Published on Mon, Feb 02, 2009 at 12:41 , Updated at Mon, Feb 02, 2009 at 15:08 Source : CNBC-TV18
During the just-concluded results season, the real estate sector was expected to show dismal numbers. The star player in the realty pack, DLF, came out with its third quarter results on January 31. The company's net profit was down by 68.72% from Rs 2144.98 crore to Rs 670.79 crore on YoY basis.
“Real estate prices would come down to inflation-adjusted 1998 prices,” Rajiv Singh, Vice Chairman of DLF, said.
Speaking on the results, Singh said the company is ready to fight the price war and would offer customers a lucrative price — the company, he said, has launched new projects at lower prices and has stopped buying land. “We saw the slowdown as early as December last year,” Singh said. DLF, he said, had tweaked its product mix to include affordable housing as demand for luxury housing and corporate offices had come down.
Singh added that things had improved after September, when customers found it difficult to avail of credit. “New volumes had declined but thankfully, old bookings didn’t get cancelled. Now, people have started thinking of buying.”
Talking about the company’s about 50% margins, Singh said margins of realty companies were a little deceptive. “We have about 100% margin in rentals. If you remove that component, the margin would come to about 35%,” he said. The working capital cycle in some cases is about 15-20 years, he added.
Here is a verbatim transcript of the exclusive interview with Rajiv Singh on CNBC-TV18. Also watch the accompanying video.
Q: Big drop in earnings, why was this quarter particularly difficult?
A: We witnessed almost a shut down of all forms of economic activity and real estate being something which is driven a lot by sentiment as well as availability of money we got hit by a double whammy. In late October, the demand completely fell off and we are yet to see it recover in any substantial measure, so that’s the first part. Secondly, since the office business and the world economy is changing in a large order, we have also decided to review our strategy viz building out DLF Assets Ltd. We have also muted our performance in that area. If you go through our numbers and see carefully, the net reductions in DLF assets are reasonably good, considering the circumstances and we are quite pleased with it.
Q: Did you see this coming in September, because in September the feeling was that it was a difficult phase, but you would not see an alarming fall off like this, have you been surprised too by the fall in October-December?
Q: Did you see this coming in September, because in September the feeling was that it was a difficult phase, but you would not see an alarming fall off like this, have you been surprised too by the fall in October-December?
A: Yes, we all are surprised by the fall and actually as far as we were concerned we saw the slowdown as early as maybe last December or January and all our launches after that were at very competitive prices, we did exceedingly well. But we have to operate with tight margins, the leasing volume though continued strong and that part of the business was unanticipated low in the last quarter.
We knew that real estate business is going to be under some pressure and we stopped our land buying almost a year back. We knew it’s going to slowdown, but not so suddenly, but net-net we are feeling reasonably confident now looking ahead in terms of the product mix we have and the pricing positions we have.
Q: What’s fallen off - is it new demand which has dried up completely or old bookings which are also getting cancelled?
A: Fortunately it’s not much of the old bookings that are being cancelled. Some customers did face pressure during the last quarter because they may not have been able to get their own disbursements from their banks. We were patient and we supported them through this difficult phase and that part is now getting behind us. New bookings were the ones, which were severely impacted. The main thing people weren’t sure about their own future and more importantly everybody read newspapers about imminent fall in prices and people are searching for the bottom now, and the good part is that everybody thinking about buying something, but then they are unsure about when to buy. So, we believe that’s a good sign now and the thought at least is towards buying property and possibly in the near future people will make a judgment as the pricing levels are attractive and may not decline much further.
Q: Even as there has been 60% fall in revenues and profits, you are still working at a 50% operating profit margin. Would you want to clear inventory at much lower margins just to shore up cash flows going forward?
A: Let me clarify to you two-things. One is that margin number in our case is a little deceptive, because we have a very large component rental income. Rental income as you know has 100% margin technically, so if we strip out our rental income, our margin levels come down to possibly somewhere close to 35%.
Q: It is still not bad.
A: It is not bad but let me also mention to you, margins in our business are not something that we buy raw material today, convert it and a month later we sell it and record a margin. In our case our working capital cycle if you want to call it, is sometimes as long as 15-20 years. So, margins are deceptive, it is a return on capital which we have to look at and if you go back and see return on capital – real estate industry’s return on capital is hopefully no worse than other industry but I don’t think substantially better.
Margin reporting is deceptive because you are just taking historical cost and putting current pricing on it without accounting for a lot of inflation in between. So to that extent, I would like to say that we are reasonably competitive in our product pricing and margins will slightly decline because of our product mix changes. Today the luxury housing and the corporate office segment would be weak for the next few quarters. To that extent our margins would be under some pressure but not too much.
Q: The reason I was asking the question is whether to figure out whether you would want to cut down on your inventory to sell at much lower price points to generate cash flow which I imagine would be top of mind for you for the next few quarters?
