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Wednesday, March 11, 2009

Top IT Companies & Job Cuts - Property Sale Hit - Future Of Realty Stocks?

Is it the right time to buy stocks of Indian realty/property companies? Surprised to see the title of article about job cuts in top IT companies? How job cuts in IT companies can affect stocks of realty companies? Let's see if you should be buying stocks of realty companies in near future.

Referring to a news published in Economic times on Job cuts at IT companies. The housing boom in the last few years in India was largely on the back of strong growth in the IT and ITES sectors. Housing loans grew at 32 per cent CAGR during FY03-FY07, as the employee base at the top 3 Indian IT majors grew 44 per cent.

However, with most global and domestic IT companies going slow on hiring plans, housing demand has been adversely impacted. According to a national survey by the Indian Labour Bureau, 5 lakh jobs were lost during Oct-Dec of 2008, with the gems & jewellery, transport and automobile sectors most affected.

In the IT sector, Infosys Technologies has put a freeze on new hiring to check costs amid the global economic downturn, Tata Consultancy Services (TCS) has ruled out salary hikes for next year and said job cuts are possible, and Wipro is said to be planning to cut 4-5 per cent of its total workforce.

“Slowing home loan growth of 10 per cent year-on-year on the back of slowing employee growth of 14 per cent at the top 3 Indian IT companies in third quarter of FY09 are early signs of this trend. A deteriorating outlook for Indian IT and our IT headcount forecast for the top 3 IT majors, which have been revised down, raise a demand risk for the residential property,” Citigroup Global Markets said in a report.

In addition to job losses, increased risk of pay cuts and low visibility on pay hikes is weighing on near-term demand for homes. According to a survey by Hewitt Associates, projected salary hikes for 2009 in India have dipped to 8.2 per cent versus an increase of 13.3 per cent in 2008. Sectors with the lowest projected salary hike include employee-intensive sectors such as retail, IT, banking & financial services and media / communications.

“While government efforts to lower interest rates to boost affordable housing and developers starting to cut prices are positive measures, these will be insufficient to stimulate residential demand over next few quarters given the rising job insecurity across sectors. For instance, PSU banks’ disbursal of home loans less than Rs 20 lakh in past two months, after lowering rates, was only Rs 15.5 billion, that is, 0.6% of outstanding home loans in Dec 2008,” a Citigroup report said.

“With the developers’ inability and reluctance to reduce home prices along with rising fear of job losses particularly in IT and across the other sectors, we maintain our cautious outlook on the real estate sector and would look for macro stability along with job security as a key trigger for driving housing demand,” said Ankit Sinha, CEO- Spark Advisory.

To bring to your notice are the following two most important facts mentioned above:

==> The housing boom in the last few years in India was largely on the back of strong growth in the IT and ITES sectors.

==> In addition to job losses, increased risk of pay cuts and low visibility on pay hikes is weighing on near-term demand for homes.

If you refer to recent news coming out from most IT companies, the news are only about job cuts/pay cuts and brakes on growth plans. Being myself in IT industry, I do not see any significant pay hikes for employees in any company. Infact many of the companies are asking employees to take a PAY CUT! Most of the buyers for realty in last 5 - 10 years were from IT / ITES companies (I would say more than 60 - 70%).

I know one of the employee from my own company who had purchased a flat costing 50 Lacs in DELHI/NCR region with assumptions in mind about his own and his wife's salary figuers (around 1 Lac P.M.). Today his wife has lost her job and he have a big questionmark in front of him about paying the EMI of his flat which is more than RS. 30000 P.M. Other liabilities on him are car EMI - Rs. 10000 P.M., Home rent- Rs. 10000 P.M. and house hold expenses averaging Rs. 15000.

And this is not only about one or two people but millions would be suffering the same in India in next few quarters. Obvious targets hit would be big ticket investments like home purchase and so the realty companies.

Looking at the overall facts, realty companies would be suffering a lot in next few quarters with these negative sentiments. This would be the period of consolidation. Buying stocks of realty company is definitely not advisable for short term but in case any one would like to invest for longer term duration of 3 -5 years, property stocks could fetch decent returns.

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