After the Reserve Bank of India (RBI) cut its key lending rate by 25 basis points (bps) on Tuesday, the stock market cheered the move but the bond market remained lacklusture. "25 bps point cut in interest rate for real estate companies will translate into about 2 percent reduction in their overall interest cost outflow," says JC Sharma, VC & MD, Sobha Developer in an interview to CNBC-TV18.
Sharma believes that a cycle where liquidity is improving and the interest rates are coming down should help real estate companies to lock more numbers in times to come. Further, Sharma sees improvement in future sales and expects FY14 to be better than FY13.
Below is an edited transcript of JC Sharma's interview on CNBC-TV18
Q: Assuming that bankers react to the credit policy and cut lending rates by 25 basis point (bps), how much of a stimulus or a positive impact do you think a 25 bps cut in lending rates will have for a company like yours?
A: The 25 bps point cut in interest rate for real estate companies will translate into about 2 percent reduction in their overall interest cost outflow. But the major impact comes from the customers' perspective because most of our customers who go for home loans, for them immediate benefits will be the interest rate reduction.
For new buyers, we shouldn't be surprised if you see cut in the cash reserve ratio (CRR) rate, some of the banks may aggressively price home loan below 10 percent, which is a psychological boost in the sentiment for our industry. So, we believe that a cycle where liquidity is improving and the interest rates are coming down should help this industry to lock more numbers in times to come.
Q: While you are expecting the demand to improve, will there be elbowroom for you to be able to hike the prices of flats because RBI has signalled that there will be more rate cuts, which means demand is going to improve even further?
A: No, I don't think, except for the food items. Inflation rate is getting moderated and we have also seen universally wherever the price increase has been unreasonable the customers have resisted and in those markets the volumes have been affected. We believe that the price should remain the function of demand and supply and the input increase cost, but from now on with the declining interest rate this industry should have better times.
Q: Would you want to quantify. How much you think you will be able to sell in percentage terms in 2013 over 2012, if you are growing at 5 percent will you grow, will you be able to sell 10 percent more. Can you give us some comparative improvement in sales?
A: There will be improvements in sales, but the exact guidance can be given only after our results on Jan 31.
Q: Do you expect FY14 to be better than FY13?
A: Of course, yes, without any doubt.
Q: With inflation expectations moderating as well, do you expect any substantial improvement in your margins going forward?
A: We do believe that in real cases, the approval related cost, the wage increase and other cost, because the transportation cost, we have to spend too much on transporting cement, sand, steel, ready-mix concrete (RMCs) and other things. So, we don't foresee that there will be no increase in the input cost, but at current prices we can maintain our margins and if the prices remain as you expect at these levels maybe the margins can expand.
Q: Now that we have got one rate cut already and it could cut in the future as well, do you see a case for aggressive launches by real estate companies?
A: The launches require about a year's time if you plan today, but whatever launches people have planned, we will try to accelerate them.