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Real Estate Companies still in a Risky Business Model

March 17, 2009

In the present credit crunch, investors seem to be more concerned about pressure on corporate balance sheets than on earnings. BNP Paribas has done an excellent research to estimate the risk to companies’ debt servicing capabilities and the risk to companies’ capex targets under various scenarios of revenue and cash flow decline (5% to 30% decline) from base case estimates.

Naturally, a company that faces risk to debt servicing under a scenario of 5% revenue decline from our estimates is more risky than a company that faces similar risk at 30% revenue decline scenario.

Companies facing potential risk to debt servicing: MOST RISKY In order of declining risk, HDIL [Highest], Unitech, Aban Offshore, DLF, JSW Steel and Tata Steel. Some of these companies turn into hypothetical defaulters under extreme assumptions though. For JSW and Tata Steel to become defaulters, revenue estimates in FY10 would have to decline 20% and 30% respectively.

In the second category – the risk of reducing capex – there are 12 companies. Naturally, the six companies facing debt servicing risk face the risk of cutting capex also. The additions are – IndiaBulls Real Estate, Tata Power, Punj Lloyd, Glenmark, GSPL and Great Offshore.

Finally, the report highlights 15 stocks that face the risk of breaching their debt covenants. We must reiterate, however, that except for Suzlon and Tata Steel, the judgement is based on “average industry standards” of debt covenants. new entrants in this list are – Reliance Power, GMR, Tata Communications, Hindustan Constructions and Shiv-bani oils.

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