Management Discussion and Analysis GLOBAL ECONOMY Global growth remains moderate, with uneven prospects across the main countries and regions. It is projected to be 3.5 percent in 2015, in line with forecasts in the January 2015 World Economic Outlook (WEO) Update. Relative to last year, the outlook for advanced economies is improving, while growth in emerging market and developing economies is projected to be lower, primarily reflecting weaker prospects for some large emerging market economies and oil-exporting countries. While these increasingly influence competitiveness and the global economy tentatively recovers from the economic crisis, significant risks remain, resulting from a strained geopolitical situation, rising income inequality and the potential tightening of financial conditions. As we evidence fall in crude prices globally, it is benefiting commodities dependent economies like Brazil and Russia, China and India thereby easing inflationary brssures. INDIAN ECONOMY The Indian Economy has started recuperating with GDP growth recovering from decadal lows of 4.6% y-o-y in Q1-2014 to 7.5% y-o-y in Q1-2015 putting it ahead of China as the world's fastest growing large economy in the coming years. Also, the growth in Index of Industrial Production was recorded at 4.1% y-o-y at the end of April 2015, indicating an incipient recovery in the output of the core sector industries. With Government of India's focus on pro-business legislations, expeditious clearances to large scale infrastructure projects, lowering the fiscal and current account deficit, controlling inflation, there are expectations of a major economic revival and growth. INDUSTRY OVERVIEW Overall the real estate demand has remained subdued during the fiscal due to weak consumer sentiments, primarily driven by high inflation and weak economic growth. Sale velocity continued to decline though at a slower pace, indicating a sanguine situation for the sector. In the near to medium term, recovery is expected though gradually due to better GDP growth and lower interest rates. A rise in residential demand is expected in the years ahead primarily driven by a) improvement in consumer demand with more projects nearing completion, b) buyers' capacity to take on leverage as the mortgage to credit ratio still remains at a low level; with potential tailwinds from interest rate cuts in FY16 / FY17, and c) stable pricing resulting in a steady increase in affordability. In the longer term, the sector should largely benefit given the government's macro road map for the next 4-8 years on pro-growth, pro-job creation / investment, fiscal consolidation and lower inflation expectation. All this should lead to improving demand for both residential and commercial properties in the coming years. The relaxation of thresholds for foreign direct investment in real estate projects and clear guidelines of REITs (companies owning rent-yielding assets) is likely to improve fund inflow. Further, proper implementation of proposed Land Acquisition Act and Real Estate Regulatory Bill will lead to an improvement of customer perception about the sector and lead to an increase in demand. Mumbai Real Estate The Mumbai Metropolitan Region (MMR) residential market was subdued during the first half of FY15. Several reasons resulted in contraction of demand like muted property price growth expectation and low income growth being some of them. Shift towards organized developers with better brand and track record was witnessed. In the second half of FY15 residential volumes have shown some improvement as developers have softened prices and offered deals. Going forward, further improvement in demand is expected on account of gradual improvement in employment outlook coupled with lower consumer inflation and housing loan interest rates. Commercial is witnessing green shoots of revival due to improving supply - demand dynamics, higher PE Investments (~50% in commercial) and progressive announcements on REITs. Leasing market has started showing signs of pickup with massive improvement in the volumes in the last 2 quarters of CY14 and considered to be the best in the last 2 years. This along with decreasing vacancy rates will result in lower cap rates, going forward. Also apart from BFSI sector companies, a clear trend is emerging in terms of demand from the other services sector, which comprises companies from media, consulting, e-commerce, etc. BUSINESS OVERVIEW Your company is one of the leading real estate development company of the country with focus on city-centric developments well sbrad-out across Mumbai Metropolitan Region (MMR). The company's business focuses on designing, developing and managing brmium residential and commercial properties. The strength of the company is to acquire low-cost land parcels and developing them into high end projects. The company has carved a niche for itself in the ultra-luxury and luxury segment by differentiating itself in each micro-market through brand positioning with different product offering, brand partnerships and having different reputed channel partners for each product. Sustainable Business Model Having carved niche for itself in Mumbai Metropolitan Region (MMR) your company believes that the demand for residential property in Mumbai will remain strong on account of certain factors such as limited availability of quality land, growing economy and rising immigrant population. The projects in Mumbai are well-located to gain the first mover advantage post the shift in the central business district from the south of the city primarily Nariman Point to the secondary business districts like Bandra Kurla Complex. Alongside the company remains focused on other micro-markets like Goregaon, Borivali, Andheri, Airoli, Mulund, Ville Parle and Sion. The company's strategy is to turnaround its projects in near to medium term which enables it to get higher ROEs. With the growing demands and expectations from customers in each micro market, the company ensures that all needs are appropriately addressed to satisfy them. This has helped your company to generate higher revenue on lower volumes. 