Indiabulls expects lease income to increase 30-35%

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Plagued by high cost of land, debt issues and slowdown in sales, the real estate pack has been seeing sluggish growth over the quarter. "The lower and mid-segment sales have been reasonable, and that compensated for the slow-moving premium market in Mumbai," says Gagan Banga, chief executive officer, Indiabulls Group . The group's realty subsidiary, Indiabulls Real Estate  has come out with its first quarter numbers for the current fiscal.

Speaking to CNBC-TV18 in an exclusive interview, Banga says that more than 50% land has already been leased at Lower Parel, Mumbai. "Going forward, we expect lease income for the company to increase by 30-35%," he says.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Your numbers were sluggish. Can you take us through which areas you are seeing this sluggishness from?

A: The Mumbai premium market is kind of slow. The lower-end and the mid-segment is doing reasonably okay. We believe that we had guided that sales this year should go up by about 30%, and given the base from which we come on the residential side, we are reasonably sure that we should be able to do that number.

Q: No new project for you crossed the revenue recognitions phase in this quarter. I believe even in areas like Navi Mumbai, which I imagine would not be premium housing, have also been seeing a slowdown. What gives you the confidence of hitting that guidance that you have set out? What kind of scale up do you see through the next few quarters?

A: Construction is on full swing. In times of uncertainty, there is generally a tendency of all types of consumers to prefer and buy both, completed and projects in which construction are on in full swing. Our job is to focus on construction and to ensure that the end product is made ready in time. Execution is what we are focusing on.

Q: In terms of which projects you think will get recognized by the end of this year where you are seeing initial bookings, what are the key projects in line for FY12?

A: Both, Panvel and Gurgaon are seeing reasonable traction. I believe that as these projects progress in terms of construction, it's only a matter of time that sales pickup as well as construction activity allows us to do revenue recognition and increase the sales numbers.

Q: Your investors are quite concerned about the way Panvel and Gurgaon are going where sales have been quite weak so far. Would you concede that it has been disappointing so far?

A: I would not relate to Panvel and Gurgaon sales as being weak. I believe that given the overall liquidity, interest rate and therefore, the market sentiment, these projects seem to be doing reasonably well. We also have to keep in context the fact that as buildings will progress, they will see greater tractions. Actually, if the focus continues to be on execution, sales in that segment are just a matter of coming in line. Therefore, I don't see a particular reason why sales should be tepid or weak.

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Q: What about the leasing market in Lower Parel? Has that also turned a bit lackluster?

A: Premium markets are lackluster, there is no doubt about it. Premium markets are tending to value completed apartments more than even mid-end and the lower end of the markets. So Lower Parel, no doubt about it, it's seeing very weak activity right now.

Q: So is it true that of those two office complexes that you have only about 50% is leased right now and how much of an increase do you expect to see then in leasing income?

A: Slightly more than 50% is leased. We have given out these complexes to pretty large tenants whose fit-out work is currently going on. So I believe that the lease income should go up by as much as over 30-35% towards the end of the year.

Q: How soon you see the demerger happening for Indiabulls Power because it was cleared at the start of this year in January but we haven't heard any words since?

A: It's a court-led process, and so far, the progress has been very good. Shareholders gave their approval and then, we had to go and get the approval from the lenders which have also come in. Now the court has convened a date in October for the final hearing. I expect post that, towards the end of the calendar year, the process should be complete. That makes it sometime in mid-December.

Q: So what's Indiabulls response to a sluggish market? Are you considering reducing rates both on sales and on leases?

A: We have been reasonably ahead of the curve. Especially on the leasing side, we have seen good traction and good names come to our buildings, essentially because we have priced our products pretty sensibly. So Indiabulls Finance Center today gets priced depending on the quantum that one is taking on lease around Rs 125-150. So at those rates, we are not where the rest of the Lower Parel market is, which continues to price their product at about Rs 180-200. I believe sensible pricing is one aspect of how to grow the business. The other is to continue to focus on execution.

Q: Just a clarification on the Elphinstone Mill project... there were some reports about work being stopped there because of an environmental clearance. Is everything okay there?

A: That I believe was completely misunderstood and there was a clarification later. The IT part of the building is complete. There are people who are sitting in that building and the IT Park doesn't even come under the miniscule approvals for environment. So, there is a deemed approval there. Hence, there was no issue and I am currently sitting in Elphinstone Mill which is the Indiabulls Finance Center.

Q: If you are working with lower rates than some of your peers in the areas that you function in, are you holding with your FY12 guidance in terms of margins of 25% because this quarter has been half of that?

A: We believe that sales will grow by about 30%. Margins should be in the range of about 20%.