Cash flows of realty developers are put under pressure when the living cycle enters the center: Nuvama

The Indian real estate developers witnessed the rising profitability in FY25, but the cash flows came under pressure as the working capital requirements increased and the generation of the free cash flow (FCF) weakened, according to a profound analysis by Nuvama institutional shares.

The study by Nuvama of 23 developers showed that industrial wide EBITDA margins improved to 42% in FY25, compared to 40% in FY24, because absolute cash operational profit on an annual basis rose by 16%. With sales momentum moderating and unsold inventory that pops up, a trend that is typical of the middle phase of a home cycle saws, developers a structure in working capital.

Only nine of the 23 developers reported a release of working capital in FY25 versus 12 in FY24. “Consequently, the operational cash flow faltered a bit in FY25,” said the brokerage.

Divergence among developers

Nuvama noted that the generation of cash flow varied greatly between developers. While DLF, Lodha and Rustomjee reported an EBITDA margins with high cash, colleagues such as Puravankara, Sobha and Brigade were at the bottom of the Spectrum. On the FCF front, DLF generated the highest free cash flow (Cash Pat Less Land/Annuity Capex), followed by Shriram Properties and Kolte-Patil. Prestige Estates, Puravankara and Godrej properties, on the other hand, took up shortages, largely as a result of an increased annuity Capex.

At an industrial level, FCF in FY25, with only four developers who generate a positive free cash flow compared to eight in FY24. Signature Global, Kolt-Patil and DLF improved their FCF positions on an annual basis, while Sobha, Lodha and Prestige reported deterioration.

The analysis also showed that while three-quarters of cash flows on Oberi Realty and Sunteck Realty came from serving profit, Godrej property and Aditya Birla Real Estate leaned on external financing. Despite the low lever levels, 11 of the 23 companies have collected stock funds in FY25, which is a reflection of the constant debt.

Property: Margins stable, working capital intensity to rise

Looking ahead, Nuvama expects profitability to stabilize, but marked that the working capital intensity could increase further due to a pick-up in construction activity, moderation in home-buying razoria and low levels of finished inventory.

“We believe that the rise in house prices will moderate, so that a margin improvement will be concluded. Given the Landcapex will probably remain high, this should keep the generation of cash flow under control,” said the brokerage.

Within his coverage, Nuvama retained ‘Koop’ reviews on prestige Estates and Brigade and called his best sectoral choices.

(Disclaimer: recommendations, suggestions, views and opinions of experts are their own. These do not represent the views of economic times)