[ecis2016.org] Price crash across the markets is not possible, says Amit Modi, director of ABA Corp
Lockdown is not a new reality for the developers across India, especially in the Delhi-NCR region. The NGT construction ban, often for months together, has hampered the execution cycle of the business. However, the comprehensive lockdown due to the Coronavirus spread could multiply the woes of the business, with supply chain hurdles leading to cost escalation and labour migration, and job losses in the market leading to standstill sales and even foreclosures. In an exclusive interview, Amit Modi, director of ABA Corp, states that input costs might come down to clear the material inventory in a competitive market.
You are reading: Project delays inevitable; input materials may be cheaper: ABA Corp’s Amit Modi
Q: To what extent do you see the impact of the lockdown in a city like Noida, which is known for project delays?
A: Our focus at the moment is to take care of the workforce, so that the virus spread can be controlled. In terms of the business concern, the liquidity crisis was already there in the market; there had been no support from the government agencies; and the trust deficit with the buyers was there. Hence, I do not think the Coronavirus has added to the miseries of the sector. However, now there is an increased realisation that we have to factor in unforeseen risks in future.
Labour challenges were there in October to December 2019, due to the NGT construction ban. March 2020 onwards, we have this Coronavirus issue. So, there is no doubt that there would be construction delays with the ongoing projects. However, in nearly 60%-70% of the projects, the delay is there for a variety of other reasons. For us, with many ongoing projects, a delay of six to eight months is inevitable now.
Q: Liquidity crunch is an accepted reality in the sector. How will the sector survive, without fresh funding and buyers’ receivables?
A: Financial closure of the project is always done in advance by the serious developers in the business. I have to factor in the land cost that I have to pay out of my own pocket. Over and above that I have to calculate the construction finance. Only one portion of the overall project budget is calculated as receivables from the buyers, according to the location and the ticket size of the project. Rest of the amount, we have to calculate either from the bank finance or through unsecured loans.
Now, for the developers already having a tie-up with financial institutions, they have to ensure that the funding is not stopped. The developer has to arrange the promoter contribution, either through the unsecured loans or through the buyer receivables. The marketing strategy is developer-specific and project-specific, and everyone has his own ways and means for the same. Now, everyone has to manage the lean period of six months though.
Q: Is it that easy without any fiscal support?
A: The government on its part has offered deferment which, according to me, is not the solution. The solution is a waiver and for that the Reserve Bank of India is already offering 10% of the running project cost as term loan or working capital. This amount would be a big help in sustaining the business for the next six to eight months. The developer also has to renegotiate the purchase of materials, to bring the cost down.
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Q: Would buyer receivables be challenging in the days to come?
A: It would be challenging for the next six to eight months. The project calculation has to be redone during this time. I don’t think it would be a challenge beyond that time frame, as far as sales velocity is concerned. No businessman can afford to have liquidity for the next two to three years ready with him.
Q: Foreclosure has not been a reality in this part of the world. Will the Coronavirus lockdown and resultant job losses make this an inevitable reality?
A: I think we need to see, which ticket size the impact would be felt in. I doubt that there would be defaults and foreclosures across the sector. I don’t see major job losses in the market either. There might be some salary cut among the opportunist players. Moreover, you have to understand that a lockdown is not new to the developers; for reasons ranging from the NGT to various court rulings, builders have faced lockdowns. However, a comprehensive global lockdown will have its after effects to some extent but not to the extent of hurting the job market for the next few years. I feel, even if the lockdown is partially relaxed by mid-May and production of goods is restarted, then, we don’t need to overreact.
Q: With a conservative assessment of a lockdown for one quarter, how far will it affect the supply chain?
A: Our supply chain was affected since November 2019, first due to the NGT and then November onwards, the problem started in China. It may take six to eight months to restore that, along with the labour mobilisation. It also depends on the stage of construction and for the fittings and fixtures, one may be forced to wait for a couple of quarters.
Q: Most of the developers don’t have escalation costs in their agreements. How would they deal with cost escalation, due to supply chain hurdles?
A: I don’t think the cost of construction material would escalate in the immediate future. On the contrary, I think the cost of some of the materials would come down. The manufacturers of materials are also suffering with the lockdown and unless they come out in the market with competitive pricing to clear the inventory, their business cycle will be in problem. Of course, if we don’t get fiscal relief with land payment, then, there is some problem for us, as well. We are already in talks with both, the central government and the state government. The idea, however, is that the business stress should not be passed on to the buyers through cost escalation.
Q: Migration of labourers is a worrying point. How would the developers deal with it?
A: Labour cost would escalate and the developers have no choice but to balance it with lower material cost. Moreover, the developers can also balance it with extra payment to the labour force for more working shifts, to compensate for the lost time.
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As far as labour migration is concerned, I can say for myself that we have retained all our 1,711 labourers across projects. We are supplying food and all their necessities in the labour camp. As a matter of fact, our daily expense chart today is not about steel or cement but the grocery and other expenses for the labour force. While we the developers are doing it for our labour force, at CREDAI we are additionally providing food to 1,000-odd people.
Q: Now that the CSR budget could be exhausted for feeding the labour, is there any audit of the same?
A: The government agencies are asking this data of food supply on a day-to-day basis, right from the district magistrate to the Noida Authority. They are also sending their teams to our site, for checking it. We are filling up the forms on a daily basis, as to how many labours are on which site; what are we feeding them; and if there is any short supply, then, the developer can ask them to provide as well.
Q: Why has there been labour migration then?
A: That is because of fear psychosis. I feel there would be a shortage of around 40% labour in the business even after the lockdown.
Q: Any chances of price correction or crash?
A: It could only happen, if the developer is in a fiscal crisis or if his profit margins allow for it. However, in the Noida-Greater Noida market the margins are very thin.
Q: Many of the developers are overly borrowed and with over leveraged balance sheets, they can’t even get fresh funding. What will such developers do with standing inventory?
A: It is an individual call. If one has the standing inventory, a discount of 10-15% could be offered. A price crash across the board is not feasible.
(The writer is CEO, Track2Realty)
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Source: https://ecis2016.org
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