The financial year 2008-09 will be a challenging,” says DLF Chairman K.P. Singh in the company’s latest annual report. When India’s largest real estate developer talks of challenges, then that is a sure sign that the slowdown has started hitting the real estate sector hard.
DLF, though among the least savaged real estate stocks, has seen its share price plunge 60 per cent from the heady highs of January. Its latest quarter numbers reveal a drop in margins at the earnings before interest, tax, depreciation and amortisation (EBITDA) levels, by 10 basis points, over the previous year’s April-June period. Ramesh Sanka, Group CFO & Senior Executive Director, Finance, DLF, attributes the dip to the launch of more midsegment housing in that period.
That margin erosion could have been more pronounced, if not for DLF’s strategy to counter the subdued demand for property. Sanka claims DLF is the only real estate player in the country importing steel and cement for construction purposes in a bid to counter domestic inflation. “We have been importing steel for the last one year from China at rates that are 8-10 per cent cheaper.” The same is the case with cement, which DLF is importing from Pakistan at prices that are 4-5 per cent lower. DLF claims to have 1,500-2,000 people focussed on “value engineering”. Every cost item, be it glass or a tile, is revisited; sometimes designs are also changed in this endeavour.
The DLF way
Innovation and its sheer size have come to DLF's rescue.
• Import for efficiences. Claims to be the only real estate player importing steel and cement (at cheaper prices)
• Focus on value-engineering: Claims to have 1,500-2,000 people focussed on just this. Costs of items like glass and tiles are revisited regularly
• Go easy on debt: Company's guidance suggests that the gross gearing will come down from 60 per cent to 30 per cent by the end of 2008-09
Industry review
The pain has just begun, shrugs Gaurav Dalmia, Chairman, Landmark Holdings, a real estate investment company. The suffering so far for the real estate sector has been considerable. Stocks have been hammered mercilessly on Dalal Street by as much as 70-80 per cent from their highs; the BSE Realty Index is down 35 percent from a year ago (the benchmark Sensex lost 10 per cent in that period). Almost everyone in the industry is looking at trimming expenses.
They are experimenting with ideas like changing the design of taps to save steel, ensuring uniform door sizes, importing accessories, ensuring uniformsized doors, increasing the working hours of workforce or simply laying off employees.
70-80% erosion in stock prices from their all-time highs |
