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India Per Sq Ft Portable
Cost Inflation a Big Challenge … Or is it Shrinking Volumes?
Sector faces inflationary woes … — DLF surprised investors with Rs4.75b of one-time cost reset in 4Q, highlighting inflationary pressures. We believe this is not a recent phenomenon since both cement and steel prices have been trending upwards over the past 3-4 years, albeit with much volatility. In fact average pricing of cement has remained flat in FY10 and FY11.
… Not a cause for margin contraction — Steel/Cement costs (which constitute 25-40% of construction costs) are up ~16%/20% respectively since Aug-10. Most developers indicate that this rally hasn't led to any meaningful margin contraction, being offset by higher realizations across most cities. Recently reported margin erosions for few players have been led by causes like cost over-runs due to delays in old projects, changes in product mix and one-time cost adjustments.
Are material costs peaking? — Developers have mixed views – Oberoi & Prestige opine that input costs have peaked/close to peaking, while DLF/Godrej Properties feels that inflationary pressures may continue. CIRA believes that steel and cement prices could see some correction in the near term. However in the medium term, cement would tend to be flattish while steel would likely decline marginally YoY.
Margins versus volumes? — Prices have shot up in the past year and are being sustained at high levels by developers to protect their margins. This has resulted in lower affordability, impairing sale volumes and in turn cash flows.
Falling volumes is a bigger concern — Given a modest outlook for both steel/cement, we believe margins should be less of an issue going forward and transaction pick-up will be a key catalyst in sector recovery. Some price correction is imminent and should prove healthy as it would help drive volumes/cash flows in urrent tight liquidity environment. Our top picks are DLF/Prestige/Oberoi.
What Developers had to say
DLF
Cost of construction break up: Steel + cement make 40% of cost of construction and civil costs (i.e. – steel + cement + labour) are ~70% of total.
Changes in last 6months/one year: Management highlights that costs have risen to the tune of ~10-20% in the past one year across all product categories.
Margin impact of inflation: Company recently made one-time cost reset adjustment of Rs 4.75b in Q4 to account for increase in budgeted costs across their ongoing product portfolio.
Terms with contractors: DLF outsources 50-60% of their projects to external contractors like Ahluwalia Contracts, BL Kashyap and some local contractors. However, they do material (Steel + cement) procurement on their own.
Budgetary cost adjustments in projects: Going forward, company has clarified that they would make cost adjustments on a more regular basis (quarterly) to capture changes in budgeted costs.
Outlook for margins/input costs: Management opines that margins could see stagnation/some downward bias going into FY12 as these cost pressures continue.
Any strategic shift in product mix to maintain margins: Company's product mix for FY12 has majority of plotted developments planned as the associated risks due to inflationary pressures are lower. Mid income is most prone to such cost pressures/margin erosion- hence, company is planning no new launches in this segment.
Oberoi Realty
Cost of construction break up: For a typical luxury residential product like Exquisite in Goregaon, Mumbai, steel + cement make ~16% of cost of construction. Overall civil costs (i.e., steel + cement + labour) are ~46% of total (see table alongside). >50% of costs are related to other expenditures like flooring/tiles/painting/landscaping/elevators/electrical fittings and so on as Oberoi doesn’t hand over bare shell apartments.
Changes in last 6months/one year: Management sees no meaningful changes in the past year. They highlight that these input costs are very volatile, so much depends on timing of the procurement. Over the last 3 years, i.e. since they handed over Oberoi Woods, the costs have gone up from ~Rs 2,200/sf to ~Rs 3,000/sf- 70-80% on account of higher costs of raw material and balance on account of higher floors in current project.
Margin impact of inflation: Normal inflation is factored in their budgeted costs and so far it hasn’t seen any further pressure on costs to do any adjustments.
Terms with contractors: So far all Oberoi projects have been/are being executed by L&T. However, material procurement (Steel + cement) is fully driven by the company.
Budgetary cost adjustments in projects: Company makes regular cost adjustments (quarterly) to capture changes in budgeted costs. Hence, no one-time cost adjustments are on the cards.
