Real estate cos explore financing options to cut debt

Mumbai, Jul 06

Several leading realty players focused on Mumbai Metropolitan Region (Mumbai MMR) such as Macrotech (Lodha), Kalpataru and Rustomjee (Keystone Realtors) are seeking different financial options to cut their debt.

Talking to Bizz Buzz, Dr Prashant Das, Chairperson of the Finance & Accounting Area and an Associate Professor of Real Estate at IIM (A) says, “The post-COVID sales boom allowed top developers to deleverage. Investors and rating agencies now favored low leverage. As they say, "Market is a voting machine": others may feel the pressure to follow suit.”

I am concerned if this will lead to more consolidation in the market at the cost of smaller developers. The market seems to be gravitating towards luxury housing, and large players, he said.

Macrotech (Lodha) had high leverage with gross debt of Rs 18,600 crore at the time of its IPO launch. Kalpataru also had a gross debt of over Rs 11,000 crore but after promoters converted CCDs into Rs 1,440 crore of equity, the net debt stands at Rs 8,820 crore at the time of IPO. Rustomjee also had a debt of over Rs 2,500 crore at the time of its IPO launch, says an IPO Investment advisor, who doesn’t wish to be quoted.

In its latest operational update, Macrotech Developers noted that the company’s net debt reduced by Rs 320 crore during the January-March 2025 quarter to Rs 3,990 crore due to record sales and healthy collections. Kalpataru will use IPO proceeds to reduce the debt equity ratio to less than 2x post the public issue.

Prof Neerav Nagar, Associate Professor of Accounting at IIM (A) says, "It is important for a leveraged business to have its return on assets greater than at least the cost of borrrowing, otherwise, the debt harms.”

In the latter case, the ROE goes down instead of increasing. This is more important under the project completion method as a regular stream of earnings may be missing, he said.

Debt plays a very important role in the whole scheme of project financing to be able to give reasonable return on equity. But it may lead to a status of overleveraging also because real estate business is cyclical. However, it is good to see that real estate players are exploring different options to cut their debt and monetize their assets, says a leading real estate consultant. The average interest cost of debt may range between 10 to 13 per cent.

It is important to understand the revenue recognition method as per accounting standards to be able to have fair look at profit & loss account. There are two methods of booking revenue in RE business. They include percentage of Completion Method and Project Completion Method.

In Percentage of Completion Method, the revenue gets recognized as the work progresses and the corresponding expenses also get recognized.

However, in Project Completion Method, the revenue & corresponding expenses gets recognized only when project receives OC.

However, the sales & marketing expenses and other overheads get recognized in the year of occurrence itself. That may lead to losses reported during the lifecycle of project till the revenue is recorded in the year of completion of the project in Profit & Loss Account.

Total of the Kalpataru's unsold inventory is Rs 8,248.6 crore, as per its offer document and CFO C Joglekar. Kalpataru has exhibited strong operational performance, with Pre-Sales and Collections registering a CAGR of 23 per cent and 31 per cent, respectively, between FY22 and FY24. Notably, Collections for the 9-month period of FY25 stood at approximately ₹2,621 crore — nearly matching the full-year FY24 Collections of ₹2,685 crore — indicating sustained growth momentum and improved execution efficiency.

Kalpataru launched a number of projects totalling 10 mn sq ft saleable area since FY 2022 till 9M FY25. The projects launched post 1st April 2022 aggregating 10 mn sq ft out of aggregate of 25 mn sq ft of Ongoing Projects are following PCM Method.

Keystone Realtors recently adjusted its valuation due to a low stable debt-to-equity ratio despite challenges in profitability and significant market fluctuations over the past year.

EoM.