1. Multi-Pronged Land Acquisition - Periodic acquisitions through Government Tenders (closed), Joint Development, outright purchase from private corporates and re-development of housing societies has resulted in getting relatively clean and clear land parcels at lower acquisition cost. Consequently, it provides scope for further land acquisition. 2. Premium Positioning - To differentiate the company's projects from its peers, your company has developed four brands that well resonate the product offering across the residential and commercial developments. (a) Signature brand - targets ultra luxury residences that are aimed at high-net worth individuals, (b) Signia brand -targets brmium and aspirational residences in select suburban micro markets, (c) Sunteck City brand - for large formats and mixed-use developments and (d) Sunteck brand - for commercial developments. 3. Corporate Sales - The Company does sales through reputed channel partners, wealth managers, institutions and participation in property exhibitions to attract corporate, HNI and retail customers. Your company's main customer focus is on the corporate employees, Business heads of Financial Institutions and some of the most celebrated businessman / finance professionals of the country. In addition, the company provides services to its customers from the date of purchase till the date of delivery. 4. Strong tie-ups for execution - The company utilizes a strong in-house project management team with an outsourcing model for execution that emphasizes on quality, design and construction of its projects. Further, the company endeavors to deliver high-architecture, timely execution and it believes that this outsourcing model provides the scalability required to undertake large developments. 5. Strategic Partners & Associates - As your company has grown it has tied up with few selected partners who have ensured financial strength to the business and brand partners & associates who have enabled the company to create high end products to deliver luxury living experience. 6. Focus on cash flows and low leverage - The company's focus has always been on managing its cash flows prudently. During the initial years of operations the company avoided getting into highly speculative commercial developments and focused on developing residential projects. Additionally, the company maintained discipline in acquisitions and growth by utilizing the surplus cash flows from current projects prudently. As on March 2015, the company has a construction finance loan on 5 out of 24 projects and 4 rented assets under the development portfolio. Development Portfolio Presently, your company has 24 projects aggregating to development potential of ~24 msf, of which about 70% is in residential segment and the balance in commercial & retail segment. Out of the said development potential, the company has an economic interest on ~12 msf of developable area. This scale of development portfolio has been achieved within a short span since your company's foray into real estate development business in 2005. Besides, the company also has 4 rented assets in its portfolio with a leasable area of ~0.22 msf on which the company has an economic interest on 0.14 msf of the leasable area. These assets are generating steady rental income annually for the group. Your company's 3 residential projects in BKC, Mumbai and 23 acres township in Goregaon (W), Mumbai (mixed-use development) contribute to a large pie of the revenue potential. The company has chosen these locations for development because (a) BKC - it has emerged as the financial hub of the city and is considered as the most secured & well connected CBDs. The locale houses some of the most well known Corporates, Financial Institutions, Bourses, Consulates, Educational Institutions, 7 Star Hospitality providers, Multi Specialty Hospitals, upcoming Convention Centre and a planned High End Mall. The key management personnel in these corporate houses and institutions who forms part of high-income group, aspires for luxury living residences with ease of reach to their work place and is well complemented by socio-economic environment. Moreover, the adjoining catchment areas to BKC like Kurla, Kalina and Kalanagar do not have any high end luxury residences and adequate social infrastructure. With so many corporates and institutions operating out of BKC, the third phase of Mumbai's metro project has also been planned to connect BKC to Andheri and South Mumbai. (b) Goregaon - identified as next Commercial Business District (CBD) of the city by MMRDA (after BKC) is strategically located and supported with the best infrastructure. The residential potential of the given location is well justified with the huge office space already operational including Nirlon knowledge Park, Nesco, and Mind Space having prominent corporates, several back offices of well-known banks like Citi, JP Moran, Deutsche Bank and also many IT companies as its clientele. This together, with the thrust on infrastructure projects (the general rule being-the better the infrastructure, the better the property value) ensures easy accessibility to the Western Exbrss highway and to arterial roads like JVLR, two upcoming east - west flyovers, proposed Goregaon - Mulund Link Road, proposed coastal road, upcoming Oshiwara station and proposed MUIP's (Mumbai Urban Infrastructure Project) plan to start a Metro link from Charkop to Mankhurd. In the said location, your company has launched and further intends to launch smaller ticket sized apartments