By Raghavendra Kamath
Top listed property developers such as Godrej Properties and Prestige Estates saw their net debt surge in the June quarter as they launched new projects and entered into fresh agreements. Analysts and companies have said their debt is expected to go up further in the coming quarters for similar reasons. Godrej Properties’ debt went up by `490 crore during the quarter as it generated just `20 crore of operating surplus and spent `540 crore on land buys. When contacted, Mohit Malhotra ,managing director & CEO, Godrej Properties, said the net debt level will go up in the coming quarters due to deployment of cash (capital raised through QIP) for new projects.
“However, our debt-equity ratio at present is in a very comfortable range and we intend to keep it in the range of 1 to 1:5 in near term, depending on new business development opportunities. While borrowing cost will rise due to repo rate increase, we will continue to have the best borrowing rates in the industry,” he added.
On how the company plans to reduce debt, Malhotra said the company has sufficient surplus cash to be deployed for new projects acquisition. Otherwise, for working capital, Godrej Properties doesn’t require debt as ongoing projects are self-funded. “Further we expect to significantly improve on operating cashflow, as we focus on OCs and deliveries resulting in higher collection from the existing customers.”
Analysts said generation of cash flows is crucial for the company. “With large land acquisitions lined up in FY23 (including one large project with potential GDV of `5,000 crore), operating cash flows will be the key monitorable going forward to keep debt levels in check,” Adhidev Chattopadhyay, vice-president at equity research – real estate and hotels — ICICI Securities, said in a recent report. GDV refers to gross development value. The company plans to achieve sales booking of `10,000 crore in FY23 and expects to grow the same by 20% over the next two-to-three years. The company has a robust launch pipeline for FY23 and going forward as well (Ashok Vihar, Pune Township, Worli), which would help it achieve the targets. Further, it is also in an advanced stage to sign some large projects which will add to this, Malhotra said.Similarly, the net debt of Bengaluru-based Prestige Estates increased by `550 crore sequentially due to investments in ongoing projects and capex in hotel properties. International brokerage Jefferies said the company’s debt to equity ratio is expected to rise from 0.4 times to 0.5 times over the next few quarters.
Prestige is looking to garner pre-sales of over `12,000 crore in FY23, with residential projects in big markets such as Bengaluru and Mumbai likely to contribute `8,000 crore and `2,500-3,000 crore, respectively. Prestige has close to ~15 million sq ft of new launches in the upcoming quarters this year. Multiple launches are planned in geographies outside of Bengaluru, such as Hyderabad, Mumbai, and Noida, the company had said earlier. The realty firm had sold some of its commercial assets to Blackstone group in 2021 to reduce debt. Experts said a surge in opportunities for Grade A developers has led to rise in their debt. “While we have seen shooting up of net debt and its concurrent issues in the past, I believe that today developers — especially the Grade A and corporate players — have learnt the lessons and are far more prudent in that aspect. Debt levels will always increase considering a few really good opportunities coming up due to consolidation via acquisition or joint venture or joint development options. But not all increase in debt should be looked at through the same lens,” Shobhit Agarwal, managing director at Anarock Capital, said.
In the rising interest rate scenario, cost of debt will definitely go up but we need to consider it against what kind of business opportunities developers are getting into, and what the impact on cash flows will be in the next one to three years – which, in most cases, is moving towards the positive side, Agarwal said.“Developers will continuously take stock of assets and whenever required, will look at adding newer but short-term development assets and be asset light with regards to long-terms development options. This will be an ongoing phenomenon, and makes perfect sense in the larger scheme of things,” he said.