Outlook for margins/input costs: Company sees no downside to margins. While they feel steel/cement prices are close to peaking, margins will not be enhanced on account of any downside in costs (if any), as they will rather use surplus/savings to deliver a better product. This in turn will drive higher realizations.
Prestige Estates
Cost of construction break up: Steel + cement make ~25% of cost of construction. However, incase there are more than one basement levels, this proportion increases. Overall civil costs (ie – steel + cement + labour) are ~47% of total construction costs.
Changes in last 6months/one year: Management sees no meaningful changes in the last one year. They highlight that there is significant change when compared to input costs 3-4 yrs back. Steel prices have increased from ~Rs 15,000/tonne to Rs 40,000/tonne now and a cement bag now costs Rs 300 versus ~Rs 100.
Margin impact of inflation: Normal inflation (4-5%) over the project life is factored in their budgeted costs and so far the company hasn’t seen any further pressure on costs to do any adjustments.
Terms with contractors: Company largely outsources projects to external contractors like JMC, BL Kashyap, L&T, Simplex and some local contractors whom they have worked with for a long time. However, they do material (Steel + cement) procurement on their own for (a) better quality assurance, (b) better control (c) economies of scale.
Budgetary cost adjustments in projects: Based on quarterly project review meeting, the company makes regular cost adjustments to capture changes in budgeted costs in that quarter itself. Hence, no one time cost adjustments is expected.
Outlook for margins/input costs: Company believes that steel and cement prices have already peaked so it doesn’t see any significant downside to current margins. Near term could see a marginal hit on margins, if at all, on account of high input costs.
Any strategic shift in product mix/practices: (1) In the past, company preferred to sell as much area as possible at the time of the launch; now they hold back 20-30% of inventory for sale towards completion of the project. Higher realization would enable setting off incremental cost inflation, if any (2) Company has recently planned number of mid-income project launches. This is purely to bring balance to their current ongoing portfolio which is largely skewed towards luxury, especially after the handover of Shantiniketan.
Godrej Properties
Cost of construction break up: Steel + cement make ~30% of cost of construction. Overall civil costs (i.e. – steel + cement + labour) are ~60-65% of total construction costs. However, incase of high-rise developments, this proportion changes marginally.
Changes in last 6months/one year: Management indicated that costs have gone up by ~10-15% in the past year due to increases in steel and cement prices. Former has increased from ~Rs 31,000/tonne to ~Rs 37,000/tonne while the latter is at Rs 180/bag, had reached highs of Rs 250-260/bag.
Margin impact of inflation: Inflation in input costs have so far not impacted margins because prices have increased at a faster pace for their ongoing projects; e.g. Ahmedabad Garden City was launched last year at Rs 2,200/sf is averaging Rs 3,000/sf, up >35%. Gurgaon project was launched in Jan-11 at Rs 3,550 has gone up to Rs 4,550/sf, up ~28% in the past six months.
Terms with contractors: Construction is outsourced to established contractors like L&T (majority), Shapoorji, Gammon and so on. Fixed price/rate construction contracts are no longer preferred by developers or contractors given the volatility in input costs. Long-term contracts for steel and cement are not available in the market due to the uncertainties around their pricing. Like the industry, Godrej Properties enters into item rate contracts, where a base rate is mentioned for steel, cement. While procurement is jointly done, upside/downside to the base rate lies with the company.
Budgetary cost adjustments in projects: Company builds in a contingency in all its project budgets to cater to any cost abnormalities in the course of project execution. So far no project costs have exceeded the budgeted costs. In case incremental costs were to exceed the contingency built in; company will make necessary adjustments on a quarterly basis.
Outlook for margins/input costs: While the company believes that steel and cement prices have shot up in the past year to 15 months, they comment that input costs could still see some marginal increase, if inflation doesn’t come under control. However, they are not worried on the margin front given good price escalation in their projects. Company also indicated that such increases in costs would be passed on to customers. So margins are likely to sustain.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Per Sq Ft Portable
Cost Inflation a Big Challenge … Or is it Shrinking Volumes?
