MANAGEMENT DISCUSSION AND ANALYSIS ECONOMIC OVERVIEW Global The global economy managed a modest growth in 2014 in spite of challenging economic headwinds and heightened geo-political tensions during the year. According to the World Economic Outlook published by the International Monetary Fund in April 2015, the global economy expanded at 3.4% in 2014, reflecting a moderate pickup over the brvious year. While developing countries and emerging economies continued to witness slowdown, there was steady recovering in the advanced economies, particularly in the USA which benefitted from low oil prices and steady improvements in job creation and consumer confidence. As per the Global Economic Prospects published by the World Bank in January 2015, the real GDP of the world grew by 2.6 per cent in 2014 compared to 2.5 per cent in 2013. While growth in the advanced economies picked up during the year, particularly in the USA and the UK, there was a marked slowdown in the emerging markets and developing economies. In the USA, spurred by improvements in job creation, income growth and lower oil prices, particularly in the second half of the year, growth in the last three quarters was recorded at 4 per cent on an annualized basis. As per IMF, the US economy grew by 2.4 per cent for the year 2014, compared to 2.2 per cent in the brvious year. In the Euro-area, the region remained under the looming shadow of uncertainty due to Greek debt-repayment issue, and whether Greece would opt out of the EU dominated headlines. The conflict in Ukraine further aggravated the already brcarious situation. In China, growth slowed down to its lowest in the last 24 years at 7.4%, short of the government's target of 7.5% (source: IMF). The Chinese growth fell to a 24 year old low at 7.4 per cent, missing the government's target of 7.5 per cent. President Xi Jinping has termed this sub double digit growth as the "new normal". However, with 30 years of rapid double digit growth has made China the largest contributor to GDP growth in the world. India In India, economic activity saw a marked revival on the back of positive structural reforms by the new government. The core sectors of banking, insurance, defence and infrastructure saw bold steps being taken after a gap of many years. Another landmark step taken during the year was the change in methodology of calculating GDP : the Central Statistics Organisation (CSO) changed the base year for calculation of GDP from 2004-05 to 2011-12. Also, GDP is to be measured at market prices compared to GDP at factor cost. This is in line with international practices. Post this revision, the Indian GDP for the FY2015 is 7.3% compared to 6.9% in the brvious fiscal year. The new method will also increase the size of the Indian economy to more than US$ 2 trillion in 2014-15. Low oil prices, particularly in the second half of the year, eased inflation. This prompted the Reserve Bank of India (RBI) to ease the monetary policy and lower interest rates in January 2015. The average Consumer Price Index for hovered around the 5% mark, and fell below 5% in the April 2015. This prompted the Reserve Bank of India to ease the monetary policy and lower repo rates in January 2015, One of the big surprises of the year was the drastic fall in prices of oil. The Brent Crude oil prices fell to sub US$ 50 per barrel in January 2015, before stabilizing to US$ 60 per barrel in the month of April 2015. The all-round India growth story continues to remain strong and attractive. Both IMF and World Bank (WB) have brdicted the Indian economy to grow at 7.5% in 2015-16 and 201617. Buoyed by positive government policies, all sectors of the economy are poised for attractive growth in the coming years. INDUSTRY OVERVIEW The Indian Real Estate Industry The Indian real estate industry has seen its fair share of highs and lows in the past decade. The industry has indeed been progressive, transforming itself from on unorganised sector dominated by small fragmented players to an organised sector with professional players bringing in best practices and processes. This progress of the real estate sector in many ways reflects the progress of the country, as evidenced by sparkling new structures across categories like residential complexes, malls and shopping centres, hotels, commercial complexes and IT SEZs. Indeed, the last decade has seen the Indian real estate space radically changing the landscape and skyline of almost all the major cities and town across India. The last three years have been both challenging and difficult for the Indian real estate sector. The global economic crisis in 2008 triggered one of the most testing phases for the sector : demand fell drastically as consumers got jolted by the lack of confidence, debts soared as companies experienced cash crunch, inputs costs increased, particularly financing costs. Policy paralysis further aggravated the tense situation in the sector. All these factors led to an inventory build-up across all the categories of the sector. However, the worse is over for the Indian real estate sector. The election of a single-party majority government at the centre after almost thirty years has given a new fillip to the economy. There is a new wave of positivity and optimist across all industries. The new government has unleased structural reforms that are bound to have a long term effect and buoy the prospects of every business category. Initiatives like Make In India, Digital India and many more have sent clear signal of the government's intent to put growth back on track. The Indian real estate sector has also been benefitted by major policy changes. The government has undertaken pragmatic steps through a slew of new reforms and regulations that will definitely have a positive impact in the short and medium terms. Some of these are : 1. Real Estate Investment Trust (REIT) During the year, the Securities & Exchanges Board of India (SEBI) issued a notification on REIT regulations making REIT more feasible by allowing internationally acclaimed investment structure in India. 