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Property/Real Estate
2013 Outlook: Indian Real Estate Sector
Signs of Stability Emerge Outlook Report
Rating Outlook
Rating Outlook
Negative to Stable Outlook for 2013: India Ratings has revised its outlook on the Indian real estate sector to negative to stable for 2013, from negative in 2012. This is because the agency sees signs of stability emerging amid persistent weak demand drivers and weak credit metrics of the dominant players. The trend of deterioration in EBITDA margins has ended and free cash flows (FCF) have turned positive, signalling easing of liquidity pressures. Demand Stable despite Weak Drivers: Residential demand showed signs of stability in 2012, with yoy growth in home loans from banks showing an uptrend from May 2012. However, the sales of large players declined marginally in 2012. Economic weakness continued with the associated apprehension of employee downsizing and salary freezes, which adversely affected consumer sentiments. Persistence of adverse sentiments, high inflation and high interest rates which reduce affordability, coupled with high property prices, continue to hinder any improvement in demand. Commercial demand will be hit by subdued job growth in the IT sector, where average quarterly net headcount addition in 2012 was around 28%-32%, lower than that in the previous two years. Demand for retail space is likely to be muted in the near term. Stable Margins despite High Costs: EBITDA margins, which steadily declined to 30% in FY12 from about 55% in FY08, remained at around that level during 2012. That this was possible despite increases in construction costs, signals a potential return of stability. Liquidity Pressures Ease: In FY12, real estate companies generated positive FCF and the trend continued into H1FY13. Apart from stable demand, other efforts to improve liquidity included strategies like monetisation of land and non-core assets, exercising prudence in new launces and adopting the JV route to developing projects. Leverage to Stay High: Although companies are continuing their debt reduction efforts, the lower level of profitability at which the industry seems to be stabilising now will keep financial leverage (gross debt/EBITDA) at elevated levels of around 6.5x in the short to medium term. To achieve a significant improvement in leverage, companies will need to rely less on debt financing and focus on buyer advances and internal accruals - a strategy which can only be adopted if there is an improvement in demand.
NEGATIVE TO STABLE
Figure 1
Sector Rating Outlooks
(%) 100 80 60 40 20 0 Positive Source: Fitch Stable Negative 21% 68%
Related Research
2012Mid-Year Outlook: Indian Real Estate Sector
Analysts
Subhasree Banerjee +91 44 4340 1726 [email protected] Aashish Bhusnurmath +91 11 4356 7252 [email protected] S. Prasanna +91 44 4340 1711 [email protected]
Funding Options Limited: Banks’ exposure to the commercial real estate sector increased by only 1.7% during the first 11 months of 2012. Private equity inflow into the sector has been moderate. The limited funding options imply companies’ continued dependence on operational cash flows for funding growth and debt servicing. Commercial real estate developers, especially those with cash flow visibility through lease rentals, continue to have better credit profiles.
What Could Change the Outlook
Continuation of positive free cash flow generation, stability in EBITDA margins and improvement in demand could change the sector outlook to stable.
