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Fitch cuts outlook on Lodha Developers to ‘Negative’ from ‘Stable’

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Fitch Ratings has revised its outlook on India-based property developer Lodha Developers Private Ltd to Negative from Stable saying the real estate major’s reduction of debt has been slower than expected. However, the ratings agency expects improvements in the company’s operating metrics this year.

“The Outlook revision reflects weaker-than-expected operating performance for the financial year ended March 2015 (FY15), and that a rating downgrade is likely unless Lodha’s performance improves significantly over the next 12 months,” Fitch said.

India has seen a continuous slowdown in its real estate sector, which is dominated sales of apartments, due to high inflation and interest rates compounded by slower growth.

However, the economy has started picking up recently, and interest rates have started climbing down. Real estate sector, however, is yet to show ‘green shoots’.

Fitch pointed out that Lodha’s performance during the just-concluded financial year were not up to expectations.

“Annual presales of INR77bn (Rs 7,700 cr or around USD 1.2bn) were 4% lower than in FY14, and 13% below the company’s target of INR 90 bn. Cash collections also fell short of expectations, due to weaker demand and slower construction of some of its larger projects. Consequently, leverage (measured as net debt/inventory minus customer advances) had increased to 91% by FYE15 from 77% at FYE14, and is worse than our initial expectations of 84%,” it noted.

IMPROVEMENT EXPECTED

Fitch, however, is optimistic about Lodha’s ability to turn around its performance this year.

“Presales show an improving trend over FY15. Furthermore, Lodha achieved more of its annual presale targets than some of its domestic peers, indicating the relative strength of its products as well as its marketing and execution capabilities.

“Fitch expects presales to improve to at least INR110bn by FYE16, as more of its large, high-end projects will come to a close in the next 24 months. Our expectations for an improvement in performance is also supported by early signs of an improving macroeconomic climate, led by monetary easing earlier in 2015, which has spurred an increase in bank retail lending.”

Lodha is India’s largest residential real estate property developer based on presales. Its land bank of 25 million square metres is among the biggest, with the land valued at over USD10bn by external valuers.

The company expects its current land bank to support developments and sales over the next seven years, Fitch noted.

Lodha’s four largest projects will account for nearly 80% of contracted sales in FY16, declining to around 60% in FY19.

“Most medium-term sales are focused on the high-end and luxury segments, which are defined by the company as properties with per-square-foot prices of over INR20,000 (USD325) and over INR50,000, respectively. The bulk of presales in FY15 stemmed from these two market segments. Sales here typically exhibit a higher correlation with economic cycles, and therefore are generally more volatile – owing to consumers’ ability to delay their purchase decisions,” the agency said.

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