A: Fortunately we are quite competitively priced. We have different product segments. May be about year back we came out with mid-income homes when we were about 30% below the market at that moment in time. We have just done a test launch in Hyderabad where we are I believe around 30% below the market in Hyderabad today and that test launch is meeting with very encouraging response.
We are ready to fight the price war there is no two-ways about it. We will give the customer pricing a point which will be very strong are done by homework and research. 1998 was about a similar point in time for the real estate industry as it is today.
Q: So you are saying prices will fall 40% like it did in 1997-98?
A: Let me clarify now that price point today which we are planning to operate at which would be in mid-income houses are price points which are about 15-20% lower than what they exist in most cases today and we have already started off. That would be equivalent to 1998 inflation adjusted price. So if I just take an inflation adjusted price from 1998 to today, the real estate pricing levels will come to about that point.
Q: But no more than 20%?
A: I don’t think so, because the margins are not there. To be very honest with you, today in Hyderabad we have launched our project. Our project pricing varies from Rs 1,850 per square feet to Rs 2,200 per square feet. If you look at our cost of construction and government taxes, this is a very attractive and a good price.
Q: What about markets like Gurgaon where there seems to be quite a bit of supply?
A: Our price levels were anyway competitive. We sold at Gurgaon last year in Rs 2250 per square feet and we believe there may be an element to improve by 10% but not much more. So that market will not drop below 10% on what the prevalent prices were when we sold about a year back.
Q: What about places like NCR and Noida?
A: I can’t comment on Noida because we are not present there and in such Tier II cities, it might be 20-25% less. I am talking about price levels where business is happening, there may be some illusionary price levels, which I am not talking about.
We have got our products and our rollout plans ready for 20 cities across the country and we actually held it back because in times of uncertainty, you cant do anything, nobody in certain is talking about buying. However, in responding to the price cuts and the government initiatives, the SBI and PNB have done on the interest rates. We are determined to respond favourably and we will in the next three-four months come out with about eight to 10 products at different points, which will be very attractive that will hopefully revise demand in our sector.
Q: You had set out a guidance of 22 million square feet to be delivered in FY09 — not a whole lot of that has been achieved. Do you think you will fall short of that target?
A: We will be a bit short of that target partially because some of our rental projects are getting delayed. Some of our customers are also deferring their own rollout programmes but overall, as I mentioned to you earlier, we still struggle with government approvals. It is very interesting in our industry but somebody still sits back and says, what's your biggest worry long-term? It is still the whole plethora of approvals, which inhabit our industry and add substantially to our cost. We are constrained in delivery terms more than approvals not necessarily by the immediate problem of what is going on in the markets today.
“Real estate prices would come down to inflation-adjusted 1998 prices,” Rajiv Singh, Vice Chairman of DLF, said.
Speaking on the results, Singh said the company is ready to fight the price war and would offer customers a lucrative price — the company, he said, has launched new projects at lower prices and has stopped buying land. “We saw the slowdown as early as December last year,” Singh said. DLF, he said, had tweaked its product mix to include affordable housing as demand for luxury housing and corporate offices had come down.
Singh added that things had improved after September, when customers found it difficult to avail of credit. “New volumes had declined but thankfully, old bookings didn’t get cancelled. Now, people have started thinking of buying.”
Talking about the company’s about 50% margins, Singh said margins of realty companies were a little deceptive. “We have about 100% margin in rentals. If you remove that component, the margin would come to about 35%,” he said. The working capital cycle in some cases is about 15-20 years, he added.
Here is a verbatim transcript of the exclusive interview with Rajiv Singh on CNBC-TV18. Also watch the accompanying video.
Q: Big drop in earnings, why was this quarter particularly difficult?
A: We witnessed almost a shut down of all forms of economic activity and real estate being something which is driven a lot by sentiment as well as availability of money we got hit by a double whammy. In late October, the demand completely fell off and we are yet to see it recover in any substantial measure, so that’s the first part. Secondly, since the office business and the world economy is changing in a large order, we have also decided to review our strategy viz building out DLF Assets Ltd. We have also muted our performance in that area. If you go through our numbers and see carefully, the net reductions in DLF assets are reasonably good, considering the circumstances and we are quite pleased with it.
Q: Did you see this coming in September, because in September the feeling was that it was a difficult phase, but you would not see an alarming fall off like this, have you been surprised too by the fall in October-December?
Q: Did you see this coming in September, because in September the feeling was that it was a difficult phase, but you would not see an alarming fall off like this, have you been surprised too by the fall in October-December?
A: Yes, we all are surprised by the fall and actually as far as we were concerned we saw the slowdown as early as maybe last December or January and all our launches after that were at very competitive prices, we did exceedingly well. But we have to operate with tight margins, the leasing volume though continued strong and that part of the business was unanticipated low in the last quarter.
