South Indian real estate firms make profit despite downturn

Despite continued worsening scenario of the real estate market across India, affordable prices and end-user driven market made the real estate market in South India the most sought after for the middle-income group for the last two years, according to a report.

Referring to the Southern India real estate market as the most stable when compared to other regions, a Knight Frank report suggested that the sales volume of several southern Indian builders remained buoyant for all the quarters since 2012.

For the current quarter it booked sales to the tune of 3.92 mn.sq.ft as against 3.76 mn.sq.ft in Q3FY13, thereby registering a growth of 4%, it said.

The South India-based real estate companies, which primarily cater to Bengaluru, Chennai, Hyderabad and Kochi real estate markets, offer the only respite in the current tepid environment. Aggregate revenues for the south India, firms exhibited positive growth on a Y-o-Y basis in each of the past eight quarters. Affordable prices consistently lured end-users to this region, sales booked brought in the much-needed funds to fuel the construction activity. An increase in sales volume along with increase in revenue implies growth in construction activity.

This can be concluded by change in prices in this region, which grew by 10% in Chennai and 17% in Bengaluru during the past eight quarters.

However, unlike sales volume the region could not decouple itself from the rise in input cost. In the last eight quarters, operating profit for the first time has reported a decline in Q3FY14. It has fallen marginally by 5% to Rs 4.75 bn. as against Rs 4.98 bn. in Q3FY13. Moreover, stable prices and increase in input cost adversely impacted operating profit margins. OPM has declined in each of the last six quarters and now stabilised between 30-33%.

Although South India based realty companies reported a bit dismal performance on the operating levels, it has been successful in sustaining its net profit as well as net profit margins. Net profits have never reported a decline in each of the previous eight quarters. In the current quarter net profits grew by 25% on a Y-o-Y basis to `1.76 bn. A relatively less leveraged balance sheet worked in favour of this region's real estate companies. This consequently had a positive impact on the net profit margins too, which has now

stablised at 12-14% level.

Compared to North and West India, real estate companies in south, particularly in Chennai and Bengaluru, have been successful in sustaining their net profit as well as net pro it margins. A relatively less leveraged balance sheet worked in favour southern region's realty companies. This consequently had a positive impact on the net profit margins too.