www.indiaratings.co.in
16 January 2013
Corporates
Key Issues
Residential Demand Steady
Figure 2
Banks’ total exposure to the housing sector had always been increasing on a yoy basis. However, the downtrend in growth seen till May 2012 reflected a slowing down of disbursements. In fact, trailing 12-month disbursements (monthly disbursements calculated by taking the difference between month-end exposures and adding 1/120 of previous month’s outstanding to account for repayments) actually declined during the first few months of 2012 and started picking up only in May 2012. Its steady increase since then indicates a return of growth in the residential housing sector. However, large real estate companies show a declining trend in revenue; For 12 months ended September 2012, revenue was 8% lower than that observed in the 12 months ended September 2011. The prices during this period however remain firm in most cities. This indicates that demand is shifting in favour of lower ticket size housing, either affordable housing in tier 1 cities or new developments in tier 2 cities
Figure 3
(Selected companies include: Anant Raj Limited, Ansal Housing & Construction Ltd. (‘IND BB’/Stable), Ansal Properties & Infrastructure Ltd., Ashiana Housing Ltd., Brigade Enterprises Ltd., DLF Ltd., Ganesh Housing Corporation Ltd., Housing Development & Infrastructure Ltd., Omaxe Ltd., Parsvanth Developers Ltd., Puravankara Projects Ltd. (‘IND BBB’/ Stable), Sobha Developers Ltd., Unitech Ltd. Unless otherwise mentioned, data from these companies have been included in our analysis)
Related Criteria
Corporate Rating Methodology (September 2012)
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
Figure 4
Commercial and Retail Demand to be Slow
India Ratings expects demand for commercial space to remain sluggish, till the IT sector revives. Given the economic slowdown, demand for retail space will also be low. Demand for commercial space is driven largely by the IT/ITeS sector, which is experiencing a slowdown in hiring. Average quarterly net hiring in major IT companies (aggregate data for Infosys Ltd., Tata Consultancy Services Ltd., Wipro Ltd., HCL Technologies Ltd., Tech Mahindra Ltd., Mindtree Ltd. and Cognizant Technology Solutions) at around 21,000 in 2012 was 32% lower than in 2011 and 28% lower than in 2010.
Demand Drivers Continue to be Weak
Economic growth has been progressively weak. The GDP growth for the past two to three quarters has been hovering around 5.3%-5.5%, compared with the 7%-8% growth achieved from June 2010 to June 2011. Inflation and interest rates continue to be high, with CPI inflation being 9.8% on an average from June-November 2012. Only a handful of banks have responded to the Reserve Bank of India’s (RBI) 50bps reduction in repo rates in April 2012, by reducing their bank rate marginally by 25bps. Economic weakness fosters fear about job losses and salary freezes; and in such a scenario, high property prices and elevated interest rates, resulting in high EMIs, encourage postponement of purchase decisions.
Margins Stabilise Despite Cost Pressures
EBITDA margin during January-September 2012 has stabilised at the 2011 level of 30%, from highs of 50%-60% in 2007 and 2008. This happened despite continuing cost pressures, as companies were able to pass on cost increases to consumers, resulting in firm property prices. From January-September 2012, average yoy growth in steel prices was 17% and that of cement was 10% (Source: CMIE). The National Rural Employment Guarantee Scheme (NREGS) will keep labour supply constrained, while wages being inflation linked will further add to costs.
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
Figure 5
Leverage to Remain Elevated Despite Debt Reduction Efforts
In September 2012, aggregate outstanding debt for the large real estate companies presented here was 7% lower than that in September 2011. Companies have been making a conscious effort to reduce debt, at times through selling off non-core assets. To illustrate, DLF monetised non-core assets in H1FY13, largely land parcels to the extent of lNR9.2bn, using the proceeds primarily to reduce outstanding debt to INR244bn in H1FY13, down 3% from FY12. In September 2012, a marginal debt reduction over March 2012, together with annualised EBITDA reducing by 13%, resulted in financial leverage increasing to 6.7x after progressively showing a decline in the previous two quarters. As EBITDA margins appear to be stabilising at levels lower than historically seen, companies will be required to increase sales significantly to reduce leverage.
Figure 6
Debt to EBITDA
(x) 7 6 5 4 3 2 1 0 Mar 08 Mar 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Source: Company results 1.9 5.0 6.1 6.1 6.6 6.4 6.7 5.9
The decline in gearing is a direct reflection of the reduction in outstanding debt.
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
Figure 7
Gearing
(x) 1.4 1.21 1.2 1.0 0.8 0.6 0.4 Mar 08 Mar 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Source: Company results 0.84 0.65 0.71 0.76 0.69 0.64 0.63
Liquidity Pressures Ease
Despite slowing revenue, cash flows have turned positive for large companies. This illustrates the efforts by builders to improve their liquidity by adopting a bouquet of strategies – monetisation of non-core assets as well as land holdings, selling plotted developments, exercising prudence in launching new projects and adopting the JV route to develop projects. The JV route prevents cash outflow for land acquisition, as the JV partner is remunerated in built-up space.
