India developers face the risk of cancellations

Bloomberg

DLF, along with Parsvnath Developers and Orbit, have more than 20 percent of their revenue booked since 2006 as outstanding, Mumbai-based analyst Anand Agarwal wrote in a report yesterday. The company, India’s largest real-estate company, has lowered prices for a project in Chennai by as much as 14 percent, the report said.

"Wherever possible, customers are looking to walk out of transactions entered at the peak of the real-estate market," Agarwal wrote. "Many real-estate companies have recognized revenue on percentage completion against future cash inflows on contracted sales. Some of these transactions could be canceled, leading to write-offs."

The Bombay Stock Exchange Realty Index has dropped 36 percent this year, compared with an 8.6 percent slump on the benchmark Sensitive Index. Home sales in India have tapered as the global financial crisis and slowing economic growth reduced the availability of home loans and hurt spending.

DLF will cut prices in new projects over the next three months to revive a slump in home sales, Vice Chairman Rajiv Singh told reporters on Feb. 2. The developer reduced prices at a project in Bangalore and Hyderabad, according to reports in the Business Standard this month.

Outstanding debts at DLF amount to about 38 percent of its total revenues between the 2006 and 2009 fiscal years, while Parsvnath and Orbit have ratios of 29 percent and 20 percent, respectively, Credit Suisse estimated.

DLF has dropped 44 percent this year, the worst performer among the 30 companies making up the Sensex. Parsvnath has retreated 26 percent during the same period, while Orbit has lost 32 percent.

A rebound in Indian developers may only take place in six months’ time, when signs emerge that asset prices are halting their slump and as liquidity recovers, Macquarie Group said in a report yesterday. The Reserve Bank of India reduced interest rates to an unprecedented low on Jan. 2 and Governor Duvvuri Subbarao said on Feb. 18 there’s "certainly room" to lower rates further.

"This is a tough time for the real-estate sector because of tight liquidity and slowing sales," Macquarie analysts Unmesh Sharma and Gautam Duggad wrote. "Stocks remain under pressure due to the lack of visible triggers in the near term."