‘The trend of deterioration in EBITDA has ended and free cash flow has turned positive’

Revising its outlook on the Indian realty sector to negative-to-stable for 2013 from negative last year, India Ratings & Research on Wednesday said signs of stability were emerging amid persistent weak demand drivers and weak credit metrics of the dominant players.

“The trend of deterioration in EBITDA (earnings before interest, tax, depreciation and amortisation) has ended and free cash flow has turned positive,” senior executives of the rating agency told presspersons here while announcing the details of its 2013 outlook report.

The improved free cash flow translates into a situation where the companies would be better off in terms of adhering to the delivery schedules of the projects and with regard to servicing the debt.

Price correction

A correction in property prices, widely expected at least in some markets, was unlikely as better cash flow mean that the companies would be under no pressure to sell at reduced prices.

“Correction may not happen… [but] the free cash flow will make a difference to project completion,” said Sreenivasa Prasanna, Senior Director, India Ratings & Research Pvt. Ltd.

The report, on which Mr. Prasanna and Subhasree Banerjee, Associate Director in the Fitch group company, made a presentation, said that the “EBITDA margins, which steadily declined to 30 per cent in 2011-12 from about 55 per cent in 2007-08, remained at around that level during 2012. That this was possible despite increases in construction costs, signals a potential return of stability.” The report is based on a dozen real estate companies.

Trend continues

Further, in 2011-12, real estate companies generated positive free cash flow and the trend continued into first half of 2012-13.

Besides stable demand, other efforts to improve liquidity included strategies such as monetisation of land and non-core assets, exercising prudence in new launches and adopting the joint venture to develop project, the report said.

The companies, it said, would need to rely less on debt financing and focus on buyer advances and internal accruals, something for which an improvement in demand is imperative.

Stable signs

In 2012, residential demand showed signs of stability. Stating that the sales of large players declined marginally last year, the report said “persistence of adverse sentiments, high inflation and high interest rates, which reduce affordability, coupled with high property prices, continue to hinder any improvement in demand. Commercial demand will be hit by subdued job growth in the IT sector. Demand for retail space is likely to be muted in the near term.”

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