Figure 8
Funding Options Limited
The Indian real estate sector will continue to face limited funding options in the near term. In such a scenario, internal accruals will assume significance for funding growth, and companies with revenue visibility from lease rentals will have stable credit profiles. Banks remain cautious in lending to this sector as reflected in the yoy growth of bank exposure to the commercial real estate sector, which fell to a low of 1.1% in September 2012 compared with double digit growth in 2011.Although it recovered to 2.9% in November 2012, it remains to be seen whether the trend is maintained.
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
Figure 9
Private equity inflow into the sector has been moderate. January-November 2012 PE inflow into the real estate sector was USD0.7bn, i.e. 70% of total 2011 inflow of USD1bn. (Source: Grant Thornton Deal Tracker). Weak capital markets continue to make initial public offerings (IPOs) unviable. There have been no IPOs in the real estate sector in FY12 and in FY13 till date, and no red herring prospectus has been filed either in these periods.
Other Trends – Joint Ventures
A combination of economic growth and urbanisation will mean that long-term demand for housing will continue and strengthen. Managing opportunities without being trapped by speculative forces is a key challenge for creditworthiness in the industry. Many developers are using the JV route to develop new projects. India Ratings believes that joint development with land owners, which shields developers from volatile land prices, if used extensively, can be an important contributor to strengthen creditworthiness of developers. Joint development, which allows payment for land through built-up space, allows superior estimation of costs as the builder can plan and control construction costs. Also, the price of land, a key component of overall price, will be subject to market discovery, leading to flexibility in pricing and therefore superior liquidity. Such a development will also significantly reduce stickiness in prices and improve demand. Developers will continue focussing on affordable housing - with average ticket size of INR2.5mINR3.5m - and increasingly shift to Tier 2 and Tier 3 cities in the next year. In H1FY13, 68% of Sobha’s new launches were in Tier 2 cities like Coimbatore and Thrissur. Over the same period, 30% of Unitech’s new launches were in non-metro cities. In H1FY13, 57% of DLF’s sales were in Tier 2 cities. While low ticket size projects are being offered mainly by small builders, big builders like Unitech has projects with ticket size ranging from INR2.0m-INR3.5m in Chennai, while Puravankara offers affordable housing in the INR2.5m-INR3.5m price range under its 100% subsidiary company – Provident Housing Limited.
2012 Review
In 2012, margins showed signs of stabilising, despite cost pressures. Companies passed on increased costs to buyers, as evidenced from firm property prices. Free cash flows turned positive, as companies adopted various strategies to improve liquidity, such as selling land and non-core assets and judiciously making new launches. Builders focussed on affordable housing in the price tag of INR2.5m-INR3.5m and continued to diversify into Tier 2 and Tier 3 cities.
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
While residential demand remained stable, demand drivers remained weak. Commercial demand was adversely impacted by the slowdown in the IT/ITeS sector. Gearing showed some decline as a result of debt reduction, but leverage continued to be high on account of the lower levels at which margins stabilised.
Rating Action in 2012
In 2012, the ratings of two issuers were upgraded, and one was affirmed with its Outlook revised to Negative. Ansal Housing & Construction Limited, which was at ‘IND D’ on account of defaults, was upgraded to ‘IND BB-’ with a Stable Outlook as the company successfully serviced its debt obligations in the six months preceding the upgrade. For Vikhroli Corporate Park Private Limited, the rating was upgraded by one notch to ‘IND BBB+’ with a Stable Outlook, as the issuer was successful in rolling over its rental agreements with an increase in rentals. The Outlook on Intelligent Infrastructure Limited was revised to Negative from Stable, while the rating was affirmed at ‘IND BB+’ to reflect the possibility of further termination of lease rentals.
