Old demons of surging prices, ballooning inventory levels and subdued demand returned to haunt the sector during the third quarter, says the real estate rating and research agency
The third quarter of FY2012-13 saw the residential realty sector slipping into a lull once again. The market did not seem to be enamoured by the festive spirit and the astounding performance of the second quarter proved to be just a flash in the pan, says Liases Foras in a research note.
“Weakness in India’s macroeconomic scenario continued as the Index of Industrial Production (IIP) growth for November fell to a four-month low and current account deficit as a percentage of GDP stood at an unsustainable level of 5.4% for second quarter of FY13. The residential real estate market also mirrored the negative sentiment and witnessed a lacklustre performance in the December quarter of FY13. The old demons of surging prices, ballooning inventory levels and subdued demand returned to haunt the sector in the third quarter,” the report said.
Prices continue to edge higher in Q3
According to Liases Foras, the price of existing supply remains at an elevated level across most of the six major cities, the National Capital Region (NCR), Mumbai Metropolitan Region (MMR), Bengaluru, Chennai, Hyderabad and Pune on an annual as well as sequential basis. This had a cascading effect on the demand and inventory pile-up. Sales in terms of volume and value slipped in most of the cities due to which time required to clear the stock at the existing absorption pace showed a significant rise.
NCR witnessed an uptrend in prices with Faridabad and North Delhi showing 23% and 21% sequential gain. However, the pace of price increase slowed in Q3 2012-13 as against the previous quarter. Bengaluru saw a whopping 10% surge in prices on account of mushrooming IT companies and availability of superior range of products. Moreover, execution of projects at a faster pace has also impacted the upward movement of prices, the report said.
Apparently, MMR is inching towards normalcy as prices have moved southward after three long quarters. Even as the remaining suburbs recorded a 2%-3% quarterly price rise, it is likely that the long due correction could see the light of the day, as the 3% sequential price drop in the Island City could have a rippling effect on the prices across other locations in the city. However, effects of a sudden rise in Ready Reckoner rates in Mumbai, since 1 January 2013, cannot be completely ruled out.
Sales declined marginally except in Mumbai and Hyderabad
In terms of composition NCR, MMR and Bengaluru contribute more that 50% of the total sales in India's residential realty sector. Although, the trend rolled over this quarter, the sales contribution saw a marginal decline across most of the major six cities with an exception of MMR and Hyderabad. NCR, Bengaluru and Chennai lost their respective chunks in the pie both in terms of volume as well as value. On the flipside, MMR, in terms of volume, garnered a market share of 17% compared to 13% in the previous quarter, whereas in terms of business turnover, the region contributed 30% of the sales as against 24% recorded in the September quarter. Treading on the same lines, Hyderabad witnessed an increase in contribution in volume sales and business turnover.
The pace of offtake also slowed across the cities. Chennai witnessed a significant decline in the sales velocity to 1.38% in the Q3 from 2.08% in the previous quarter. In Q3 FY 2012-13, Bengaluru outdid Pune to show the fastest pace of sale across the nation. Sales movement was the slowest in MMR, while Hyderabad saw slight acceleration in its velocity, the report said.
Liases Foras said it is interesting to observe that the market is following a spiral movement, whereas the efficient markets like Pune and Bengaluru are slipping into the inefficient territory. Perceived inefficient markets like Hyderabad and MMR are moving into the efficient zone.
“While, price still remains at elevated levels, new properties being launched at lower price points are a welcome move and generate prospects of moving towards efficiency in the long run. Moreover, announcements made in the Union Budget 2013-14 are also likely to have repercussions on the market and the prevailing sentiment,” the Liases Foras report said.
While petrol prices are being cut in step with falling international oil rates, diesel rate increase would be in line with the January decision to raise prices in small dozes every month till all of the Rs11 per litre losses are eliminated
Petrol price may be cut by about Re1 per litre while diesel price may be increased by 40-50 paisa a litre from 15th-16th March.
While petrol prices are being cut in step with falling international oil rates, diesel rate increase would be in line with the January decision to raise prices in small dozes every month till all of the Rs11 per litre losses are eliminated.
Sources said the revision in rates of petrol and diesel is likely to be announced as early as Friday.
The cut in petrol price will follow two rounds of hike in rates since February. Petrol price was hiked by Rs1.50 a litre on 16th February and then by Rs1.40 per litre from 2nd March. Both the increases were excluding local VAT.
Petrol in Delhi presently costs Rs70.74 a litre. Since last revision, international gasoline (petrol) prices have come down to about $120 per barrel from $131.00 a barrel at the last time last revision. Also, the rupee has marginally appreciated against the dollar to Rs54.11.
Diesel prices have been since January hiked by over Re1 per litre in two instalments and it currently costs Rs48.16 a litre. Despite the increases, oil firms lose Rs11.26 per litre on sale of the nation's most consumed fuel.