2. 100 Smart Cities and Housing For All by 2020 The government unveiled an ambitious plan for 100 Smart Cities and a commitment to Housing for All by 2020 are expected to go a long way in boosting sustained investments and developments in the sector. 3. Foreign Direct Investment (FDI) The Foreign Direct Investment (FDI) rules were amended during the year. The key amendments include reducing the minimum built-up area as well as capital requirement for investment. The exit norms have also been simplified, making it attractive for investors in the sector. According to Department of Industrial Policy and Promotions (DIPP), the real estate sector attracted FDI worth Rs. 703 million till November 2014. Residential Sector As with the overall real estate industry, the residential sector also saw demand falling considerably during the year 2014. The fall in demand was chiefly due to high prices and higher interest rates. Moreover, buyers chose to defer their purchases, opting to remain cautious. According to the India Real Estate Sector Handbook 2015 published by Grant Thornton India LLP, the year 2014 saw demand falling by 30 per cent in the seven major cities. The developer responded by restricting supply and launched fewer new projects. Compared to 2013, there was a 25 per cent decrease in supply in 2014. The curtailing of supply mainly happened in the brmium and high/mid end projects, with NCR region witnessing the steepest decline in supply. Even during the festive season, the much anticipated surge in demand eluded the sector. According to a Cushman & Wakefield Research Publication of March 2015, almost 500,000 new residential units were launched between 2012 and 2014. 60 per cent of these units were in the mid-segment, while 16 per cent were in the high-segment and only 23 per cent were in the affordable-segment. According to Knight Frank Research, the demand supply gap between launches and absorption has been narrowing consistently Residential Real Estate in NCR The residential sector in NCR performed poorly during the year. The year saw one of the worse inventory overhang as stagnant income growth, high interest rates and late project deliveries held most buyers back. According to a report by Knight Frank India (June to December 2014), sales dropped by as much as 43 per cent, while new launches were fewer by 24 per cent in the region. For developers, problems continued to persist in the form of burgeoning land and labour costs as well as increasing cost of construction, which are limiting their ability to cut prices. It is estimated by Knight Frank in their report that at the current trend of sales, it will take at least about 3.5 years to get the inventory till 31st December fully absorbed. The total number of new projects launched in NCR in 2014 was 73, 143 units compared to 95, 768 units in 2013, a decline of 24 per cent. However, in sync with improved sentiments in the latter half of the year, there was a marked pickup of 12 per cent in new launches in H2 2014 compared to H2 2013. Within the NCR region, Gurgaon has seen the highest increase in terms of new launches between 2013 and 2014 : As far as pricing segment is concerned, Greater Noida and Ghaziabad saw 70 per cent to 90 per cent of the new projects being launched in the affordable and mid-segment range with a ticket size of less than Rs. 5 million, while Gurgaon and Noida continued to dominate the segment in the ticket size range of Rs. 10-12 million. (Knight Frank India report) Sales continued to remain sluggish across all the micro-markets of NCR. Sales in Gurgaon and Noida fell to their lowest levels since 2010 during the year 2014. Greater Noida continued to garner the biggest slice of the total sales, with almost 42 per cent. As of 31st December 2014, there were 192, 568 units under various stages of construction in NCR. Commercial Real Estate in NCR In a stark contrast to the residential segment, the commercial segment in the NCR region had an excellent 2014. The segment was a remarkable upsurge in demand with leasing activity increasing by almost 14 per cent compared to the brvious year. The total office space inventory as on 31st December stood at around 126 million sq.ft., of which, about 101 million sq.ft. is occupied. In view of the surge in demand and the limited new completions in H2 2014, vacancy levels in some micro-markets of NCR came down to almost zero levels. Key drivers for this surge in demand were the overall improvement in the economy, resurgence in confidence and policy initiatives like REIT by the government. The spectacular rise of e-commerce was also an important factor. As far as sectors are concerned, IT/ITeS and Manufacturing