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
Annex 1
Figure 10
Selected India Ratings-Rated Issuers
SN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 18 19 Issuer Adarsh Developers Ansal Housing & Construction Limited Amba Highrise Pvt Ltd ARG Developers Private Limited ARG Housing Private Limited Bansal Coal Udyog Private Limited Bhavya Constructions Pvt Ltd Bhoruka Park Pvt Limited ILD Millennium Private Limited Indian Express Newspapers (Mumbai) Limited Intelligent Infrastructure Limited Lilasons Infrastructure Private Limited Martin Burn Information Technology Private Limited MVL Limited Neptune Developers Limited Ninex Developers Limited Prime Newline AOP Puravankara Projects Limited Vicky Realtors Vikhroli Corporate Park Private Limited Long-Term Issuer Rating IND B+ IND BBIND B IND B IND B IND B IND B+ IND BBB+ IND B+ IND AIND BB+ INDBIND B+ IND D IND BIND D IND BB IND BBB IND BB+ IND BBB+ Outlook Negative Stable Stable Stable Stable Stable Stable Stable Stable Stable Negative Negative Stable Negative Stable Stable Stable Stable
Source: India Ratings
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://WWW.INDIARATINGS.CO.IN/UNDERSTANDINGCREDITRATINGS.JSP IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.
Copyright © 2012 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings, India Ratings & Research (India Ratings) relies on factual information it receives from issuers and underwriters and from other sources India Ratings believes to be credible. India Ratings conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of India Ratings factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of India Ratings’ ratings should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information India Ratings relies on in connection with a rating will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to India Ratings and to the market in offering documents and other reports. In issuing its ratings India Ratings must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind. A rating provided by India Ratings is an opinion as to the creditworthiness of a security. This opinion is based on established criteria and methodologies that India Ratings is continuously evaluating and updating. Therefore, ratings are the collective work product of India Ratings and no individual, or group of individuals, is solely responsible for a rating. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. India Ratings is not engaged in the offer or sale of any security. All India Ratings reports have shared authorship. Individuals identified in a India Ratings report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a rating by India Ratings is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of India Ratings. India Ratings does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. India Ratings receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. The assignment, publication, or dissemination of a rating by India Ratings shall not constitute a consent by India Ratings to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction including India. Due to the relative efficiency of electronic publishing and distribution, India Ratings research may be available to electronic subscribers up to three days earlier than to print subscribers.
2013 Outlook: Indian Real Estate Sector January 2013
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Property/Real Estate
2013 Outlook: Indian Real Estate Sector
Signs of Stability Emerge Outlook Report
Rating Outlook
Rating Outlook
Negative to Stable Outlook for 2013: India Ratings has revised its outlook on the Indian real estate sector to negative to stable for 2013, from negative in 2012. This is because the agency sees signs of stability emerging amid persistent weak demand drivers and weak credit metrics of the dominant players. The trend of deterioration in EBITDA margins has ended and free cash flows (FCF) have turned positive, signalling easing of liquidity pressures. Demand Stable despite Weak Drivers: Residential demand showed signs of stability in 2012, with yoy growth in home loans from banks showing an uptrend from May 2012. However, the sales of large players declined marginally in 2012. Economic weakness continued with the associated apprehension of employee downsizing and salary freezes, which adversely affected consumer sentiments. Persistence of adverse sentiments, high inflation and high interest rates which reduce affordability, coupled with high property prices, continue to hinder any improvement in demand. Commercial demand will be hit by subdued job growth in the IT sector, where average quarterly net headcount addition in 2012 was around 28%-32%, lower than that in the previous two years. Demand for retail space is likely to be muted in the near term. Stable Margins despite High Costs: EBITDA margins, which steadily declined to 30% in FY12 from about 55% in FY08, remained at around that level during 2012. That this was possible despite increases in construction costs, signals a potential return of stability. Liquidity Pressures Ease: In FY12, real estate companies generated positive FCF and the trend continued into H1FY13. Apart from stable demand, other efforts to improve liquidity included strategies like monetisation of land and non-core assets, exercising prudence in new launces and adopting the JV route to developing projects. Leverage to Stay High: Although companies are continuing their debt reduction efforts, the lower level of profitability at which the industry seems to be stabilising now will keep financial leverage (gross debt/EBITDA) at elevated levels of around 6.5x in the short to medium term. To achieve a significant improvement in leverage, companies will need to rely less on debt financing and focus on buyer advances and internal accruals - a strategy which can only be adopted if there is an improvement in demand.
