Market Consolidation To Gather Pace in Residential Real Estate in 2nd Half of FY21 on Liquidity Concerns: Report
While maintaining its negative outlook for the residential real estate (RE) sector for the second half of FY20-21 (H2FY20-21), India Ratings and Research (Ind-Ra) expects ongoing market consolidation for grade I players to be more aggressive than previously, due to their better brand, execution ability and access to liquidity in the current market environment than that for non-grade I players.
The ratings agency also revised its recovery estimates on the possibility of a slower-than-expected recovery, and believes that the overall residential demand would decline about 40% year-on-year (y-o-y) in FY20-21 with affordable segment to be the worst hit, due to a higher-than-anticipated slowdown, led by the COVID-19 pandemic.
Ind-Ra, though has maintained a stable rating outlook for its rated residential RE companies for H2FY20-21, expecting limited rating movements in its investment grade large RE portfolio, as the ratings already reflect the agency’s revised expectations.
During Q1FY20-21, the pre-sales of grade I players fell 22% y-o-y as against the overall residential RE market (top-6 cities) which was down by 61% on y-o-y, as per the data from Liases Foras.
Indian RE sector accounts for over 10% of gross domestic product (GDP) and also is an employment generating sector. A continued slowdown in GDP could impact the purchasing power of buyers and consumer sentiment about job security, resulting in muted sales velocity for developers and thus lower cash flows available for debt servicing.
Ind-Ra says it has revised its pre-COVID base case estimates for interest coverage and leverage for FY20-21 to factor in the impact of the outbreak. Ind-Ra expects interest coverage for grade I player to moderate to 1.5 times-2 times for FY20-21-FY21-22 compared with 2.33 times in FY20 and that for non-grade I players to moderate to 1 times-1.3 times as against 1.35 times a year ago.
"Net leverage (net debt/(inventory plus investment property plus receivables plus unbilled revenue less customer advances)) for both grade-I and non-grade-I during FY19-20 were better than estimates; however, we expect deterioration of these for grade I to 62%-70% for FY20-21-FY21-22 (FY19-20: 60%) and for non-grade I to 80%-85% (74%)," the ratings agency added.
Ind-Ra sees cost optimisation and market consolidation to continue over next few months. It says, "Many companies have initiated various cost optimisation measures to reduce their costs and focus more on digital offerings. Reputed developers with a track record of timely project delivery are likely to benefit and gain market share."
Existing under-construction and ready projects have piled up due to low base of sales in the lockdown period, leading to an all-time high of 36 quarters to sales, as per data from Liases Foras as of June 2020.
Ind-Ra says it expects the quarters to sales to rationalise by end-FY20-21. "The demand-side risks combined with rising uncertainty over credit availability for the sector in the light of increasing risk aversion by financial institutions could add to the refinancing as well as liquidity risks for the sector. Timely execution skills coupled with sound cash flow management and financial flexibility could drive near-term rating actions," it added.
The ratings agency expects the sector’s liquidity to face a moderate risk in the near term. The sector’s refinancing requirements are likely to be the key monitorable.
Ind-Ra rated issuers with strong parentage will continue to have better access to capital markets. "Measures such as debt moratorium have provided an interim relief to the sector. Majority of the companies rated ‘IND A+’ and above have the liquidity buffers necessary to absorb the effect of decline in sales and pressures on margins, if any – even up to the next 12 months," it added.
Around 27% of the Ind-Ra rated large RE players (revenue above Rs7.5 billion) availed debt moratoriums during March-August 2020 to preserve their liquidity profiles whereas the others had robust liquidity profiles or financial flexibility. Ind-Ra says it does not expect its high rated (IND A and above) large RE player to opt for loan restructuring.
As per the ratings agency, grade I players continued to report healthy and stable margins of 27% in FY20, 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 2.33 times in FY19-20 compared with 2.78 times in FY18-19, it added.
Ind-Ra says, non-grade I players have reported deterioration in margins to 17% in FY19-20 as against 21% in FY18-19, due to disruption in operations due to the COVID-19 related lockdown and intense completion from grade 1 players.
"The EBITDA fall has resulted in a moderation of interest coverage for non-Grade I companies to 1.35 times in FY19-20 compared with 1.78 times in FY18-19, reflecting the impact of continuing weak sales along with higher input costs and liquidity-driven execution issues. 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," Ind-Ra concludes.