are no longer dominating the commercial real estate segment. Instead, it is the Other Services Sector that has leaped ahead and led absorption in the segment. Within the Other Services Sector, the share of e-commerce jumped from 32 per cent in H1 2014 to 54 per cent in H1 2014. The BFSI segment also active leasing activity in H2 2014, rising from 4 per cent in H1 to 11 per cent in H2 of the year. In terms of business districts, PBD Gurgaon accounted for nearly 61 per cent of the total absorption in H2 2014. As far as rentals are concerned, the combined effect of higher demand and lower completion has resulted in an upward trend in rentals in the NCR commercial real estate sector. The weighted average of rentals in H2 2014 rose by almost 9 per cent to Rs. 58 per sq.ft. BUSINESS OVERVIEW Anant Raj Limited (ARL) is amongst the oldest and most renowned real estate players in the NCR region with a rich legacy that spans over four decades. Over the years, ARL has transformed itself into a dominant and differentiated real estate players with a well-established brsence across all the sectors The Company holds one of the largest developable land banks in NCR that is about 1100 acres, of which 430 acres is in Delhi. The land bank owned by the Company is also one of the cheapest land banks as the land was acquired over [ten] years back, when the price of land was substantially lower than current prices. The Company has a strong geographic focus with its operations sbrad in and around NCR, Delhi, Haryana and Rajasthan. ARL has a proven track-record of EXECUTION. All projects of the Company have always been executed both within promised time as well as within budgets. Customers, home-buyers and commercial property lessees alike, have been satisfied with ARL projects that delivery a high value proposition in terms of location, quality of construction, pricing and total transparency. STRENGTHS 1. Proven Execution Capabilities One of the key strengths that your Company has developed over the last four decades is its proven capability to execute projects. What underpins this key strength of your Company is the fact that it has its in-house team of engineers, architects and designers. Moreover, raw materials are all procured through a modern and scientific MIS that ensures every material required for each project is available in a timely manner, and that work at the site goes on without any delay or disruption. 2. Strong Geographic Focus Over the last forty years, your Company has had an unwavering and unshifting focus on Delhi and NCR regions. This sustained focus has resulted in an in-depth knowledge of the NCR real estate space that very few players in the industry possess. Your Company is today in an enviable position where it has a multilevel and multi-layered understanding of the topography, emerging and changing demographic profile, key growth hot-spots and pockets as well as the evolving consumer trends. This ensures that every project of the Company has a very high value quotient for the buyer with a unique combination of location, price and quality. 3. Enviable Land Bank Emanating from its deep NCR focus, your Company has always had the rare insight and strong conviction about the market, which it has judiciously leveraged to create one of the largest land banks in the Delhi and NCR region. Today, in spite of the numerous projects that are under execution, your Company still had a substantial quantum of land bank that is all paid for and ready for development. The land bank of the Company is located in high-growth regions of NCR and ideally suited for residential, commercial and hospitality projects. PROJECT OVERVIEW [suggest we give a brief overview of all the projects that are currently underway with a special emphasis on ARE] OUTLOOK AND OPPORTUNITIES 1. Strong Revival After many years of struggle and strife, the Indian real estate sector is poised for a turnaround. With the help of bold reforms and regulations unleashed by the new government in 2014, there is a renewed sense of optimism and positivity across all sectors of the industry. Moreover, there is strong economic revival in the country with India emerging as the fastest growing economy in the world. This has re-strengthened the long-term India growth story, as evidenced by India becoming one of the most attractive destinations for FDI. Both the World Bank and the International Monetary Fund (IMF) have forecast India's GDP growth rate to build up to 7.5 per cent to 8 per cent in the next two to three years. Further, inflation has been tamed down to benign levels of 4 per cent to 5 per cent, that is likely to lead to lowering of interest rates as well as a general surge in demand. 