MANAGEMENT DISCUSSION & ANALYSIS Economic Overview The global economic growth remained unchanged at 3.4% in 2014, as per the World Economic Outlook Report by IMF released in April, 2015. The major advanced economies during the year witnessed a gradual recoveryin growth rate. However, the recovery continues to remain very fragile. The weak growth accompanied with soft commodity prices led to a low inflation level in these economies. Sluggish economic activities in Euro zone and Japan in spite of a prolonged near zero level interest rate brvailing there prompted the respective Central Banks to extend accommodative monetary policies. The emerging economies grew at a slower rate of 4.6% in 2014 as against 5.0% in 2013. This has been largely due to the slowdown in China & Brazil. Going forward, IMF brdicts that the global economic growth would be at 3.5% in 2015. The economic fundamentals are currently showing robust trends which substantiates the expected growth in the economy. The government has significantly focused towards bringing growth back on track which has led to increased optimism in the system. The current account deficit has come down to 0.2% of GDP (January - March, 2015) from 1.3% in FY15 and is expected to be at 1.5% in FY16. The government has also aimed at bringing down the fiscal deficit from 4.1% in 2015 to 3% by FY18. With inflation at RBI's comfort zone the Repo rate was reduced twice at the beginning of 2015. However, the full benefit is yet to be passed on to the consumers by the Banks. GDP grew at 7.3% in FY15 as compared to 6.9% in FY14 as per the CSO's new methodology taking 2011-12 as the base year. The increased impetus on infrastructure sector revival and efforts towards increasing India's export potential would make the economic growth prospects for India stronger. Industry Overview Real Estate Sector Overview Urbanisation, rising income level, young population, growing number of nuclear families, growth in manufacturing and services sector have supported the growth of real estate in India. One of the fastest growing sectors, Real Estate contributes about 11% of India's GDP, creates large number of employment and attracts huge capital. The market size is expected to increase at a CAGR of 11.2% between 2008-2020 as per a report by PHD Chamber of Commerce and Industry (PHDCCI). The sector can be broadly categorised as residential, commercial, retail and hospitality Residential segment Urbanisation in India is growing at a rapid rate due to the changing demographic trend and large migration of rural population to cities in search ofbetter liveling hood. According to the Planning Commission Report on 12th five year plan, in 2012 there was shortage of 18.78 mn housing units in urban India. A Cushman & Wakefield Research Report mentions that the total housing demand in the country by 2017 could be as high as 88.78 mn units with demand in urban areas scaling up nearly 12 mn units in the same period. Hence, there is a huge shortage of housing in India, especially in the affordable housing segment. The brsent government has acknowledged the urgent need of addressing this issue before it is further aggravated. It has announced the ambitious plan to provide housing to every Indian by 2022. With rising input cost due to continuous high inflation for the past few years the cost of construction has increased significantly. This has led to a rise is real estate prices even after a slack demand scenario. Hence, despite low sales volume and higher inventories, there has not been softening of property prices in India. With significant jump in real estate prices, a new segment as affordable housing has emerged since 2008 and the demand in this segment continues to remain stable as it majorly targets the fast growing mid income group in India. Most research houses have projected that Bangalore office leasing market will witness over 15 mn sq ft. of absorption in 2015 calendar year as against 13 mn sq ft. of absorption in 2014calendaryear. For every 100 sq ft. of office leased, the basic thumb rule states that one new job is created within 9-12 months of the office being occupied. With this assumption, in the calendar year 13 mn sq ft. was leased and approximately 13 lakh new jobs would get generated in 2015 and approximately 15 lakh new jobs will be generated in the calendar year 2015. Effectively this means higher demand for housing in the Bangalore market. With such job creation trends, the demand for housing increases. Market is witnessing higher demand in the product segment ranging in the budget of Rs. 50 Lakhs to Rs. 1.5 Cr. Robust job creation in the city of Bangalore is fuelling the demand for housing in the city. Similar trend is being witnessed in cities of Hyderabad & Chennai. Commercial Segment The growth of the commercial segment largely depends on the services and industrial sector of the economy. Total stock of Grade A office space across major Indian cities grew by 8.0% in 2014 over the brvious year, with an additional supply of slightly below 30 mn sq ft. Bangalore saw the biggest addition in office supply in absolute area terms, followed by NCR-Delhi. Office space leasing grew by 11% in 2014 to nearly 30 mn sq ft. in seven major cities. Pan-India office space vacancy dropped from 18.5% as of end-2013 to 16.9% as of