MANAGEMENT DISCUSSION & ANALYSIS GLOBAL ECONOMY The global economy struggled to gain momentum as many high-income countries continued to struggle and emerging economies were less dynamic than in the past. Global growth picked up marginally in 2014 to 2.6 percent from 2.5 percent in 2013. Among the major advanced economies, growth in the United States rebounded ahead of expectations in 2014 on account of low inflation and a decline in unemployment and oil prices. According to 'The World Economic Outlook' growth in the US is projected to exceed 3 percent in 2015-16, supported by strong domestic demand and an accommodative monetary policy stance despite the projected gradual rise in interest rates. In the Euro area, growth in 2014 was weaker than expected on account of low investment and inflation. Annual growth is projected to be in the region of 1.2 percent in 2015 and 1.4 percent in 2016. In emerging market and developing economies, growth is projected to remain broadly stable at 4.3 percent in 2015 and increase to 4.7 percent in 2016. Global growth is expected to rise moderately to 3.0 percent in 2015 and average about 3.3 percent through 2017. High-income countries are likely to see growth of 2.2 percent in 2015-17, up from 1.8 percent in 2014, on the back of gradually recovering labour markets, fiscal consolidation and lower financing costs. Sizable uncertainty about oil prices has added a new risk dimension to the global growth outlook. On the upside, the boost to global demand from lower oil prices could be greater than is currently factored into projections. INDIAN ECONOMY The Indian economy has been reporting a growth of less than 5% for the past two financial years. India's GDP growth was 4.5% and 4.7% in FY13 and FY14, respectively. However since the start of FY15, business and investor sentiments have been positive which coincided with the new government assuming power at the Centre. According to Indian Finance Ministry, the annual growth rate of the Indian economy is projected to have increased to 7.4% in 2014-15 as compared to 6.9% in the fiscal year 2013-14. The new growth numbers have been arrived at after a revision of the way GDP is calculated in India. The Central Statistics Office has revised the base year on which comparisons are made to 2011-12 from 2004-05. Post the revision, GDP growth stands at 6.9 percent (from 4.7 percent) in FY14 and 5.1 percent in FY13. Capital formation has been a major problem for the economy with a slowdown in investment by both the private sector and government. The gross fixed capital formation (GFCF) rate at current prices has come down continuously from 33.6% in FY12 to 28.6% in FY15. It is expected that with a revival in demand and the stalled projects getting back on-stream, the GFCF rate would improve significantly in FY16. Government of India has launched the "Make in India" campaign, which includes major new initiatives designed to facilitate investment, foster innovation, protect intellectual property and build best-in-class manufacturing infrastructure. There is also an increased emphasis on reducing entry barriers by introducing new de-licensing and deregulation measures thereby reducing complexity and significantly increasing the ease of doing business. The International Monetary Fund released an update to its World Economic Outlook report brdicting that India's economy will overtake China in terms of its annual growth rate in 2015-16. The IMF estimates brdict that India's economy will grow at 7.5 percent over the next two years. This puts India's projected growth in 2015 ahead of the organization's estimates for China (which stand at 6.8 and 6.3 percent for 2015 and 2016, respectively), making India the fastest growing major emerging economy in the world. REAL ESTATE OVERVIEW Real estate is a critical sector for India's economy due to its large potential for employment generation, capital attraction and revenue generation for the Government. It is one of the fastest growing sectors contributing about 6 percent to India's GDP. After witnessing fluctuating business cycles in the last decade, the real estate sector witnessed a slowdown in FY15 due to moderate end user demand, rising inventory and high finance costs. However, despite adverse sector dynamics, prices were resilient in most cities and have dropped only in select micro markets. Capital values of properties have surpassed the 2008 peak value which has created affordability concerns in some markets. To cope with this reduced demand and high pricing, developers are now reducing the sizes of apartments in new projects in order to target mid-income customers. A number of factors are expected to contribute to the growth of housing demand in India. Chief among them are rapid urbanisation rates, a decreasing average household size and easier availability of home loans. The effect of urbanisation rates on housing demand is most profound in the Tier 1 cities, where a large influx of migrants is causing housing demand to surge. The socio-cultural shift towards nuclear families is also providing an additional impetus to housing demand in India. The urban sector currently