India's real estate sector witnessed a mixed financial performance, with improved profitability but increasing cash flow pressures, according to a recent study by Nuvama.

Improved Profitability

The real estate development industry in India saw a notable improvement in profitability. Cash EBITDA margins rose to 42% from 40%, indicating enhanced operational efficiency. This improvement translated into a significant 16% year-on-year increase in absolute cash operating profits.

Cash Flow Challenges

Despite the uptick in profitability, developers faced mounting cash flow pressures. The study, which analyzed 23 developers, revealed:

• Only 9 developers reported working capital release, down from 12 in the previous period
• Operating cash flow weakened due to moderating sales momentum and rising unsold inventory
• Free cash flow generation declined, with only 4 developers generating positive free cash flow, compared to 8 in the previous period

Company-Specific Performance

The study highlighted significant variations in performance across companies:

Equity Funding and Debt Aversion

Despite generally low leverage levels across the sector, 11 out of the 23 companies raised equity funds. This trend reflects a continued aversion to debt among real estate developers, possibly due to past experiences and current market uncertainties.

Future Outlook

Nuvama's analysis suggests that while profitability is expected to stabilize, working capital intensity could rise further. This projection is based on two key factors:

1. Increased construction activity
2. Moderation in home-buying demand

These factors could potentially put additional strain on the cash flows of real estate developers in the coming periods.

The real estate sector's performance underscores the complex dynamics at play, with improved profitability juxtaposed against cash flow challenges. As the industry navigates these conditions, companies may need to focus on optimizing their working capital management and carefully balancing their construction activities with market demand to maintain financial health.

India's housing market is poised for significant changes following the recent GST rate reductions on key construction materials. The government has slashed GST rates on cement from 28% to 18%, while materials like marble, granite, and bricks now attract a 5% GST rate, down from the previous 12%.

Impact on Different Housing Segments

BPTP CEO Manik Malik suggests that these tax reforms will have varying effects across different housing segments:

• Mid-Income Segment: Expected to benefit the most due to improved affordability and reduced costs.
• Premium Housing: Likely to see indirect benefits through enhanced buyer confidence and increased market liquidity.

Cost Implications for Developers

The GST rate cuts are anticipated to bring about significant cost reductions for developers:

• Developers procuring materials directly could see construction cost reductions ranging from 3% to 5%.
• Those under fixed-rate contracts may experience minimal immediate impact.

Market Dynamics and Future Outlook

The reforms are expected to reshape the real estate landscape in several ways:

• Project Viability: Improved cost structures could enhance the feasibility of new and ongoing projects.
• New Launches: Developers may be encouraged to initiate more projects, particularly in the mid-income segment.
• Market Sentiment: Key regions like NCR, Gurugram, Faridabad, and Noida are likely to see strengthened market sentiment.

Timeline for Impact

The full effect of these GST rate cuts may take some time to materialize:

• New tender negotiations reflecting revised GST rates are expected to commence over the next 2-3 quarters.
• The mid-income housing segment, where affordability and cost sensitivity are crucial factors, is likely to see the most pronounced benefits.

These GST reforms represent a significant move by the government to stimulate the real estate sector, with potential ripple effects across the entire housing market. As the industry adapts to these changes, both developers and homebuyers will be keenly watching how these tax cuts translate into tangible benefits in the coming months.