end-2014. During the year, rentals in the top cities including Mumbai, Delhi, Bengaluru, Hyderabad, Chennai, Ahmedabad and Kolkata increased moderately reflecting a recovery in the market. This is despite a large inventory of office space remaining vacant there. The IT-ITES sector has been the main consumer of commercial office space in India and continues to be a key growth driver for the commercial real estate sector. The National Association of Software and Services Companies (NASSCOM) has projected that the sector is likely to employ 10 mn people by 2020 from around 3 mn in FY13. BFSI is the second largest consumer of office space in India occupying about 16% of the total office space. As per the Planning Commission Report on employment for 12th five year plan; the workforce in the banking sector is expected to increase by 8.5 mn during the period 2012-2020. Retail Segment The Indian retail sector has recorded a phenomenal growth over the last decade, supported by economic growth, large number of young population, rising income levels and changing lifestyles leading to higher aspirations of the Indian consumer. As per a KPMG report on Real Estate, organised Retail sector in India is expected to grow at a CAGR of 11% reaching USD 191 bnby2020fromUSD41 bn in 2012. With this growth, the total demand for retail space is estimated reach to 275-300 mnsq ft. by 2019. Encouraged by the strong growth potential of retail sector, several well established international mass market brands entered India by setting up their shops in metro cities and brsently expanding into the non-metro cities. Retail being a location driven activity, there has been an increase in competition between domestic and international retailers in select pockets. Fashion and Food & Beverages retailers continue to enter or expand in major markets across the country, including some non-metro locations. Going ahead the retail infrastructure will further improve to cater to increasing demand of the Indian consumers. Hospitality Segment India is still classified as an emerging market with a significant rise in the urban middle class population. This has given an impetus to both leisure and business travel across the country. Historically, much of the hotel development had been focused on the upscale and luxury market but the maximum potential lies within the mid-market, budget and extended stay sectors. Our government has identified a shortage of nearly 150,000 rooms especially in the budget sector. As of 2015, India has somewhere between 800-1000 mn domestic travelers, however many of these still utilize the unorganized sector. These domestic travelers are the most important factor in the expansion of India's hospitality sector. According to the WTTC (World Travel & Tourism Council), the direct contribution of Travel and Tourism was approximately Rs. 2200 bn which is equivalent to 2% of the national GPD and this number is expected to grow to 7.5% by end 2015. India received a total of 7.1 mn visitors in FY15, up by 5% from FY14. India's total inventory in the organized sector is approximately 104,000 rooms. As of 2014, Bengaluru's room count in the organized sector stood at nearly 9,900 rooms. Of this 19% are in the luxury sector, 27% in the upscale sector, 25% in the mid market sector, 17% in the budget and 12% in the extended stay sectors. Bengaluru has a total of around 6,900 rooms in the development pipeline from now till 2020, which is a close second behind NCR region. 2014 saw the addition of approximately 1,300 rooms. Occupancy levels for the city grew by 6% over the brvious year, however the ARR fell by approximately 9%. The city wide average occupancy rate was 58.2% whereas the ARR was Rs. 6500. The Rev PAR for the year was approximately Rs. 3800. Bengaluru is slated to see a slight dip in occupancy levels owing to new supply coming in to the market, however the ARR will bounce back to nearly Rs. 7000 in the next year as per industry forecast Real Estate Funding Opening up of Real estate sector for FDI route in 2005 encouraged global Real Estate Funds, Private Equity Funds, and hedge funds to invest in the high potential real estate sector in India. However, The FDI flow declined substantially post 2008 due to more cautious approach from investors. With availability of bank credit becoming difficult and equity investment hitting the rough patch, investors have shifted focus to more secured funding options such as mezzanine and structured equity instruments. Also many housing finance companies have started project based lending. Operational Review Real Estate Segment The total sales volume in this segment grew by 7% in FY15 to 2.80 mn sq ft. from 2.63 mn sq ft. in FY14. Residential segment grew by 17% in FY15 to 2.65 mn sq ft. from 2.26 mn sq ft. in the brvious year. Sales volume in the commercial segment decreased by 58% to 0.16 mn sq ft. in FY15 from 0.37mn sq ft. last year. The average realisation for residential and commercial projects was Rs. 5,076/sq ft. during the year. The salable area for ongoing real estate projects is 16.36 mn sq ft. with Brigade's share of 12.05 mn sq ft. at the end of FY15. Brigade has a total land bank of 401 acres at the end of FY15. This translates to a total developable area of 34.1 mn sq ft. with Brigade's share of 26.0 mn sq ft. Residential