contributes around to 60% of India's GDP. The link between the economic performance of cities and the national economy is only likely to get stronger as the rate of urbanization increases. Housing and urban development are key priorities of the new government. The new Government is expected to drive reforms and regulations that are long overdue. The recent policy measures to relax Foreign Direct Investment (FDI) norms, provide housing for all by 2022, create 100 smart cities and approve Real Estate Investment Trusts (REITs) have boosted the confidence of stakeholders. While all of these policies have some direct benefits, the larger benefit is the signalling of intent to support growth in the sector, which in turn will lead to an improvement in sentiment in the sector and amongst customers. RESIDENTIAL REAL ESTATE The residential real estate sector in India witnessed moderation in sales, absorption and new launches. According to the property research company Knight Frank, national sales volume declined by 17% and new launches fell by 28% in CY2014. A total of 234,930 units were sold during 2014 compared to 284,550 units in 2013. Divergent trends were witnessed based on location and price. Overall, demand continued to be weak across top cities and did not witness a meaningful pick up after the general elections. Mumbai posted the highest sales volume in 2014, followed by Bengaluru and Pune. NCR saw a significant fall of 43% in sales volume. New launches in INR 10mn/unit category witnessed moderation, a shift away from higher ticket size trend which was a mainstay for the past 2 years. Prices remained largely sideways across markets with the exception of few micro markets in NCR which witnessed some correction Despite the subdued performance in recent years, India's demographics and urbanization trends brsent an optimistic future for the residential market. Demand is expected to revive given the reduction in interest rates and higher GDP growth. The rate cut cycle bodes well for the residential sector with lower outgo for mortgage payments improving affordability COMMERCIAL REAL ESTATE Developers were wary of launching new office projects over CY12-13 on account of cautious expansion plans of corporates and oversupply of office space. CY14 saw a marked recovery in office absorption across tier-1 cities. Overall net absorption stood at 30.3 mn sq ft, up 39% YoY. After a dismal CY13 that saw relocations dominate leasing activity, the first green shoots were visible with a pickup in br-leasing and demand for new space. The Bengaluru office market was the key driver of recovery, with net absorption nearly doubling to 8.9mn sq ft. In Bengaluru, E-retailers emerge as a major driver for increased absorption of office space. In CY14, MMR saw balanced absorption and supply with net absorption of 3.9mn sq ft that matched up well with fresh completions of 4.5 mn sq ft. Kolkata saw subdued net absorption of 0.8 mn sq ft in CY14, with fresh supply of 0.94 mn sq ft continuing to outpace absorption. Overall vacancy is likely to gradually reduce over CY15-17, owing to limited launches of new office space. Corporate entities have already begun rolling out their expansion plans due to an improvement in business fundamentals. The anticipated revival of the economy is expected to be a key trigger for the segment. Given that the market has seen an oversupply in the last few years, the gap between demand and supply is likely to shorten, leading to a further increase in rentals. OPPORTUNITIES Housing Demand Your Company expects demand from the mid income residential segment to remain strong as we believe there is significant demand in this category across the country. Increasing disposable incomes, rapid urbanization, and strong demographics are some of the trends favouring the mid-income residential market. Monetary Easing The real estate sector performance is directly bound by the country's economic fundamentals and monetary policies. The RBI had lowered its policy rate to 7.5% in March 2015 after a similar cut in January on the back Real Estate Reforms FDI The government's policy initiative to ease FDI rules in construction by reducing the minimum capital requirement from US$ 10 million to US$ 5 million and the built up area from 50,000 sq.m. to 20,000 sq.m. is likely to boost foreign fund inflows significantly. This will bring in both capital and expertise, ensuring development of sustainable and quality urban housing in India. The relaxation of the lock-in period also comes as a major relief for the industry. Projects with a commitment of at least 30% of the total cost towards low-cost affordable housing will be exempted from requirements relating to minimum built-up area and capitalization, with a three-year lock-in period. The government expects the new measures to considerably enhance inflows into the real estate sector. Issue of long-term bonds by banks for financing affordable housing In order to ensure adequate credit flow to the affordable housing sector, the RBI has allowed issuance of long-term bonds by banks for raising capital. Lending to the affordable housing sector includes