Sector faces inflationary woes … — DLF surprised investors with Rs4.75b of one-time cost reset in 4Q, highlighting inflationary pressures. We believe this is not a recent phenomenon since both cement and steel prices have been trending upwards over the past 3-4 years, albeit with much volatility. In fact average pricing of cement has remained flat in FY10 and FY11.
… Not a cause for margin contraction — Steel/Cement costs (which constitute 25-40% of construction costs) are up ~16%/20% respectively since Aug-10. Most developers indicate that this rally hasn't led to any meaningful margin contraction, being offset by higher realizations across most cities. Recently reported margin erosions for few players have been led by causes like cost over-runs due to delays in old projects, changes in product mix and one-time cost adjustments.
Are material costs peaking? — Developers have mixed views – Oberoi & Prestige opine that input costs have peaked/close to peaking, while DLF/Godrej Properties feels that inflationary pressures may continue. CIRA believes that steel and cement prices could see some correction in the near term. However in the medium term, cement would tend to be flattish while steel would likely decline marginally YoY.
Margins versus volumes? — Prices have shot up in the past year and are being sustained at high levels by developers to protect their margins. This has resulted in lower affordability, impairing sale volumes and in turn cash flows.
Falling volumes is a bigger concern — Given a modest outlook for both steel/cement, we believe margins should be less of an issue going forward and transaction pick-up will be a key catalyst in sector recovery. Some price correction is imminent and should prove healthy as it would help drive volumes/cash flows in urrent tight liquidity environment. Our top picks are DLF/Prestige/Oberoi.
What Developers had to say
DLF
Cost of construction break up: Steel + cement make 40% of cost of construction and civil costs (i.e. – steel + cement + labour) are ~70% of total.
Changes in last 6months/one year: Management highlights that costs have risen to the tune of ~10-20% in the past one year across all product categories.
Margin impact of inflation: Company recently made one-time cost reset adjustment of Rs 4.75b in Q4 to account for increase in budgeted costs across their ongoing product portfolio.
Terms with contractors: DLF outsources 50-60% of their projects to external contractors like Ahluwalia Contracts, BL Kashyap and some local contractors. However, they do material (Steel + cement) procurement on their own.
Budgetary cost adjustments in projects: Going forward, company has clarified that they would make cost adjustments on a more regular basis (quarterly) to capture changes in budgeted costs.
Outlook for margins/input costs: Management opines that margins could see stagnation/some downward bias going into FY12 as these cost pressures continue.
Any strategic shift in product mix to maintain margins: Company's product mix for FY12 has majority of plotted developments planned as the associated risks due to inflationary pressures are lower. Mid income is most prone to such cost pressures/margin erosion- hence, company is planning no new launches in this segment.
Oberoi Realty
Cost of construction break up: For a typical luxury residential product like Exquisite in Goregaon, Mumbai, steel + cement make ~16% of cost of construction. Overall civil costs (i.e., steel + cement + labour) are ~46% of total (see table alongside). >50% of costs are related to other expenditures like flooring/tiles/painting/landscaping/elevators/electrical fittings and so on as Oberoi doesn’t hand over bare shell apartments.
Changes in last 6months/one year: Management sees no meaningful changes in the past year. They highlight that these input costs are very volatile, so much depends on timing of the procurement. Over the last 3 years, i.e. since they handed over Oberoi Woods, the costs have gone up from ~Rs 2,200/sf to ~Rs 3,000/sf- 70-80% on account of higher costs of raw material and balance on account of higher floors in current project.
Margin impact of inflation: Normal inflation is factored in their budgeted costs and so far it hasn’t seen any further pressure on costs to do any adjustments.
Terms with contractors: So far all Oberoi projects have been/are being executed by L&T. However, material procurement (Steel + cement) is fully driven by the company.
Budgetary cost adjustments in projects: Company makes regular cost adjustments (quarterly) to capture changes in budgeted costs. Hence, no one-time cost adjustments are on the cards.
