For investors in real estate stocks, one of the highlights of the June quarter results was the increased focus of companies on debt reduction.

Comments from the management of real estate companies in all regions expressed their intention to turn around the balance sheets through various measures, including streamlining costs, selling assets and raising funds through equity.

An analysis by ICICI Securities Ltd showed that on an aggregate basis, listed promoters were able to reduce their level of consolidated net debt by 37% to reach ??27,400 crore, excluding DLF Cyber ​​City Developers Ltd (DCCDL), between March 2020 and June 2021. It should be noted that this analysis excludes the financial performance of listed real estate investment companies.

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Under reparation

Considering that the real estate sector has been among the main victims of the pandemic, their efforts to reduce debt are impressive. Companies were able to achieve this through a combination of 80-160 basis points (bps) cost of debt reduction, 20-40% reduction in overheads from pre-Covid levels and surpluses. operating cash flow, analysts at ICICI said. Securities Ltd. One basis point is 0.01%. Godrej Properties Ltd, based in Mumbai, was one such company that raised up to ??3,700 crore in Q4FY21 through Qualified Institutional Placement (QIP), which enabled the company to become net cash positive as of this quarter.

Phoenix Mills Ltd and Brigade Enterprises Ltd have also raised capital through PAQ to reduce debt. Macrotech Developers Ltd (Lodha) recently registered used ??1,500 crore of its initial public offering (IPO) proceeds to the reduction of the debt. In a post-June earnings conference call, Lodha management shared a formal direction to reduce its company’s India-based net debt to approximately ??1,000 crore by March 2022. He aspires to become debt free on a net basis by March 2024.

Going forward, even though companies have strong launch pipelines, they aim to keep debt at manageable levels. For example, the management of Sunteck Realty Ltd has stated that it will stick to its model of light asset income sharing and joint development, which will facilitate expansion without too much leverage. Analysts said this was a welcome change from the previous strategy of real estate companies in which they accumulated large plots of land, which kept their cash flow situation under pressure.

In short, a lean balance sheet, especially for a capital-intensive sector like real estate, bodes well for investor sentiment towards real estate stocks. A debt-free balance sheet could boost company valuations, analysts say. Second, post-covid consolidation accelerated in this industry as small developers and regional developers continued to struggle with working capital issues.

Against this backdrop, analysts expect listed real estate companies with strong balance sheets to gain market share in the unorganized sector.

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