segment has a developable area of 21.1 mn sq ft. out of which Brigade's share is 15.6 mn sq ft. and commercial salable segment has a developable area of 1.4 mn sq ft. with Brigade's share of 0.8 mn sq ft. Bangalore, Chennai, Pune & Hyderabad are among the few markets that have lesser stress when it comes to unsold inventory hangover. Considering Brigade Group is majorly operating in the affordable and luxury residential segment, the Company is comfortably positioned on this front as the unsold inventory is immaterial when compared to market numbers. The affordable and luxury segments are robust in terms of demand and absorption providing comfortable environment for the Brigade Group. Comfortably positioned basis the market demand Considering the market is robust in the sub 100 lakhs segment, Brigade is well positioned to cater the demand in this segment. 64% of our current stock is sub 100 lakhs segment and this is the fastest moving segment in the Bangalore, Mangalore & Mysore market Sales Growth Focus on Digital marketing has considerably helped the Company position itself well when it comes to capturing the market share. Company has smartly re-positioned its focus towards innovative ways to get the best ROI on each rupee spenton marketing. Outreach activities and focused open house sessions across the country, International markets like US, UK, Singapore & UAE have been well received. Recently the Company participated in multiple online promotion initiatives and witnessed good amount of interest for business growth. Hospitality During the year, the occupancy rate at Grand Mercure was 78% compared to 86% in FY14. The average room rate (ARR) was up by 3% to X 6,757 in FY15 from Rs. 6,558 in the last year. Sheraton had an occupancy rate of 72% in FY15 compared to 75% in FY14. The average room rate was Rs. 7,811 in FY15, up 2% from Rs. 7,633 in the brvious year. Apart from the existing projects, Brigade has three ongoing projects -Holiday Inn in Chennai, Holiday Inn Exbrss in Bengaluru and Grand Mercure in Mysore, which are expected to commence operations over the next 1-3 years. Lease Rentals The total leasable area is 1.63 mn sq ft. in commercial and retail assets at the end of FY15. The occupancy rate stands at 96% compared to 92% in FY14. Presently, seven projects are ongoing with a total area of 1.94 mn sq ft. with Brigade's share of 1.16mnsqft Opportunities and Strengths • Pioneers in development of integrated enclave(residential, offices, retail and hospitality) and brsently developing the first smart township project development of 130 acres in Bangalore. • Good mix of residential, offices & retail and hospitality projects. • Steady annuity income from Lease Rental & Hospitality Segments. • Strong brand Equity in South India more specifically in Karnataka. • Strong Project Management Team. • Use of advanced technology in construction. • Good financial discipline. • Dedicated and experienced senior management team across segments. • Creditratingof A from CRISIL and ICRA. • Increasing demand due to increase in IT and ITeS segment employment, E-commerce and startups. Threats and Weakness • Delay in getting statutory clearances. • Non availability of skilled labour for contractors. • Major concentration only in South India. • Non availability of Land with cleartitles. • Bigger project size with longer gestation period increase the project costs. Credit Rating During the year, CRISIL has assigned us a long term rating of "A" with stable outlook. Further ICRA has assigned "A" rating with positive outlook for our long term borrowings and A1 rating for our short term borrowings. This is a reflection of our track record. Others Brigade Group received the Allotment of Development Rights for 1.1 mn sq ft. of Built Up Area (BUA) in Gujarat International Finance Tec-City (GIFT City) encompassing commercial, residential, retail mall and hotel projects in both SEZ and non-SEZ areas. The Company will invest Rs. 500 cr in the next few years in GIFT City, India's first globally benchmarked International Financial Services Centre (IFSC). Apart from the allocated area, the Company submitted its interest in acquiring additional space, aggregating to 1.8 mn sq ft. of BUA, demonstrating its strategic long-term interest in being part of the development of India's first Global Financial Hub at GIFT City. Brigade Group entered into an MOU with GIC, Singapore to jointly invest upto Rs. 1,500 Cr in residential as well as mixed use development projects in south India. During the year Brigade Group entered into partnerships with online real estate portals for online offers on its luxury projects. The Company launched an online booking platform for customers to book a Brigade apartment online in a few easy steps. It also rolled out a customer portal which is the first by a Bangalore Developer. This portal allows residential buyers to access details of the home they purchased. Financial Review (Consolidated) Equity Share Capital The equity share capital of the Company as on 31st March, 2015 stood at Rs. 112.74 Cr from Rs. 112.25 Cr in the brvious year. The increase in equity capital is due to the exercise of stock options by certain employees. Debt Equity The debt equity ratio of the Company as on 31st March, 2015, is at 1:1 asagainst0.7:1 in the brvious financial