Outlook for margins/input costs: Company sees no downside to margins. While they feel steel/cement prices are close to peaking, margins will not be enhanced on account of any downside in costs (if any), as they will rather use surplus/savings to deliver a better product. This in turn will drive higher realizations.
Prestige Estates
Cost of construction break up: Steel + cement make ~25% of cost of construction. However, incase there are more than one basement levels, this proportion increases. Overall civil costs (ie – steel + cement + labour) are ~47% of total construction costs.
Changes in last 6months/one year: Management sees no meaningful changes in the last one year. They highlight that there is significant change when compared to input costs 3-4 yrs back. Steel prices have increased from ~Rs 15,000/tonne to Rs 40,000/tonne now and a cement bag now costs Rs 300 versus ~Rs 100.
Margin impact of inflation: Normal inflation (4-5%) over the project life is factored in their budgeted costs and so far the company hasn’t seen any further pressure on costs to do any adjustments.
Terms with contractors: Company largely outsources projects to external contractors like JMC, BL Kashyap, L&T, Simplex and some local contractors whom they have worked with for a long time. However, they do material (Steel + cement) procurement on their own for (a) better quality assurance, (b) better control (c) economies of scale.
Budgetary cost adjustments in projects: Based on quarterly project review meeting, the company makes regular cost adjustments to capture changes in budgeted costs in that quarter itself. Hence, no one time cost adjustments is expected.
Outlook for margins/input costs: Company believes that steel and cement prices have already peaked so it doesn’t see any significant downside to current margins. Near term could see a marginal hit on margins, if at all, on account of high input costs.
Any strategic shift in product mix/practices: (1) In the past, company preferred to sell as much area as possible at the time of the launch; now they hold back 20-30% of inventory for sale towards completion of the project. Higher realization would enable setting off incremental cost inflation, if any (2) Company has recently planned number of mid-income project launches. This is purely to bring balance to their current ongoing portfolio which is largely skewed towards luxury, especially after the handover of Shantiniketan.
Godrej Properties
Cost of construction break up: Steel + cement make ~30% of cost of construction. Overall civil costs (i.e. – steel + cement + labour) are ~60-65% of total construction costs. However, incase of high-rise developments, this proportion changes marginally.
Changes in last 6months/one year: Management indicated that costs have gone up by ~10-15% in the past year due to increases in steel and cement prices. Former has increased from ~Rs 31,000/tonne to ~Rs 37,000/tonne while the latter is at Rs 180/bag, had reached highs of Rs 250-260/bag.
Margin impact of inflation: Inflation in input costs have so far not impacted margins because prices have increased at a faster pace for their ongoing projects; e.g. Ahmedabad Garden City was launched last year at Rs 2,200/sf is averaging Rs 3,000/sf, up >35%. Gurgaon project was launched in Jan-11 at Rs 3,550 has gone up to Rs 4,550/sf, up ~28% in the past six months.
Terms with contractors: Construction is outsourced to established contractors like L&T (majority), Shapoorji, Gammon and so on. Fixed price/rate construction contracts are no longer preferred by developers or contractors given the volatility in input costs. Long-term contracts for steel and cement are not available in the market due to the uncertainties around their pricing. Like the industry, Godrej Properties enters into item rate contracts, where a base rate is mentioned for steel, cement. While procurement is jointly done, upside/downside to the base rate lies with the company.
Budgetary cost adjustments in projects: Company builds in a contingency in all its project budgets to cater to any cost abnormalities in the course of project execution. So far no project costs have exceeded the budgeted costs. In case incremental costs were to exceed the contingency built in; company will make necessary adjustments on a quarterly basis.
Outlook for margins/input costs: While the company believes that steel and cement prices have shot up in the past year to 15 months, they comment that input costs could still see some marginal increase, if inflation doesn’t come under control. However, they are not worried on the margin front given good price escalation in their projects. Company also indicated that such increases in costs would be passed on to customers. So margins are likely to sustain.
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