The Finance Minister’s call to slash prices in a host of sectors is not an easy talk to walk for many industries, where profit margins are low — or in fact, in a zone of losses. Real estate and hotels seem to be the ones in a better position to follow Chidambaram’s appeal.
The finance minister said, “Hotels must cut tariffs, airlines must cut prices, real estate must cut rates of apartments and homes they sell, car makers and two-wheeler makers must cut prices.”
A look at the financial performance of various sectors suggests that real estate is best placed to take a hit on its margins. In the quarter ended September 2008, the top 14 real estate players clocked an average net profit margin of 50 per cent.
However experts feel that the price cut would depend on the land acquisition cost, construction cost and cost of money.
“Market forces determine the price, however if the developer is comfortable it would make sense to compromise on margin and
keep the working capital flow on,” said Anshuman Magazine, managing director, CB Richard Ellis.
Also, real estate is the only sector that has witnessed a rise in its profit margin over the same quarter previous year.
All other sectors have witnessed a fall in their profit margin over the previous year. Aviation is operating on a negative profit margin and the net margin of hotel industry is down from 19 per cent in September 2007 to 13.6 per cent in September 08. Auto companies too have taken a hit on their margins in the second quarter.