loans eligible under priority sector along with mortgage loans that are limited to INR 5 mn in six metro cities (for houses valued up to INR 6.5 mn in Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad) and up to INR 4 mn for houses valued up to INR 5 mn in other locations. REITs The introduction of REITs will provide access to funding for developers, better valuations for commercial properties, access to individual investors in commercial real estate and a more structured and transparent commercial real estate market. REITs primarily invest in completed real estate assets that generate revenue and the majority of their earnings are distributed among investors. REITs are thus a low-risk investment avenue providing regular income. The Union Budget 2015 rationalised the capital gain tax regime for the sponsors of REITs. The Budget also proposed that the rental income arising from real estate assets directly held by the REIT would be allowed to pass through and will be taxed in the hands of the unit holders of the REIT. This would help to channel both domestic and overseas investments into real estate projects in the country. Globally REITs have proven to be an attractive investment option ensuring participation from retail investors, pension funds and insurance companies. The operation of REITs will deepen the market, attract long-term and low-cost capital, and usher in greater transparency and better levels of disclosure. Real Estate Regulatory Bill The Union Cabinet approved amendments to the long-pending real estate bill to bring all ongoing projects under its ambit. The Bill entails the formation of a Housing Regulatory Authority (HRA) to ensure compliance by the developer and increase transparency in the housing sector. The government expects the new Bill to create a uniform regulatory mechanism and protect the interests of consumers while at the same time enhance the growth of the construction sector through better credibility. Key provisions of the bill are listed below: • Developers will need to deposit 50% of the money collected from the buyers in a project within 15 days into a separate bank account to be used for construction of that project • 10% of the project cost will be imposed as a penalty for non-registration and another 10% or three-year imprisonment, or both, if there is further non-compliance with the rules and regulations • Developers in both residential and commercial sectors will be required to register their projects with the regulatory authority and disclose information regarding the promoters, project, layout plan, schedule of development work, land status, and status of statutory approval, among others • Real estate agents also can be penalized for non-compliance of the orders of the regulatory authority The Bill will provide a renewed boost to transparency levels in the Indian real estate sector. This will instil more confidence among global investors and in turn provide better access to structured capital for the sector. However, the continued non-inclusion of government agencies whose slow regulatory approval processes are a major contributor to project delays, remains an issue that needs to be addressed. THREATS & CHALLENGES Regulatory Hurdles Unfavorable changes in government policies and the regulatory environment can adversely impact the performance of the sector. There are substantial procedural delays with regards to land acquisition, land use, project launches and construction approvals. Retrospective policy changes and regulatory bottlenecks may impact profitability and affect the attractiveness of the sector and companies operating within the sector. Fiinaincj Problems The RBI has set a threshold of 15% for the total maximum exposure of banks to real estate, including individual housing loans and lending to developers for construction finance which is quite low and is curtailing the growth of the sector. Absence of long term funding from banks is forcing developers to look at alternative sources of funds, most of which do not offer affordable interest rates. Shortage of Manpower & Technology Despite being the second largest employer in the country the construction sector as a whole faces a manpower shortage. Further the sector is heavily dependent on manual labour which increases the timelines for projects and results in supply getting deferred. Hence less labour intensive alternative methods of construction need to be adopted on a large scale through training and skill development of manpower. About Godrej Properties Limited Godrej Properties Limited (GPL) is the real estate development arm of the Godrej Group, which was started in 1897 and is today one of India's most successful conglomerates. GPL brings the Group's philosophy of innovation and excellence to the real estate industry, while aspiring to continue to be the most trusted name in the industry. GPL has completed several landmark projects and is currently developing residential, commercial and township projects sbrad across 10 million square meters (108 million square feet) in 12 cities across India. Throughout its operations, GPL aims to deliver superior value to all stakeholders