Escalation fears misplaced, input materials might be cheaper: Amit Modi, Director, ABA Corp

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Lockdown is not a new reality for the developers across India, and more particularly in the Delhi NCR region. The NGT construction ban, often for months together, has hampered the execution cycle of the business. However, the comprehensive lockdown due to Coronavirus could multiply the woes of the business with supply chain hurdles leading to cost escalation, labour migration and the job losses in the market leading to standstill sales and even foreclosures. However, Amit Modi, Director of ABA Corp who is also a known face of CREDAI in this part of world thinks otherwise. In an exclusive video conferencing with Ravi Sinha, he feels some of the input costs might come down to clear the material inventory in a competitive market.   

Ravi Sinha: To what extent do you see the impact of lockdown in a city like Noida known for project delays?

Amit Modi: Our focus at the moment is to take care of the workforce so that virus spread could be controlled. In terms of the business concern, the liquidity crisis was already there in the market; there had been no support from the government agencies; and the trust deficit with the buyers was there. Hence, I don’t think Corona has added to the miseries of the sector. But yes! Now there is an increased realization that we have to factor in unforeseen risks in future.

Labour challenges were there in October to December due to NGT construction ban. By January when the problem was easing out then now March onwards we have this Coronavirus issue. So, there is no doubt that there would be construction delays with the ongoing projects. But for the rest of the projects, say 60-70 percent are stuck up projects, there have been so many issues that even if you add Corona or a couple of other reasons there won’t be any difference. For us with many ongoing projects, a delay of six to eight months is inevitable now. 

Ravi Sinha: Liquidity crunch is an accepted reality in the sector. How would the sector survive without fresh funding and buyers receivables?

Amit Modi: Financial closure of the project is always done in advance by the serious developers in the business. It is like I have to factor in the land cost that I have to pay out of my own pocket. Over and above that I have to calculate the construction finance. Only one portion of the overall project budget is calculated as receivables from the buyers, according to the location and the ticket size of the project. Rest of the amount we have to calculate either from the bank finance or through unsecured loans.

Now for the developers already having tie-up with the financial institutions, they have to ensure that the funding is not stopped. Developer has to arrange the promoter contribution, either through the unsecured loans or through the buyer receivables. The marketing strategy is developer specific and project specific, and everyone has his own ways & means for the same. But everyone has to manage the lean period of six months now.

Ravi Sinha: Is it that easy without any fiscal support?

Amit Modi: The government on its part has offered deferment which, according to me, is not the solution. The solution is waiver and for that the Reserve Bank of India is already offering 10 percent of the running project cost as term loan or working capital. This amount would be a big help in sustaining the business for the next six to eight months. The developer also has to renegotiate the purchase of materials to bring the cost down.

Ravi Sinha: Buyer receivables would be challenging in the days to come? 

Amit Modi: It would be challenging for the next six to eight months from here onwards. And the project calculation has to be redone during this time. I don’t think it would be a challenge beyond that time frame as far as sales velocity is concerned. No businessman can afford to have liquidity for the next two to three years ready with him.

Ravi Sinha: Foreclosure has not been a reality in this part of the world. Will the Corona lockdown and resultant job losses make this an inevitable reality?

Amit Modi: I think what we need to see is that the impact would be felt in which ticket size. I doubt that there would be defaults and foreclosures across the sector. I don’t see major job losses in the market either. There might be some salary cut among the opportunist players. Moreover, you have to understand that lockdown is not new to we the developers; for reasons ranging from NGT to various court rulings. But a comprehensive global lockdown will have its after effects to some extent but not to the extent of hurting the job market for the next few years. I feel even if lockdown is partially relaxed by mid-May and production of goods is restarted then we don’t need to overreact.

Ravi Sinha: With a conservative assessment of one quarter lockdown, how far will it affect the supply chain?

Amit Modi: Our supply chain was affected since last November, first due to NGT and then November onwards the problem had started in China. It may take six to eight months to restore that, along with the labour mobilization. It also depends on the stage of construction and for the fittings & fixtures one may be forced to wait for a couple of quarter.

Ravi Sinha: Any policy incentive that you are looking at?

Amit Modi: We don’t want deferment but time extension for the payments, land payment waiver for at least one year and rescheduled loan terms. This would be for the benefit of the buyers only as the developers would be in a position to deliver the projects.    

Ravi Sinha: Most of the developers don’t have escalation cost in their agreements. How would they deal with cost escalation due to supply chain hurdles?

Amit Modi: I don’t think cost of construction material would escalate in immediate future. On the contrary, I think cost of some of the materials would come down. The manufacturers of material are also suffering with the lockdown and unless they come out in the market with competitive pricing to clear the inventory, their business cycle will be in problem. Of course, if we don’t get fiscal relief with land payment then there is some problem for us as well. We are already in talks with both the Central Government and the State Government. But the idea is that the business stress should not be passed on to the buyers with escalation cost.   

Ravi Sinha: Migration of labours is something that is a worrying point. But  more migration of labours post lockdown can’t be ruled out. How would the developers deal with it?

Amit Modi: Labour cost would escalate and the developers have no choice but to balance it with lower material cost. Moreover, the developers can also balance it with extra payment to the labour force for more working shifts to compensate with the lost time.

As far as labour migration is concerned, I can say it for myself that we have retained all our 1711 labours across the projects. We are supplying food and all their necessities in the labour camp. As a matter of fact, our daily expense chart today is not about steel or cement but the grocery and other expenses for the labour force. While we the developers are doing it for our labour force, at CREDAI we are additionally providing food to 1000 odd needy people.

Ravi Sinha: Now that the CSR budget could be exhausted for feeding the labour, is there any audit of the same?

Amit Modi: The government agencies are asking this data of food supply on a day-to-day basis, right from the District Magistrate to the Noida Authority. They are also sending their teams to our site for checking it. We are filling up the forms on a daily basis as to how many labours are on which site; what are we feeding them; and if there is any short supply then the developer can ask them to provide as well.

Ravi Sinha: Why has there been labour migration then?

Amit Modi: That is because of fear psychosis. And I feel there would be shortage of around 40 percent labour in the business post the lockdown.  

Ravi Sinha: Any chances of price correction or crash?

Amit Modi: It could only happen if the developer is in fiscal crisis and his profit margins allow him then it is an individual choice. But I think in Noida-Greater Noida market the margins are very thin.

Ravi Sinha: But many of the developers are overly borrowed and with over leveraged balance sheets they can’t even get fresh funding. What to do with standing inventory? 

Amit Modi: I won’t deny but it is an individual call and if one has the standing inventory then a discount of 10-15 percent could be offered. Price crash across the board is not feasible.

Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.

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