Credit Suisse expects the supply glut pressure to ease up, with north India benefitting the most from the accretive price increase in cement. However risks like paying the penalty of $1.2 billion levied by CCI and government support remains
When the infrastructure boom was happening between 2000 and 2009, cement companies, in anticipation of huge demand started ramping up their capacities. However, this proved to be a costly mistake and they paid the price for it, when infrastructure development slowed down considerably (thanks to the policy paralysis of the government coupled with corruption and global slowdown). This left the cement industry with a supply glut as well as drastic price reductions and wafer-thin margins (and in some cases even outright losses) and poor performance, especially over past few years.
However, according to Credit Suisse, the cement industry is expected to pick up steam in the next two years with supply pressure easing and improved demand. “We expect the cement upcycle to continue at least for the next two years with accretive price increases leading to margin expansion. Capacity additions should peak out in FY14 and production discipline should imply a recovering FY14 and a stronger FY15,” it said in a research report.
Government support crucial
Credit Suisse feels one of the key drivers for the expected outperformance of these cement companies is the higher outlay announced in the recent Union Budget for rural infrastructure development vis-a-vis Prime Minister’s Rural Roads Programme (PMGSY) and rural housing (Indira Awas Yojna) as well as a pick up in general demand. Credit Suisse expects ACC and Grasim to outperform in the next 12 months while it is neutral on UltraTech Cement and Ambuja Cement. None of the south-based cement companies were covered though.
However, Credit Suisse said, one of the key risks to the recovery is the implementation of the Competition Commission of India’s (CCI) order against cartelisation that could see an outflow of as much as $1.2 billion, which will severely impact future capacity expansions.
Capacities added in FY10 still not breaking even
In fact, according to Credit Suisse, some small- and mid-cap companies are not even breaking even on RoIC (or return on invested capital). Not only is cement capital intensive, it is also extremely competitive which tips the scales in favour of large-cap cement companies. It is quite possible that consolidation could happen; or there is even the possibility of small-cap cement companies winding up since the economics are stacked against them.
Even among large-cap cement players, production has slowed down, thanks to the rapid capacity expansion that happened between 2005 and 2010. According to Credit Suisse, “Greenfield capacities commissioned in FY10-12 are still not breaking even on cost of capital as these capacities are operating at ~70%-75% utilisation. 60% of new capacities commissioning during FY13-15 are greenfield capacities with higher break-even utilisation.” In other words, new plants take longer time to break even as opposed to brownfield plants (or simply boosting existing capacities. But supply pressure is expected to cool off, leading to inventory take off and higher sales, as well as meet 65% of the demand, according to the report.
Production discipline holds the key
Credit Suisse says its views on cement upcycle assume production discipline to continue where volume growth of existing players is expected below industry average to accommodate new capacities. The economic rationale for the production discipline is higher sensitivity of profits to prices (5% profit change for 1% change in prices) versus volumes (2%). "We expect production discipline to be sustained, as the pace of new capacity additions has slowed, which reduces supply pressure, majority of capacity addition in last four years was with mid-caps and small-caps where overall RoIC is still below cost of capital due to low utilisation and profitability and 60% of new capacities commissioning during FY13-15 are greenfield capacities with higher break-even utilisation," it said.
North to have the maximum accretive price increases
Credit Suisse said it expect overall accretive price to increase but regional performances could come out as different. It said, “We expect maximum accretive price increase in the northern region over next two years followed by eastern and southern regions. We expect no accretive price increases for western and central India, given the higher supply pressure. However, if ABG’s or Reliance’s commissioning is delayed in FY14, supply pressure could be lower in western and central regions. Of the two regions, central is likely to face the maximum supply pressure where Madhya Pradesh and Uttar Pradesh caters to 15% of India’s cement demand.”
Cost to go up over next two years
According to Credit Suisse’s analysis over past two decades, cement price increase have not exceeded inflation unless cost increases were more than inflation and cement companies have been able to pass on increases in cost unless demand growth was weak as was the case in FY11 when the demand in southern India turned negative.
However, Credit Suisse expects cost to increase by about 8% over the next two years against inflation of 7-8%. “As per the feedback from the industry there are two factors leading to cost increase. One increase in cost of linkage coal as Coal India starts importing coal and implement pooling process to average coal costs. We expect cost of linkage coal to increase at a 10% CAGR over the next two years; and diesel price deregulation for bulk purchasers such as Railways and periodical increase in diesel price which impacts road freight,” it said.
“The extent of accretive price increases depends on whether the demand is strong (if south recovers) or moderate (low accretive price increase). We build in higher increase in EBITDA/t in FY15 only as we expect southern India demand to recover by FY15 and supply pressure to moderates in FY15,” it added.