through extraordinary and imaginative spaces created out of deep customer focus and insight. GPL has always embraced the notion that collaboration is the essence of excellence. To that end, we have worked with the best designers, architects and contractors within India and around the globe to deliver imaginative and sustainable spaces. By bringing together the best talent in the global real estate sector, GPL works to create developments that will last into the future and foresee the needs of each and every resident. Our Key Business Priorities: a. Leveraging the 'Godrej' Brand We believe that the 'Godrej' brand is instantly recognizable across India due to its long standing brsence in the Indian market, the diversified businesses in which the Godrej Group operates and the trust it has developed over the course of its operating history. We believe that the strength of the 'Godrej' brand and its association with trust, quality and reliability help us in many aspects of our business. These include entering into joint development agreements, expanding to new cities and markets and formulating business associations. The brand has also helped us build deeper relationships with our customers, service providers, process partners, investors and lenders, all of which have led to us acquiring a strong position within the sector. In addition, GPL's association with the Godrej Group provides accessibility to several land parcels owned by Godrej Group companies enhancing the scope of our development portfolio significantly. b. Strong sales performance in key residential markets Your Company has posted a strong sales performance in key markets in FY14. The response to our new project launches in Gurgaon has been excellent despite a challenging market. At Godrej Oasis in Gurgaon, we were able to sell close to 0.35 million square feet with a booking value of over Rs. 250 crore in the launch quarter. This launch was executed within 8 months of signing the development agreement. At Godrej Aria, we were able to sell 0.4 million square feet with a booking value of Rs. 284 crore in the launch quarter. We launched the project within four months of signing the development agreement which is the quickest turnaround time for any project launch in GPL's history. Given that we had no brsence in NCR 4 years ago, we have added 5 projects in a very short span of time and launched 4 of these projects with tremendous success. Our cumulative sales in Gurgaon are now more than 3 million square feet. In Mumbai your Company successfully launched its second township project, Godrej City in Panvel and sold 0.6 million sq.ft with a booking value of Rs. 343 crore in FY15. We also had a successful launch of the second phase of Godrej Central in Chembur and have now sold close to 0.6 million square feet of space worth over Rs. 870 crore since the launch of the project. Your Company also successfully launched Godrej Prana in Pune within one year of signing the development agreement. At Godrej Infinity, Pune we sold more than 200 apartments in ten days with a booking value of Rs. 120 crore. We also had a successful launch of the second phase of Godrej United in Bangalore several months ahead of our target launch date. We have now sold 524,000 square feet of space worth Rs. 324 crore in the twelve months since the launch of the project. In addition to these new launches, Your Company also witnessed strong sales from existing residential projects and closed the year with booking area of 3.9 million sq.ft and booking value of INR 2,681 Cr. c. Sustained Business Development Momentum During FY2015, we added 5 new projects to our development portfolio and concluded deals across India, in Mumbai, Bengaluru, Gurgaon and Kolkata. Our deal pipeline for new projects across the country's leading real estate markets looks robust and we expect to have further positive news on the business development front in the year ahead. The table below has the details on these new projects signed in FY15: d. Excellence in Project Execution Our key strength has been meticulous execution of our under-construction projects within the determined timeframe. Our track record on execution quality and timelines gives us credibility with our customers. To further enhance our execution capabilities, we outsource certain functions to leverage best-in-class practices and partners. This enables us to focus on core functions of land sourcing, project execution, and marketing. Since regulatory approvals are often a considerable obstacle in meeting our goals, we have strengthened our internal capabilities to expedite these approvals and launch projects on time. During FY15 we have successfully delivered the following projects: e. Sustainable Development To demonstrate our commitment to sustainable practices, Godrej Industries Limited & Associated Companies (GILAC) initiated the 'Godrej Good & Green' initiative to achieve specified environmental benchmarks by the year 2020. Under the ambit of this initiative, at GPL we have committed ourselves to the triple bottom line approach of People, Planet & Profit. We follow a combrhensive approach to sustainable