year. Revenue The total revenue of the Company increased by 38% to Rs. 1330.84 Cr in the financial year 2014-15 as compared to Rs. 966.69 Cr in the brvious financial year. EBITDA EBITDA margin during the financial year 2014-15 stood at 30.3% as compared to 32.9% in the brvious year. Finance Costs Interest and Finance cost during the year stood at Rs. 131.4 Cr as compared to Rs. 113.1 Cr in the brvious financial year. Net Profit Net profit for the year stood at Rs. 116.4 Cr as compared to Rs. 89.9 Cr in the brvious financial year. Earnings Per Share Earnings Per share during the year is Rs.8.47 as compared to Rs. 8.19 in the brvious financial year. Outlook The economic growth in India is gradually reviving. The government's increased focus towards bringing the growth in the beleaguered infrastructure sector back on track would further add momentum to India's economic growth. Increased economic activities will raise the demand for new homes and office space. With US economy fast reviving and Europe gradually moving out of recessionary phase the IT/ITes, which is the largest consumer of office space, has strong growth prospects. The government's initiatives towards modernisation of India by developing 100 Smart Cities will create a huge opportunity both for the residential and commercial segments. New instruments of financing like REITs will help the industry to grow faster as it will give access to long term and steady funds for the sector. Brigade Group currently has a very strong pipeline with 19 mn sq ft. of ongoing projects in key real estate markets in South India to tap the rising demand. Brigade also holds a huge land bank of 401 acres, provides visibility of launching new projects for the coming years. Risk Management Economic Risk The real estate market is affected by changes in economic conditions, government policies, interest rates, income levels among other factors. These factors can affect the demand for both our Forthcoming and ongoing Projects. Mitigating Measures: The Company follows certain policies such as leveraging of Balance sheet, building projects in an asset light mode and doing research before land purchase. Liquidity Risk Weak sales or lack of timely payment from our customers or can create a liquidity crunch and hamper the progress of project work. Mitigating Measures: Brigade enjoys a strong brand name which ensures all our upcoming projects getting good response from the consumers. A low leveraged Balance Sheet helps the company to avail short term credit facilities. Political Risk Our business can be hampered due to political uncertainties. Mitigating Measures: Company's diversification across South Indian cities and recent foray into GIFT City in Gujarat has reduced the risk brewing from regional political unrest. Execution Risk Many real estate projects are stopped or delayed due to pending regulatory clearance leading tocost overruns. Mitigating Measures: The Company has a commendable record of completing all its projects on time since its inception. As a practice it completes with the entire statutory requirement beforehand. Human Resources At Brigade Group, development of Human Resources, is considered as the prime responsibility to build invaluable asset to organisation. The Company believes that the continuous improvement of the knowledge and skill of its employees drives its growth and that the stakeholder satisfaction is reliant on the professionalism displayed by the employees. Being cognizant of this principal, the HUMAN RESOURCES department plays a critical role in the Company to meet the greater objective of growth. The Financial Year 2014-15 was dedicated to further the initiatives undertaken in the brvious financial and consolidating them for effective implementation. However many new initiatives were also started to build a strong bond of employee engagement. The company continued with its talent induction, capability build, job designs and culture management to strengthen itself. These efforts helped fostering greater level of collaboration, openness, high performance and team work. Brigade Group has been selected as one of 'India's Best Companies to Work For 2014' by Great Place to Work Institute and the Economic Times for the fourth consecutive year. Brigade Group was ranked among the top 100 across all industries and 2nd in the real estate industry. This is a testimony of our commitment to our employees and their well being. Internal Control Systems and their adequacy The Company has adequate internal control systems to commensurate with the size and nature of its business. The system is supported by documented policies, guidelines and procedures to monitor business and operational performance which are aimed at ensuring business integrity and promoting operational efficiency. The Company has an Internal Audit Department as well as independent audit firms to conduct periodical audits to ensure adequacy of internal control systems, adherence to management policies and compliance with applicable laws and regulations. Their scope of work includes review of internal controls on accounting, efficiency and economy of operations. The internal auditors brsent to the audit committee the findings of their audit, recommend better practices and report on the status of implementation of their recommendations. |