20.04.2015, 12:00
Fitch: India's Improving Investment Climate to Help Developers Deleverage
OREANDA-NEWS. Fitch Ratings says it expects Indian property developers to deleverage meaningfully by end-2016 as the country's investment climate improves. The process of reducing leverage stalled in 2014 due to weak sales and slower cash collections on properties that were sold towards the end of 2014 and in early 2015, as developers introduced easy payment schemes to stoke demand.
On 9 April 2015, Fitch raised its forecasts for India's GDP growth to 8% for the year ending 31 March 2016 (FY16) and 8.3% for FY17, from 7.4% in FY15. The agency's expectations of an improving investment climate and higher GDP growth are supported by the implementation of the government's structural reform agenda, and structurally lower inflation (See "Fitch Affirms India at 'BBB-'; Outlook Stable", dated 9 April 2015, which is available at www.fitchratings.com) .
Domestic property purchases remained weak in 2014 due to high interest rates and some political and policy uncertainty in an election year. Buyers postponed their purchases, which drove up inventory levels steadily during the last 12 months.
During this time, most developers responded by introducing easy payment plans for certain products. These payment plans typically require 20% of the property price to be paid up front and the remainder only paid at the end of construction, usually several years later. This has lengthened cash collection cycles and contributed to higher leverage. The agency estimates that around 20% of the sector's sales over the last two fiscal quarters were financed by easy payment plans. The longer cash collection cycle will continue to weigh on developers' balance sheets in the near term.
Fitch expects the property development sector to be a key beneficiary of reductions in housing loan interest rates by several domestic banks in April 2015. The rate cuts followed interest rate reductions by the Reserve Bank of India aimed at accelerating credit growth.
We expect property developers with a greater exposure to the middle and lower income segments to benefit more from lower domestic interest rates. Developers with a greater mix of high-income customers, such as Lodha Developers Private Limited (Lodha; B+/Stable) and Indiabulls Real Estate Developers Limited (IBREL; B+/Stable), will be less impacted because their customers are less sensitive to market interest rates.
Lodha's leverage (measured as the ratio of net debt to the sum of inventory and land bank net of customer advances) increased to 84% at end-2014 from 77% at end-March 2014. IBREL's leverage increased to 61%, from 50% over the same period. Fitch expects both companies to meaningfully deleverage by end-2016.
Among other factors that support the ratings of Lodha and IBREL are their strong profit margins, which they can narrow, if needed, to churn out faster sales and improve liquidity. Lodha's EBITDA margin was 46% and IBREL's 32% in 2014. Fitch expects their EBITDA margins to remain healthy through 2016, even after factoring in moderate price pressures.
On 9 April 2015, Fitch raised its forecasts for India's GDP growth to 8% for the year ending 31 March 2016 (FY16) and 8.3% for FY17, from 7.4% in FY15. The agency's expectations of an improving investment climate and higher GDP growth are supported by the implementation of the government's structural reform agenda, and structurally lower inflation (See "Fitch Affirms India at 'BBB-'; Outlook Stable", dated 9 April 2015, which is available at www.fitchratings.com) .
Domestic property purchases remained weak in 2014 due to high interest rates and some political and policy uncertainty in an election year. Buyers postponed their purchases, which drove up inventory levels steadily during the last 12 months.
During this time, most developers responded by introducing easy payment plans for certain products. These payment plans typically require 20% of the property price to be paid up front and the remainder only paid at the end of construction, usually several years later. This has lengthened cash collection cycles and contributed to higher leverage. The agency estimates that around 20% of the sector's sales over the last two fiscal quarters were financed by easy payment plans. The longer cash collection cycle will continue to weigh on developers' balance sheets in the near term.
Fitch expects the property development sector to be a key beneficiary of reductions in housing loan interest rates by several domestic banks in April 2015. The rate cuts followed interest rate reductions by the Reserve Bank of India aimed at accelerating credit growth.
We expect property developers with a greater exposure to the middle and lower income segments to benefit more from lower domestic interest rates. Developers with a greater mix of high-income customers, such as Lodha Developers Private Limited (Lodha; B+/Stable) and Indiabulls Real Estate Developers Limited (IBREL; B+/Stable), will be less impacted because their customers are less sensitive to market interest rates.
Lodha's leverage (measured as the ratio of net debt to the sum of inventory and land bank net of customer advances) increased to 84% at end-2014 from 77% at end-March 2014. IBREL's leverage increased to 61%, from 50% over the same period. Fitch expects both companies to meaningfully deleverage by end-2016.
Among other factors that support the ratings of Lodha and IBREL are their strong profit margins, which they can narrow, if needed, to churn out faster sales and improve liquidity. Lodha's EBITDA margin was 46% and IBREL's 32% in 2014. Fitch expects their EBITDA margins to remain healthy through 2016, even after factoring in moderate price pressures.
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