Realty firms such as Oberoi Realty, Godrej PropertiesBSE 0.60 %, HDILBSE -2.37 %, UnitechBSE -1.46 % and Sobha DevelopersBSE -0.96 % are likely to post a significant decline in earnings in the quarter ended June 2013 as property prices across India either remained flat or declined.

However, India's biggest realty firm- DLFBSE -0.76 % could well post a huge earnings growth on a quarter-onquarter basis, mainly due to lower interest outgo after pruning debt. Earnings of these companies, in the coming few quarters are likely to remain subdued given the lower demand and unsold inventory in key markets.

Property prices in Mumbai and NCR softened, while rates were flat in Bangalore. The total unsold inventory in Mumbai is the highest in the last five years at close to 32,500 units, with demand declining on a quarter-on-quarter basis. Absorption in April was significantly low at only 1,020 units, according to PropEquity data. Similarly, the total number of unsold units in Gurgaon and Noida is around 43,500 units, with absorption in April being only 2,080, while in Bangalore, it was 4,161 units compared to unsold inventory of 58,214 units.

The absorption rate, which is the total number of units sold, is quite low compared to the total inventory because of low affordability. The gap between the growth in property prices and salaries has increased significantly. While property prices over the last 10 years have grown at 14%, salaries have grown only by 9%. Unless this gap narrows, sales volume is unlikely to pick up. Going by these numbers, the absorption rate in Mumbai continues to be the lowest, followed by NCR and Bangalore in that order.

Given the over-leveraged balance sheets of realty companies, industry officials are expecting builders to lower the price to raise sales volumes and improve cash flows.

Considering this, Oberoi RealtyBSE 0.95 % appears to be best positioned in the long term as it is a debt-free company. The company not only has a strong brand, which will ensure higher sales at premium prices, but it also has over Rs 1,000 crore in cash, which provides it an advantage over other firms when it comes to purchasing new land parcels.

Compared to this, the stock performances of highly leveraged companies such as DLF, Unitech and HDIL, which are mainly based in the National Capital Region and Mumbai, respectively, will depend mainly on how these companies will generate cash flows, either through operations or sale of assets, which Chidambaram in turn will help these companies to de-leverage their balance sheets.
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