We knew that real estate business is going to be under some pressure and we stopped our land buying almost a year back. We knew it’s going to slowdown, but not so suddenly, but net-net we are feeling reasonably confident now looking ahead in terms of the product mix we have and the pricing positions we have.
Q: What’s fallen off - is it new demand which has dried up completely or old bookings which are also getting cancelled?
A: Fortunately it’s not much of the old bookings that are being cancelled. Some customers did face pressure during the last quarter because they may not have been able to get their own disbursements from their banks. We were patient and we supported them through this difficult phase and that part is now getting behind us. New bookings were the ones, which were severely impacted. The main thing people weren’t sure about their own future and more importantly everybody read newspapers about imminent fall in prices and people are searching for the bottom now, and the good part is that everybody thinking about buying something, but then they are unsure about when to buy. So, we believe that’s a good sign now and the thought at least is towards buying property and possibly in the near future people will make a judgment as the pricing levels are attractive and may not decline much further.
Q: Even as there has been 60% fall in revenues and profits, you are still working at a 50% operating profit margin. Would you want to clear inventory at much lower margins just to shore up cash flows going forward?
A: Let me clarify to you two-things. One is that margin number in our case is a little deceptive, because we have a very large component rental income. Rental income as you know has 100% margin technically, so if we strip out our rental income, our margin levels come down to possibly somewhere close to 35%.
Q: It is still not bad.
A: It is not bad but let me also mention to you, margins in our business are not something that we buy raw material today, convert it and a month later we sell it and record a margin. In our case our working capital cycle if you want to call it, is sometimes as long as 15-20 years. So, margins are deceptive, it is a return on capital which we have to look at and if you go back and see return on capital – real estate industry’s return on capital is hopefully no worse than other industry but I don’t think substantially better.
Margin reporting is deceptive because you are just taking historical cost and putting current pricing on it without accounting for a lot of inflation in between. So to that extent, I would like to say that we are reasonably competitive in our product pricing and margins will slightly decline because of our product mix changes. Today the luxury housing and the corporate office segment would be weak for the next few quarters. To that extent our margins would be under some pressure but not too much.
Q: The reason I was asking the question is whether to figure out whether you would want to cut down on your inventory to sell at much lower price points to generate cash flow which I imagine would be top of mind for you for the next few quarters?
A: Fortunately we are quite competitively priced. We have different product segments. May be about year back we came out with mid-income homes when we were about 30% below the market at that moment in time. We have just done a test launch in Hyderabad where we are I believe around 30% below the market in Hyderabad today and that test launch is meeting with very encouraging response.
We are ready to fight the price war there is no two-ways about it. We will give the customer pricing a point which will be very strong are done by homework and research. 1998 was about a similar point in time for the real estate industry as it is today.
Q: So you are saying prices will fall 40% like it did in 1997-98?
A: Let me clarify now that price point today which we are planning to operate at which would be in mid-income houses are price points which are about 15-20% lower than what they exist in most cases today and we have already started off. That would be equivalent to 1998 inflation adjusted price. So if I just take an inflation adjusted price from 1998 to today, the real estate pricing levels will come to about that point.
Q: But no more than 20%?
A: I don’t think so, because the margins are not there. To be very honest with you, today in Hyderabad we have launched our project. Our project pricing varies from Rs 1,850 per square feet to Rs 2,200 per square feet. If you look at our cost of construction and government taxes, this is a very attractive and a good price.
Q: What about markets like Gurgaon where there seems to be quite a bit of supply?
A: Our price levels were anyway competitive. We sold at Gurgaon last year in Rs 2250 per square feet and we believe there may be an element to improve by 10% but not much more. So that market will not drop below 10% on what the prevalent prices were when we sold about a year back.
Q: What about places like NCR and Noida?
A: I can’t comment on Noida because we are not present there and in such Tier II cities, it might be 20-25% less. I am talking about price levels where business is happening, there may be some illusionary price levels, which I am not talking about.
We have got our products and our rollout plans ready for 20 cities across the country and we actually held it back because in times of uncertainty, you cant do anything, nobody in certain is talking about buying. However, in responding to the price cuts and the government initiatives, the SBI and PNB have done on the interest rates. We are determined to respond favourably and we will in the next three-four months come out with about eight to 10 products at different points, which will be very attractive that will hopefully revise demand in our sector.
Q: You had set out a guidance of 22 million square feet to be delivered in FY09 — not a whole lot of that has been achieved. Do you think you will fall short of that target?
A: We will be a bit short of that target partially because some of our rental projects are getting delayed. Some of our customers are also deferring their own rollout programmes but overall, as I mentioned to you earlier, we still struggle with government approvals. It is very interesting in our industry but somebody still sits back and says, what's your biggest worry long-term? It is still the whole plethora of approvals, which inhabit our industry and add substantially to our cost. We are constrained in delivery terms more than approvals not necessarily by the immediate problem of what is going on in the markets today.
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