Industries compared to pure housing companies.This is due to the fact that these companies generally have large asset portfolio, including mainly the commercial property, besides projects in the residential segment. Although, the regular cash inflows from the leasing business can partially insulate these companies’ earnings, if there is any moderation in the residential demand due to revision in the interest cost.
This is also reflected in the inventory level of the residential segment with the inventory level of 9-11 months in the quarter ended June’11 in major cities such as Mumbai, Bangalore, Gurgaon, Chennai. The average cost of debt has gone up by 12-15%, which is 150-400- basis points higher than the last fiscal year. While large firms can manage the debt-funding pressure, small pure housing players can see the dent in the profitability in the coming quarters, after the rate revision.
As far as the fundamental is concerned, the volume growth in the residential segment has improved in the past two quarters despite the continuous increase in the interest rate.So, investor can take exposure in the sector with a selective buying by focusing on operating cash flows and the project execution history.
Economic Times
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