in the brmium segment starting INR 1.5 cr which will give higher volumes leading to higher profitability. Your company has also selectively expanded to other geographic regions in India and has acquired few projects on JV / JDA basis located in city-centric locations of cities like Jaipur, Nagpur and Goa. Going forward, the company's focus will be to expand in select areas of Mumbai and outside Mumbai on a case to case basis with thrust on low cost acquisitions / limited capital commitment, higher ROEs, working with top contractors, architects, PMCs, and employing best talent to ensure quality and timely delivery. Additionally, the company will also explore its existing development portfolio to enhance its rental portfolio. Brand Partnerships Your company has tied-up with international brands like (a) Vertu, a market leader in luxury mobile phones for 'Signature Concierge Services' for the residents of its flagship project 'Signature Island' located in the heart of Bandra Kurla Complex in Mumbai, (b) Disney India for the residents of 'Sunteck City' in Gorgeaon (W) to bring Disney inspired homes to India and create an exciting atmosphere for families to raise their kids. (c) Sussanne Roshan's Company, 'The Charcoal Project' for interiors of residential project 'Signia Skys' in Nagpur. CONSOLIDATED OPERATIONAL & FINANCIAL PERFORMANCE Your company has achieved cumulative sales of ~INR 34 bn (as on March 31, 2015) and collected ~INR 23 bn as advances from customers against the tied-up sales. Majority of the sales and advances have been achieved / received from 3 BKC Residential projects and Avenue 1 & 2 of Sunteck City, Goregaon (W). Of the total sales done till date, as per your company's accounting policy 'Project Completion Method' we have recognized revenue of INR 12 bn and the balance INR 22 bn will be recognized over the next 3 years. During the year, your company has achieved br-sales of ~INR 5,106 mn compared to ~INR 3,988 mn achieved in the corresponding period of brvious fiscal. Additionally, cash flow management with thrust on execution has contributed to the pace of customer receivables which stood at ~INR 5,402 mn (highest ever) against ~INR 4,180 mn in the corresponding period of brvious fiscal. Besides, rental income from 4 leased assets (BKC, Andheri & Vile Parle) stood at ~INR 112 mn in FY15 against ~INR 136 mn in FY14. These assets are un-encumbered and rental income takes care of the group's corporate expenses. Net Secured Debt (Construction Finance Loan) stood at ~INR 6,135 mn in FY15 against INR 1,798 mn in FY14. Debt has increased during the year due to BKC projects FSI payment / br-payment of ~INR 3,203 mn. Overall, these loans have been taken on 5 projects out of 24 projects under the company's development portfolio. During the year, 'Care A' rating was re-affirmed by Care Ratings for the group. Additionally, during the year your company completed 2 more projects i.e. a commercial project 'Sunteck Kanaka' in Goa and a residential project 'Signia Skys' in Nagpur. Consequently, the company has completed 6 projects till date with a total project size of over INR 30 bn. Accounting Policy Your company maintains its accounts on accrual basis following the historical cost convention in accordance with Generally Accepted Accounting Principles ("GAAP") and in compliance with the Accounting Standards referred to in Section 211 (3C) and other requirements of the Companies Act, 2013. Insurance and other claims are accounted for as and when admitted by the appropriate authorities. The company follows 'Project Completion Method (PCM)' of accounting unlike other real estate developers who follow percentage of completion method (POCM) for revenue recognition. Under project completion method of accounting, allocable expenses incurred during the year are debited to work-in-progress account. The revenue is accounted for as and when the significant risks and rewards of ownership of the units in real estate are passed to the buyer and the projects get completed or substantially completed, to the extent that the economic benefits will flow to the group and revenue can be reliably measured. During the year, the total revenues recognized in the P&L stood at INR 3,169 mn with an operating margin of about 46%. The total revenues consist of sales recognition from completed projects, rental income and other income. Besides, the cost recognized from the sale of completed projects has been adjusted from finished goods. INTERNAL CONTROL SYSTEMS & THEIR ADEQUACY Your company has appropriate internal control systems covering the gamut of business processes including acquisitions, sales, operations, financials and regulatory reporting. There are clearly defined roles and responsibilities amongst the team through an institutionalized job description and role profile definition. The human resource and related manuals enable all team members to coherently integrate into the company in quick time. Regular internal audits and checks ensure that responsibilities are executed effectively. The company has implemented various tools to strengthen its systems like (a) Enterprise Resource Planning (ERP) system namely, 'In4velociity' to enhance MIS reporting, This has also been implemented across the project sites, (b) 'Sensys' Easy Pay/TDS system for payroll and tax processing, (c) Microsoft Project for Planning and Monitoring of all projects for timely completion as planned, also various other tools for Project Management & Construction Management have been implemented for documentation, systems and processes , which would mean all documents, communication and business processes can be managed in a consistent way. Your Company has also developed an internal expertise to coordinate and monitor Project Development Processes for various stages such as Initiation, Planning, Design, Procurement / Contracts, Construction and finally Close out. Your company's statutory auditors are Lodha & Co. one of the well known auditors in India. Besides, during the year, your company also appointed KPMG as an internal auditor for document process, risk management and internal control so as to provide assurance on controls, compliance, effectiveness and strengthen the necessary functions of operations. The Audit Committee of the Board of Directors reviews the effectiveness of internal control and provides suggestions periodically. Your company has also appointed one of the Big 4 consultants for organizational development and transactions advisory. HUMAN RESOURCE Fiscal 2015 was a year of optimism and renewed vigor for Sunteck. As we scale up our brsence in the niche brmium residential segment in the real estate market, one of the key drivers of our growth has been the Human Capital of your company. Your company has a young and motivated work-force that brings in fresh thinking and energy. Simultaneously Senior Management team which comes with a wealth of knowledge and numerous years of industry experience act as mentors to these young employees. With greater visibility and strong brand, your company has been able to attract some of the best talents of the industry. We firmly believe that employee motivation, development and engagement are the key aspects of Human Resource Management. This year the focus has remained on strategic hiring, with encouragement given for incessant learning, recognition, innovation and leadership development. With the objective of being able to scale the talent portfolio in line with the growth of the company, Sunteck's Organizational Chart has been build in consultation with by Price Waterhouse Coopers (PWC). During the year, the human talent has been identified and recruited on the basis of competence and performance. We have increased our headcount by hiring primarily into varied verticals of operations like Engineering Procurement & Construction (EPC), Acquisitions, Legal & Liaison, Architecture & Design, Sales and Marketing. These recruitments have brought with them a breadth and depth of knowledge and expertise across all functions. We believe that our people's knowledge, talent and dedication are our most valuable assets and to accelerate their professional development we continuously have invested in their professional development through various measures of training and mentoring process. From incentives & employee benefit schemes, to individual careers development reviews, we devote significant attention to the personal and professional growth of our most valuable resources. A few practices observed by the company to ensure that the multi cultural work environ is maintained whilst giving a learning opportunity to the employee include: • Extensive and rigorous training programs with upgraded development modules, new practices & methods and superior's assistance to make them equipped with necessary skills and knowledge to handle vital functions of project management and delivery • Imparting behavioral training programs to equip our employees with the soft skills that distinguish them from their peers in the industry • Building confidence in the employee by constant communication on any developments in the company like new joinees, awards recognition, employees' poll on certain work related matters, news articles, etc. are communicated through mailers on a regular basis • Improving morale, creating loyalty and increasing overall productivity in our employees through performance management system is the key to the company outperforming the competition. The current performance management system establishes a true pay-for-performance culture which, in turn, has recognized and apbrciated the employees • The company thrives towards retaining its Talent by creating open communication medium between employees and the management. We foster employee development and make sure that they know what we expect of them by having periodic review meetings • Development of a healthy mind and body with periodic health camps, workshops and seminars. • Offsite meetings consisting of key members in the organization to strategize the Short term & Long term goals and formulate a Road map towards achieving the same The company focuses on its core values and culture of "Dream, Plan, Act and get Results "which is reflected in HR policies and plans followed at Sunteck. The culture of openness, the quest to innovate and implement new ideas is ingrained in the work environment - driving everyone to think, believe and deliver big. The company would like to exbrss its gratitude for the support and assistance rendered by its employees and expects the spirit of teamwork to continue in the years to follow. CAUTIONARY STATEMENT Statements in this Management Discussion and Analysis describing the company's objectives, estimates, expectations may be "forward-looking statements" within the meaning of applicable security laws and regulations. Actual results could differ materially from those exbrssed or implied due to several factors which are beyond the control of the management. In accordance with the Code of Corporate Governance approved by the Securities and Exchange Board of India, shareholders and readers are cautioned that in the case of data and information external to the company, no rebrsentation is made on its accuracy and combrhensiveness though the same are based on sources believed to be reliable. Utmost care has been taken to ensure that the opinions exbrssed by the management herein contain its perceptions on the material impacts on the company's operations but it is not exhaustive. The Company assumes no obligation to amend or update forward looking statements in future on the basis of new information, subsequent developments or otherwise. |