The agency has maintained a Stable Outlook for players in Grade-I residential real estate, commercial office and retail property development and operations and a Negative Outlook for non-Grade-I players for FY21.
Sector Consolidation and Strong Performance Across Grade-I Players Continue: For the remaining FY20, Ind-Ra expects Grade-I residential players to continue generating strong sales due to the ongoing consolidation in the market with fringe players losing ground in favour of Grade-I with better brand and execution ability. As per India Ratings and Research’s analysis, the market shares of the top 10 listed players gradually doubled to 13% in FY20 from 7% and 6% in FY18 and FY17, respectively. India Ratings and Research expect this trend to continue for FY21 as well. Conversely, the woes of non-Grade-I players have increased amid liquidity issues on account of declining sales, negative free cash flows, stricter regulatory compliance under Real Estate (Regulation and Development) Act and slowdown in lending from banks and non-bank finance companies.
EBITDA Margins of Grade-I Players Improve While non-Grade I Players Struggle: Grade I players continued to report healthy and stable margins of 27% in 1HFY20 (1HFY19: 27% and FY19: 26%), supported by a pick-up in sales. A rise in interest cost expense outpaced EBITDA growth due to an increase in debt and resulted in a moderation of interest coverage for Grade I companies to 2.47x in 1HFY20 (1HFY19: 2.95x).
Including Macrotech Developers Limited (‘IND BB’ /RWN) in non-Grade I players, margins, although declined from 1HFY19, remained high at 22% in 1HFY20 (1HFY19: 24% and FY19: 21%). Macrotech Developers has better margins, given its product mix. Margins for non-Grade I players (excluding Macrotech Developers) further declined in 1HFY20 to 13% (1HFY19: 16%; FY19: 12%; FY15-FY17: 24%-26%), reflecting the impact of continuing weak sales along with higher input costs and liquidity-driven execution issues. However, non-Grade I players are likely to face significant challenges in the near to medium term to meet interest expenses due to the weak demand and liquidity issues, with interest coverage remaining below 1x since FY18.
Weak Cash Flow Generation and Leverage: The overall cash flow from operations (reported CFO+interest received-interest paid) of RE companies has been negative since FY13 and is likely to remain so. Grade I players continued to report better cash flows than non-Grade I players and positive CFO until FY19, albeit lower than FY18. India Ratings and Research expect Grade I players to continue reporting neutral-to-positive CFO in FY20-FY21, as their strong sales may be offset by the various payment schemes offered by them and higher cash outflow for investments in land, through either outright purchase or joint development.
Non-Grade I players have historically reported negative CFO since FY13 and may continue to do so during FY20-FY21, given weak sales and continued liquidity issues.
Consequently, leverage (gross debt/(inventory plus investment property plus receivables plus unbilled revenue less customer advances)) for Grade-I is likely to be better than non-Grade-I players’. Leverage for Grade-I players is likely to be in the range of 66%-67% versus for non-Grade I players it is likely to likely to increase to 82%-85% in FY20-FY21 from (71%-80%) in FY18-FY19, respectively.
Improved Housing Affordability: India Ratings and Research believes housing affordability in FY20 to be better than FY12. Growth in residential prices was muted in FY18-1HFY19, resulting in time value correction in prices and consequently improved affordability. FY12-FY13 witnessed strong sales with investors having a dominant share in the overall market. Ind-Ra uses its affordability index (increase in housing price/increase in salary) to monitor the current affordability compared to the base year of FY12. Several residential players are expanding their portfolio in the affordable segment, given favourable policy support such as Credit Linked Subsidy Scheme, lower goods and services tax and exemption under income tax, as well as healthy demand for affordable houses. Companies with completed inventory will be in a better place in terms of offload risk than those with under construction projects, as the demand is driven by end-consumers who are averse to risks.
Stable Commercial Office and Retail Segment: India Ratings and Research expects demand for commercial office spaces to remain strong in FY21, driven primarily by demand from the e-commerce players, co-work office aggregators, data centre and IT- information technology-enabled services. Overall, absorption has continued to outpace supply since FY16, resulting in a decline in the quarter to absorption/lease inventory to 11 quarters in 1HFY20 (FY16: 14 quarters, based on unoccupied ready inventory) across the top six markets. Ind-Ra believes commercial office will continue to enjoy financial flexibility on account of investor inclination and its refinancing ability, given strong rental yields and stable cash flows.