Will the Coronavirus pandemic impact top builders’ profit margins?

[ecis2016.org] Some of the richest builders in India have been clocking positive revenue growth, despite the over five-year-long distress in the country’s housing market. The Novel Coronavirus outbreak is likely to impact their profit margins adversely

The Coronavirus pandemic is likely to impact the Indian realty sector adversely. Large residential developers may suffer a severe hit on their profit margins, with the government extending the nation-wide lockdown, beginning on March 25, 2020, to May 3, 2020, as it tries to curb the COVID-19 spread in India.

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“COVID-19 has messed up the profit margins of all businesses. The cash flow is inhibited, projects are halted and builders are trying to make the situation smooth for their other stakeholders. Shortage of labour and raw materials after the situation mellows down, will constrain the pace of construction activities,” says Pradeep Aggarwal, founder and chairman, Signature Global.

Some of the richest builders in India have been clocking positive revenue growth, despite the over five-year-long distress in the country’s housing market. PropTiger.com data show that housing sales in India, the world’s second-most populous country, declined by 30% during October-December 2019, a period of festivities when sales typically increase, resulting in an unsold stock of 7.5 lakh units in India’s nine prime residential markets.

The already muted housing demand is likely to worsen, amid a spike in Coronavirus infections, feel experts. As on April 16, India has registered over 12,300  COVID-19 infections, with over 400 dead.

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“COVID-19 has immensely altered the budget planning and allocation of top builders. The cost is multiplying everyday as the work has come to a halt, without any sign of relief soon. Disruption in the supply chain is predicted to continue for a considerable time post-COVID-19 too, due to the migration of labourers,” says Kushagr Ansal, director of Ansal Housing and president, CREDAI Haryana.

COVID-19: Before and after

Sales booking of Lodha Group, India’s largest residential realty player in terms of sales, increased 30% to nearly Rs 2,000 crore in the October-December period of 2019. In the first nine months of FY20, the company sales reached around Rs 5,000 crores, showing an increase of 15% from the corresponding period the previous year. More importantly, its affordable housing projects contributed nearly 60% of the total sales booking.

Another developer, DLF reported a 24% increase in consolidated net profit during the three-month period, despite a fall in income. The company, which reported a net profit of Rs 414.01 crores for the quarter-ended December 2019, indicated its focus on affordable housing projects as demand for luxury housing – the segment DLF specialises in – had been subdued.

More importantly, the combined wealth of 100 Indians with presence in India’s realty sector stood at Rs 2,77,080 crores in 2019, up 17% as against 2018, showed the GROHE Hurun India Real Estate Rich List 2019.

Top 5 richest builders in India

Source: GROHE Hurun India Real Estate Rich List 2019

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Amid several measures launched to support the economy in general and real estate in particular, builders were envisaging better days in 2020. All projections of this kind stand retracted, as the world prepares itself to bear the extraordinary shock inflicted by the pandemic on the global economy, which is predicted to show a negative GDP growth in 2020. In the backdrop of the Coronavirus outbreak, India growth story will not be any different, as the country faces, what former RBI governor Raghuram Rajan terms as  the ‘greatest emergency since Independence’.

According to industry body CREDAI, there are nearly 20,000 ongoing projects across the country. A prolonged lockdown would result in cost-overruns for a majority of the developers, adversely affecting businesses, the COVID-19 stimulus package announced by the government and the RBI notwithstanding.

According to Sharad Mittal, CEO and head, Motilal Oswal Real Estate, post the lockdown, activity will recommence gradually, causing project delays of anywhere between four and six months at the least.

“While the top builders are trying to be carriers of goodwill and compassion through mass donations and labour camps, the profit rate will continue to dip in the coming months, post-COVID 19,” adds Aggarwal, who is also the chairman, National Council on Affordable Housing-ASSOCHAM.

“Fixed costs that realtors are bearing will definitely have an impact on profitability,” says Ansal.

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