NEGATIVE TO STABLE
Figure 1
Sector Rating Outlooks
(%) 100 80 60 40 20 0 Positive Source: Fitch Stable Negative 21% 68%
Related Research
2012Mid-Year Outlook: Indian Real Estate Sector
Analysts
Subhasree Banerjee +91 44 4340 1726 [email protected] Aashish Bhusnurmath +91 11 4356 7252 [email protected] S. Prasanna +91 44 4340 1711 [email protected]
Funding Options Limited: Banks’ exposure to the commercial real estate sector increased by only 1.7% during the first 11 months of 2012. Private equity inflow into the sector has been moderate. The limited funding options imply companies’ continued dependence on operational cash flows for funding growth and debt servicing. Commercial real estate developers, especially those with cash flow visibility through lease rentals, continue to have better credit profiles.
What Could Change the Outlook
Continuation of positive free cash flow generation, stability in EBITDA margins and improvement in demand could change the sector outlook to stable.
www.indiaratings.co.in
16 January 2013
Corporates
Key Issues
Residential Demand Steady
Figure 2
Banks’ total exposure to the housing sector had always been increasing on a yoy basis. However, the downtrend in growth seen till May 2012 reflected a slowing down of disbursements. In fact, trailing 12-month disbursements (monthly disbursements calculated by taking the difference between month-end exposures and adding 1/120 of previous month’s outstanding to account for repayments) actually declined during the first few months of 2012 and started picking up only in May 2012. Its steady increase since then indicates a return of growth in the residential housing sector. However, large real estate companies show a declining trend in revenue; For 12 months ended September 2012, revenue was 8% lower than that observed in the 12 months ended September 2011. The prices during this period however remain firm in most cities. This indicates that demand is shifting in favour of lower ticket size housing, either affordable housing in tier 1 cities or new developments in tier 2 cities
Figure 3
(Selected companies include: Anant Raj Limited, Ansal Housing & Construction Ltd. (‘IND BB’/Stable), Ansal Properties & Infrastructure Ltd., Ashiana Housing Ltd., Brigade Enterprises Ltd., DLF Ltd., Ganesh Housing Corporation Ltd., Housing Development & Infrastructure Ltd., Omaxe Ltd., Parsvanth Developers Ltd., Puravankara Projects Ltd. (‘IND BBB’/ Stable), Sobha Developers Ltd., Unitech Ltd. Unless otherwise mentioned, data from these companies have been included in our analysis)
Related Criteria
Corporate Rating Methodology (September 2012)
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
Figure 4
Commercial and Retail Demand to be Slow
India Ratings expects demand for commercial space to remain sluggish, till the IT sector revives. Given the economic slowdown, demand for retail space will also be low. Demand for commercial space is driven largely by the IT/ITeS sector, which is experiencing a slowdown in hiring. Average quarterly net hiring in major IT companies (aggregate data for Infosys Ltd., Tata Consultancy Services Ltd., Wipro Ltd., HCL Technologies Ltd., Tech Mahindra Ltd., Mindtree Ltd. and Cognizant Technology Solutions) at around 21,000 in 2012 was 32% lower than in 2011 and 28% lower than in 2010.