development from early design phase through the construction period. In our integrated process, the way we design our developments takes on key importance. Utilizing tools such as energy modeling allows us to reduce energy consumption in buildings that in turn reduces their operational carbon footprint. Our focus on sustainable development covers environmental parameters including site selection and planning, pedestrian friendly developments, indoor environmental quality, maximizing day lighting and natural ventilation, water and energy efficiency as well as responsible material sourcing. We integrate the concept of sustainable development across our operations. Sustainability is also one of the key principles underscoring our design led approach and is a part of the GPL Design Studio's mandate. This has allowed us to leverage sustainable design as an innovation mechanism and has proved useful for us to action our goal that all of our buildings should be externally certified green buildings. We look at sustainability at a larger organizational level where as a part of the Godrej group, we are one of the founding members of the Indian Green Building Council (IGBC), which is actively involved in promoting green building concepts in India. For this financial year, we have extended our commitment to sustainability across all domains of our business. We have assessed sustainability along the lines of the Global Reporting Initiative Generation 4 (GRI G4) guidelines. GRI is a non-financial disclosure of performance indicators that cover Social, Environmental & Economic aspects. Through this assessment, we intend to ensure a continuous integration of sustainable practices at GPL that will help us fulfil our Good & Green 2020 vision. f. Human Capital Human capital plays a crucial role in achieving our growth aspirations. In line with our operational scale-up, we increased our total employee strength by 39% to 836 employees during the year. Our employee value proposition is based on a strong focus on employee development, exciting work culture, competitive compensation and the pursuit of excellence. A motivated and empowered workforce gives us the flexibility in adapting to future needs of our business. During the year, we were ranked amongst India's Top 50 Companies to Work for in 2014 for the third consecutive year. In the same study, we were ranked No. 1 in the Real Estate and Construction sector. THREATS, RISKS AND CONCERNS 1. Industry Cyclically The real estate market is inherently a cyclical market and is affected by macroeconomic conditions, changes in applicable governmental schemes, changes in supply and demand for projects, availability of consumer financing and illiquidity. Your Company has attempted to hedge against the inherent risks through a business model comprising joint ventures, development management fee and a pan-India brsence. However, any future significant downturn in the industry and the overall investment climate may adversely impact business. 2. Statutory Approvals The real estate sector in India is heavily regulated by the central, state and local governments. Real estate developers are required to comply with a number of laws and regulations, including policies and procedures established and implemented by local authorities in relation to land acquisition, transfer of property, registration and use of land. These laws often vary from state to state. Several of your Company's projects are in brliminary stages of planning and any delay in obtaining approvals could warrant revised scheduling of project timelines. OPERATIONAL HIGHLIGHTS OF FY2014-15: • 69% growth in volume and 58% growth in value of residential sales bookings in FY15 • Registered booking volume of 3.9 million sq.ft. and booking value of INR 2,681 crore in a weak real estate market. • Added 5 new projects with ~8 million sq.ft. of saleable area in FY15 • Delivered 3.5 million sq.ft. in FY15 which includes 2.7 million sq.ft. of residential and 2.7 million sq.ft. of commercial space across five cities • ICRA has upgraded long term rating of Godrej Properties to AA- from A+ • GPL opened its first international rebrsentative sales office in Dubai • Received 59 awards and recognitions from brstigious institutions FINANCIAL PERFORMANCE • Total income increased by 54% to INR 1927 crore from INR 1254 crore • Net profit increased by 20% to INR 191 crore from INR 159 crore • EPS amounted to INR 9.58 as compared to INR 8.62 COMPANY OUTLOOK The headwinds facing the Indian economy over the past couple of years are quickly abating. A combination of beneficial turns in commodity and interest rates cycles, a favourable policy environment and an improved consumer and investor sentiment is likely to lead to a far improved demand environment. We have an exciting launch pipeline for FY16 which should help us take advantage of the improved dynamics. Our key areas of focus for new business development will continue to be in the largest markets of Mumbai, NCR, Bengaluru and Pune. We believe our national brsence, strong brand and robust launch pipelines, leave us well placed to benefit from the improved environment. |