Slow sales, high inventories and costs?weigh?down Unitech, HDIL

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While Unitech’s net profit fell 48% to Rs.49.2 crore, HDIL posted 69.6% decline in net profit to Rs.42.7 crore in September quarter

Mumbai: Unitech Ltd and Housing Development Infrastructure Ltd (HDIL), among India’s largest listed real estate developers, reported steeply lower profits for the September quarter, reflecting the pains in the sector that’s weighed by slow sales, high inventories and increased costs.
Unitech’s net profit fell 48% to Rs.49.2 crore for the three months ended 30 September as construction and other expenses increased.
Revenue for Delhi-based Unitech were affected by weak demand.
Total income from operations increased 10.3% to Rs.595.75 crore, but profit was held back by a 91.4% jump in material costs to Rs.82.6 crore and a 27.8% rise in overall expenses to Rs.598 crore, the company said on Thursday.
“Prevailing challenging macroeconomic environment had a strong bearing on the demand for real estate in the company’s key markets during the second quarter,” said Sanjay Chandra, managing director of Unitech.
“With the onset of the festive season, there has been a gradual improvement in demand and the company has been taking measures to boost sales. Company has recently resumed launch of new residential projects and the initial response has been quite encouraging,” said Chandra.
Unitech’s net debt as on 30 September was Rs.6,240.02 crore, at a net debt-to-equity ratio of 0.54.
As for HDIL, the company posted a 69.6% decline in net profit to Rs.42.7 crore for the September quarter as construction and other expenses increased.
Total revenue grew 67.7% to Rs.433.47 crore but construction costs jumped 176% to Rs.97.7 crore and overall expenses rose to Rs.186.6 crore against a write-back of Rs.52 crore last year.
“The revenue from last year was driven by the high-margin business, compared with the low-margin affordable housing projects we are currently engaged with,” said Hari Prakash Pandey, vice-president, finance and investor relations, HDIL. “Besides, we could not pass on the additional cost due to regulatory changes in some of our older projects.”
The introduction of fungible floor space index (FSI) had made projects costlier.
Expenditure from changes in inventories alone saw a rise of Rs.42 crore against a write-back of Rs.140.5 crore a year ago. “The change is due to the project in suburban Kurla (in Mumbai) and since we follow the project completion method, the profit will be reflected in the coming quarters,” said Pandey.
HDIL’s net debt as on 30 September was around Rs.4,000 crore, little changed from the June quarter. It plans to reduce debt by 10-15% in six months.
The company is banking on the completion of its projects in Mumbai suburb Virar and Kurla. It also has the largest share of Mumbai’s Rs.2,000-crore TDR (transfer of development rights) market. HDIL has an expected inventory of 2 million sq. ft in the next six months.
TDR is a tradable certificate to develop land in lieu of land surrendered for the purpose of developing public utilities.
“TDR prices are currently at an attractive price of Rs.4,000 per sq. ft and, going forward, we expect good demand,” said Pandey.
HDIL, like Unitech, sounded a note of confidence, saying response in the festival season that began in September has been good. “Even in the current challenging environment, the company received favourable response during the festive season,” said Sarang Wadhawan, vice-chairman and managing director at HDIL, in a statement.
Analysts do not share this optimism.
“The demand for TDR depends on the recovery of the real estate market. It will take some more time to steady the business,” said Amit Anwani, analyst at Kantilal Chhaganlal Securities Pvt. Ltd. Also, “cashflows are a major problem for HDIL. It is showing in the way the debt is serviced”, he said.
“The overall market is not good and that is reflected in the earnings (of real estate companies). Balance sheets have strained and debt servicing has become difficult,” said Anwani.
With delays in delivering real estate projects, inventory levels across India have risen significantly. The pan-India inventory of residential stock is now well above the comfort level of 14-15 months, property consultant Jones Lang LaSalle India (JLL) said in a report in September.
Mumbai had an inventory of close to 48 months, Delhi of 23 months and Bangalore of 25 months, JLL said, pointing out that these are close to the levels of 2007, when the residential real estate market’s inventories were at an all-time high. JLL added that property prices have not risen by much in the previous 19 quarters, or nearly five years, in the metros.
India’s largest real estate firm DLF Ltd reported a 27.8% fall in net profit to Rs.100 crore for the September quarter, while net sales declined 4.1% from a year ago to Rs.2,039.54 crore.

Shares of Unitech rose 2.15% to Rs.16.65 and HDIL rose 2.59% to Rs.43.50 on BSE on Thursday, while the Sensex gained 1.02% to close at 20,399.42 points. BSE’s realty index rose 2.28% to 1,304.57 points

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