Demand Drivers Continue to be Weak
Economic growth has been progressively weak. The GDP growth for the past two to three quarters has been hovering around 5.3%-5.5%, compared with the 7%-8% growth achieved from June 2010 to June 2011. Inflation and interest rates continue to be high, with CPI inflation being 9.8% on an average from June-November 2012. Only a handful of banks have responded to the Reserve Bank of India’s (RBI) 50bps reduction in repo rates in April 2012, by reducing their bank rate marginally by 25bps. Economic weakness fosters fear about job losses and salary freezes; and in such a scenario, high property prices and elevated interest rates, resulting in high EMIs, encourage postponement of purchase decisions.
Margins Stabilise Despite Cost Pressures
EBITDA margin during January-September 2012 has stabilised at the 2011 level of 30%, from highs of 50%-60% in 2007 and 2008. This happened despite continuing cost pressures, as companies were able to pass on cost increases to consumers, resulting in firm property prices. From January-September 2012, average yoy growth in steel prices was 17% and that of cement was 10% (Source: CMIE). The National Rural Employment Guarantee Scheme (NREGS) will keep labour supply constrained, while wages being inflation linked will further add to costs.
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
Figure 5
Leverage to Remain Elevated Despite Debt Reduction Efforts
In September 2012, aggregate outstanding debt for the large real estate companies presented here was 7% lower than that in September 2011. Companies have been making a conscious effort to reduce debt, at times through selling off non-core assets. To illustrate, DLF monetised non-core assets in H1FY13, largely land parcels to the extent of lNR9.2bn, using the proceeds primarily to reduce outstanding debt to INR244bn in H1FY13, down 3% from FY12. In September 2012, a marginal debt reduction over March 2012, together with annualised EBITDA reducing by 13%, resulted in financial leverage increasing to 6.7x after progressively showing a decline in the previous two quarters. As EBITDA margins appear to be stabilising at levels lower than historically seen, companies will be required to increase sales significantly to reduce leverage.
Figure 6
Debt to EBITDA
(x) 7 6 5 4 3 2 1 0 Mar 08 Mar 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Source: Company results 1.9 5.0 6.1 6.1 6.6 6.4 6.7 5.9
The decline in gearing is a direct reflection of the reduction in outstanding debt.
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
Figure 7
Gearing
(x) 1.4 1.21 1.2 1.0 0.8 0.6 0.4 Mar 08 Mar 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Source: Company results 0.84 0.65 0.71 0.76 0.69 0.64 0.63
Liquidity Pressures Ease
Despite slowing revenue, cash flows have turned positive for large companies. This illustrates the efforts by builders to improve their liquidity by adopting a bouquet of strategies – monetisation of non-core assets as well as land holdings, selling plotted developments, exercising prudence in launching new projects and adopting the JV route to develop projects. The JV route prevents cash outflow for land acquisition, as the JV partner is remunerated in built-up space.
Figure 8
Funding Options Limited
The Indian real estate sector will continue to face limited funding options in the near term. In such a scenario, internal accruals will assume significance for funding growth, and companies with revenue visibility from lease rentals will have stable credit profiles. Banks remain cautious in lending to this sector as reflected in the yoy growth of bank exposure to the commercial real estate sector, which fell to a low of 1.1% in September 2012 compared with double digit growth in 2011.Although it recovered to 2.9% in November 2012, it remains to be seen whether the trend is maintained.
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
Figure 9
Private equity inflow into the sector has been moderate. January-November 2012 PE inflow into the real estate sector was USD0.7bn, i.e. 70% of total 2011 inflow of USD1bn. (Source: Grant Thornton Deal Tracker). Weak capital markets continue to make initial public offerings (IPOs) unviable. There have been no IPOs in the real estate sector in FY12 and in FY13 till date, and no red herring prospectus has been filed either in these periods.