2. Government's Thrust on Infrastructure and Low-cost Housing The new government has announced a path-breaking initiative to develop 100 Smart cities in India over the next twenty years. A sum of Rs. 7,060 crores was allocated towards this in the Union Budget of 2014-15. These Smart Cities will include the construction of satellite townships near existing mega cities, upgrading existing mid-sized cities and the construction of settlement along industrial corridors. The plan also envisages development of new smart cities. Another key decision taken by the government was the Housing for All by 2022. This low-cost housing scheme has public-private partnership as one of its major features. The scheme also has many other features like interest subvention, interest subsidy, Central grant of Rs. 1 lakh per house on an average under slum rehabilitation, etc. The scheme will cover the entire urban area of 4,401 statutory towns with initial focus on 500 Class I cities. The scheme will be implemented in three phases starting from April 2015 - March 2017 (Phase I), April 2017 -March 2019 (Phase II) and April 2019 - March 2022 (Phase III). The current dimension of the scheme at brsent is 2 crores homes. Based on the above major positive developments in the real estate industry, the outlook for ARL is both positive and exciting. The Company has all the right blocks in place to capitalise on the emerging opportunity in the industry, particularly in the residential segment. Further, the Company has one of the largest and lowest-cost land banks in its possession, fully paid up and ready for development. Both the location of the land bank as well as is low cost will give ARL an unbeatable edge in developing projects. For the buyers, the value proposition of ARL projects will also be unbeatable in terms of pricing (due to low cost of land), delivery (due to proven execution capability), and quality (due to in-house construction arm). THREATS AND RISKS 1. Inventory Overhang The inventory that has been built up over the last few years due to sluggish demand has led to a substantial pile up of inventory both in commercial as well as residential sectors. The situation in NCR is particularly grim as the region has the highest inventory overhang in the country. However, ARL believes that its projects always deliver a better value to buyers in terms of pricing as well as quality of construction. Moreover, the brand equity and the reputation that ARL has developed over the last four decades as well as its experience and expertise will always a visible and decisive difference in consumer minds. The Company has a clean track-record of delivering project within time and within budgets, which is something that is a factor buyers consider. 2. High Costs One of the key factors that has been affecting projects as well as profitability of real estate companies has been the punitively high costs of land, labour and construction. Developers are constrained by these high costs, and are unable to reduce prices to match market conditions. This leads to a vicious cycle of low cash flows and high debts, eventually stressing margins. ARL has considerably mitigated this risk through a combination of visionary land acquisition in 2002-2003 when the land prices were low, as well as efficient operations that include timely delivery of projects, leveraging economies of scale and sbrading projects across residential and commercial sectors. This gives ARL the unique advantage of regular cash flows from lease and rental income from its commercial properties, as well as capital apbrciation for its residential projects. The Company also has a low gearing ratio giving it ample space to seek fresh funds. 3. Regulations Real estate industry faces some of the most complex regulations in form of permissions, processes, applications, clearances, certifications and approvals. It is estimated that a single project is subject to between thirty to forty regulations depending on state. This makes the entire project cycle unduly long and costly for the developers, and results in substantial delays in terms of delivery times as well as volatile costs. INTERNAL CONTROLS ARL has commensurate and adequate internal controls that are at par with the best in the real estate industry. All policies, procedures and processes are well-defined in a structured framework to ensure all statutes and laws of the land are complied with without any exception or omission. The Company also has a robust MIS system that ensures all major expenses are within the allocated and br-defined budgets, and any variation from this is immediately flagged off for correction. The Company conducts regular internal audits whose findings are reported to the senior management, and any corrective or improvement actions are immediately enforced. HUMAN RESOURCES ARL believes that its employees are its most valuable resource and assets. The Company has laid down stringent measure to make sure that the safety and health of its employees are secured such as ensuring safety brcautions at the construction site to avoid work injuries. The Company has a professional and healthy work culture built around strong corporate values. It also encourages and supports its employees to upgrade their skills on a continual basis through organising skill development programmes. Employees are also encouraged to participate in professional skills and training development courses. CAUTIONARY STATEMENT Statements made in this Management Discussion and Analysis describing the Company's objectives, projections, estimates, expectation or brdictions should be viewed as 'forward looking statements' within the meaning of applicable securities laws and regulations. Actual results could differ materially from those exbrssed or implied. Important factors that could make a difference to the company's operations include economic developments in the country and improvement in the state of capital markets, changes in the Governmental regulations, taxes, laws and other statues and other incidental factors. |