Leading real estate cos headed for a debt trap?

Experts say several companies may get stuck in a debt trap as the quantum of debt is too high when compared with the expected cash flow generation in the next fiscal.

Real estate developers say the worst for the sector is over. But the debt in several of the leading companies’ balance sheet suggest a different story. Experts say several companies may get stuck in a debt trap as the quantum of debt is too high when compared with the expected cash flow generation in the next fiscal.

People familiar with the developments say DLF’s debt is around Rs. 15,000 crore. On an average, the company delivers 10-11 million sq. ft per year. If we take the average cost of interest at 13%, DLF’s interest burden for FY10 will be Rs. 1,950 crore. That means the company will have to pay Rs. 163 crore every month and that’s just the interest component. Even if DLF is able to sell 10 million sq. feet at an average price of Rs. 3,000 a sq. foot, it will generate sales of Rs. 3,000 crore. However, typically just 20% of booking amount is paid upfront by customers. Going by that logic, DLF can expect an inflow of Rs. 600 crore. Compare that to the Rs. 1,950 crore of interest burden that DLF will have to pay in FY10.

Unitech’s story, sources say, is no different. With a debt burden of Rs. 8,000 crore, it will have to bear an interest burden of Rs. 1,040 crore. Assuming that one apartment of Unitech sells for Rs. 40 lakh, the company will have to pre-sell 10,400 apartments to generate Rs. 1040 crore.

There are others too in the same boat. HDIL’s debt figure is Rs. 4,000 crore. The company is launching projects aggressively. It had two launches in March and five others are planned later this year. Not surprising, since at 13% interest cost, the firm will have to bear Rs. 520 crore just as interest burden. The question several analysts are asking is will the pre-sale amount suffice for both servicing the interest cost and construction costs as well? Or is a delay in these new projects inevitable?

Sobha Developers have just 1,500 apartments ready for sale. The company has debt of Rs1,850 crore and the interest that it will have to pay is Rs. 241 crore. Sobha Developers has two launches planned later this year. While Sobha’s land bank may be 3,000 acres, just 23 acres is under construction. Company sources have confirmed that it will take additional debt to service interest cost burden in FY10. And industry players fear, several others will follow suit.

Aggressive asset sales will be another characteristic the year ahead in a desperate attempt to generate cash flow. But in the current environment, there are few takers. Unitech’s Saket property still remain unsold after four months. Experts say, like DLF and Puravankara have done in the past, developers may have to surrender back auctioned land to state governments.

We are at the beginning of earnings season, and simply going by the options several companies have to generate cash flow, it looks like FY10 is going to be a tougher challenge than the year gone by.