Other Trends – Joint Ventures
A combination of economic growth and urbanisation will mean that long-term demand for housing will continue and strengthen. Managing opportunities without being trapped by speculative forces is a key challenge for creditworthiness in the industry. Many developers are using the JV route to develop new projects. India Ratings believes that joint development with land owners, which shields developers from volatile land prices, if used extensively, can be an important contributor to strengthen creditworthiness of developers. Joint development, which allows payment for land through built-up space, allows superior estimation of costs as the builder can plan and control construction costs. Also, the price of land, a key component of overall price, will be subject to market discovery, leading to flexibility in pricing and therefore superior liquidity. Such a development will also significantly reduce stickiness in prices and improve demand. Developers will continue focussing on affordable housing - with average ticket size of INR2.5mINR3.5m - and increasingly shift to Tier 2 and Tier 3 cities in the next year. In H1FY13, 68% of Sobha’s new launches were in Tier 2 cities like Coimbatore and Thrissur. Over the same period, 30% of Unitech’s new launches were in non-metro cities. In H1FY13, 57% of DLF’s sales were in Tier 2 cities. While low ticket size projects are being offered mainly by small builders, big builders like Unitech has projects with ticket size ranging from INR2.0m-INR3.5m in Chennai, while Puravankara offers affordable housing in the INR2.5m-INR3.5m price range under its 100% subsidiary company – Provident Housing Limited.
2012 Review
In 2012, margins showed signs of stabilising, despite cost pressures. Companies passed on increased costs to buyers, as evidenced from firm property prices. Free cash flows turned positive, as companies adopted various strategies to improve liquidity, such as selling land and non-core assets and judiciously making new launches. Builders focussed on affordable housing in the price tag of INR2.5m-INR3.5m and continued to diversify into Tier 2 and Tier 3 cities.
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
While residential demand remained stable, demand drivers remained weak. Commercial demand was adversely impacted by the slowdown in the IT/ITeS sector. Gearing showed some decline as a result of debt reduction, but leverage continued to be high on account of the lower levels at which margins stabilised.
Rating Action in 2012
In 2012, the ratings of two issuers were upgraded, and one was affirmed with its Outlook revised to Negative. Ansal Housing & Construction Limited, which was at ‘IND D’ on account of defaults, was upgraded to ‘IND BB-’ with a Stable Outlook as the company successfully serviced its debt obligations in the six months preceding the upgrade. For Vikhroli Corporate Park Private Limited, the rating was upgraded by one notch to ‘IND BBB+’ with a Stable Outlook, as the issuer was successful in rolling over its rental agreements with an increase in rentals. The Outlook on Intelligent Infrastructure Limited was revised to Negative from Stable, while the rating was affirmed at ‘IND BB+’ to reflect the possibility of further termination of lease rentals.
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
Annex 1
Figure 10
Selected India Ratings-Rated Issuers
SN 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 18 19 Issuer Adarsh Developers Ansal Housing & Construction Limited Amba Highrise Pvt Ltd ARG Developers Private Limited ARG Housing Private Limited Bansal Coal Udyog Private Limited Bhavya Constructions Pvt Ltd Bhoruka Park Pvt Limited ILD Millennium Private Limited Indian Express Newspapers (Mumbai) Limited Intelligent Infrastructure Limited Lilasons Infrastructure Private Limited Martin Burn Information Technology Private Limited MVL Limited Neptune Developers Limited Ninex Developers Limited Prime Newline AOP Puravankara Projects Limited Vicky Realtors Vikhroli Corporate Park Private Limited Long-Term Issuer Rating IND B+ IND BBIND B IND B IND B IND B IND B+ IND BBB+ IND B+ IND AIND BB+ INDBIND B+ IND D IND BIND D IND BB IND BBB IND BB+ IND BBB+ Outlook Negative Stable Stable Stable Stable Stable Stable Stable Stable Stable Negative Negative Stable Negative Stable Stable Stable Stable
Source: India Ratings
2013 Outlook: Indian Real Estate Sector January 2013
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Corporates
ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://WWW.INDIARATINGS.CO.IN/UNDERSTANDINGCREDITRATINGS.JSP IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.
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2013 Outlook: Indian Real Estate Sector January 2013
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