As developers hack through debt, realty stocks’ outlook improves

For investors in real estate stocks, a key highlight of the June-quarter earnings was the increased focus of companies on debt reduction.

The management commentaries of real estate companies across regions have expressed their intent to repair balance sheets through various measures, including cost rationalization, asset sales and fundraising via equity.

An analysis by ICICI Securities Ltd showed that on an aggregate basis, listed developers have been able to bring down their consolidated net debt levels by 37% to 27,400 crore, excluding DLF Cyber City Developers Ltd (DCCDL), between March 2020 and June 2021. It should be noted that this analysis excludes the financial performance of listed real estate investment trusts.

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Under repair

Considering that the real estate sector was among the key casualties of the pandemic, their efforts to pare debt are impressive. Firms have been able to achieve it through a combination of reduction in the cost of debt by 80-160 basis points (bps), reduction in corporate overheads by 20-40% from pre-covid levels and operating cash surpluses, said analysts at ICICI Securities Ltd. One basis point is 0.01%. Mumbai-based Godrej Properties Ltd was one such firm that raised as much as 3,700 crore in Q4FY21 through a qualified institutional placement (QIP), resulting in the company becoming net cash positive from that quarter.

Phoenix Mills Ltd and Brigade Enterprises Ltd have also raised capital through the QIP route to pare debt. Recently listed Macrotech Developers Ltd (Lodha) used 1,500 crore from its initial public offering (IPO) proceeds to cut debt. In a post-June quarter earnings conference call, the Lodha management shared a formal guidance to reduce its India business net debt to around 1,000 crore by March 2022. It aspires to become debt-free on a net basis by March 2024.

Going ahead, even as firms have strong launch pipelines, they aim to keep debt under manageable levels. For instance, the management of Sunteck Realty Ltd said it would stick to its asset-light and joint development revenue share model, which will aid expansion without too much leverage. Analysts said this is a welcome change from the earlier strategy of realty firms wherein they used to hoard large land parcels, which kept their cash flow situation under stress.

In short, a leaner balance sheet, especially for a capital-intensive sector such as real estate, bodes well for investors’ sentiment towards realty shares. A debt-light balance sheet could beef up valuations of the firms, analysts said. Second, post-covid consolidation has accelerated in this sector as small and regional developers continued to struggle with working capital issues.

In this backdrop, analysts expect listed real estate firms with strong balance sheets to gain market share from the unorganized sector.


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