Management
A. GENERAL ECONOMIC SCENARIO
Global Economy
The global economic growth started to accelerate on a broad front in the year 2010 andthis growth is expected to continue into 2011 and 2012. Middle East and North Africacontinue to influence the global economies, with oil prices moving higher on the back ofevents in Libya (WTI breached $100/bbl) and the dollar price of internationally tradedfood commodities (World Bank index) increasing to 2.9% in February, coming to match itsJune 2008 peak. Higher fuel and food prices and capacity constraints in a number ofdeveloping countries are contributing to rising inflation and a tightening of monetarypolicies. Domestic food prices in developing countries, the key driver for currentinflation, are up 8% since June 2010. It is predicted that the recovery will be uneven inglobal context for some more time.
According to Global Investment Atlas, Global investment rose 42% in 2010 to USD 564billion (Euro 430 billion), the third highest in the past ten years. As againstexpectations, the recovery in the world economy gathered pace in the second half of 2010despite more hesitant economic mood reflecting higher liquidity and more disposableincomes apart from high growth trajectory.
The Indian Economic environment
Despite a slow recovery in the world economies, it is heartening to see that India hasrecorded admirable growth post recession. India has moved up to fifth position in a listranking the governments of 112 countries in terms of their ability to project the economyinto the international sphere, As per the Economic Survey 2010-11, in the year 2000, thecountry was ranked 10th in the Index of Government Economic Power (IGEP). As per the IGEP,the Survey said India was among the best performers on the globe in terms of its abilityto raise resources, credit-worthiness and credibility in international financial markets.
The Indian economy has shown remarkable resilience to both external and domesticshocks. It not only recovered rapidly from the global economic downturn, but also took themonsoon failure last year in its stride and is now showing robust growth. If services andagriculture pick up, the economy will perform much better than expected in the year ahead.
Going by simple macro economic data a reasonable forecast for the year 2010-11 is thatthe economy will improve its GDP growth by around 1 percentage point from that witnessedin 2009-10. Thus, allowing for factors beyond the reach of domestic policymakers such asthe performance of the monsoon and the rate of recovery of the global economy, the IndianGDP can reasonably be expected to grow around 8.5 +/- 0.25 per cent, with a full recovery,breaching the 9 per cent mark in 2011-12. (Source : Economic Survey 2010-11)
Real Estate Sector
The real estate sector in India involves the development of residential housing,commercial buildings and office space, industrial facilities, warehouses, hotels and othercommercial spaces, purchase and sale of land and its development rights. Historically, thereal estate sector in India has been highly unorganized and characterized by variousfactors that impeded organized dealing such as, an absence of centralized title registryproviding title guarantee, lack of uniformity in local laws, non-availability of bankfinance, high interest rates and taxes, lack of transparency in transactions etc. Inrecent years, however, the real estate sector has exhibited greater maturity and value dueto economic compulsions, regulatory reforms and active consumerism. This trend has made itpossible for the sector to obtain organized investments by both private and publicfinancial institutions thus improving its liquidity and planned investments. Demand forresidential, commercial and retail real estate increased throughout India until first halfof 2008, accompanied by an increased demand for hotels and infrastructure projects.Thereafter, there was a lull in the market due to the ill-effects of the worst everrecession. The demand started picking up again in the course of 2010. The growth witnessedin real estate business in India has essentially been due to high GDP growth in theeconomy, increased urbanization, increasing number of nuclear families, higher disposablefamily income, good growth in sectors such as IT, ITES, retail, consumer durables,automobiles, telecommunication, infrastructure, banking, insurance, tourism, entertainmentand hospitality. Indian real estate has always been one of the mainstays of ourcountry’s economy. Construction sector is also the second largest employer afteragriculture, employing about 25 million people. Construction Industry’s contributionto GDP’s growth is around 2-3 percentage points.
The following factors generally affect demand and supply in real estate sector:
• Economic growth
IMF projects a positive growth for the Indian economy and it is expected to be fasterthan the advanced and the developing economies.
• Demographic profile of the population
The earning population of India (persons in the age group of 20-59) is expected toincrease in the overall population creating more demand for housing
• Interest rates and availability of bank finance
The lowering of interest rates for value housing is expected to increase the new housepurchases since large portions of housing needs are met through bank financing.
• Government policies and tax incentives
Foreign Direct Investment (FDI) Policy and other liberalization initiatives of theGovernment will help channelize more investments into real estate sector. Extension of Taxbenefits for investments in self occupied and let out properties will also help improvethe demand.
This is not to say that construction industry is unaffected by a few issues such as:
• Highly fragmented markets
• Dominance of unorganized regional players
• High interest, inflation and transaction costs
• Vexed local laws and bureaucracy
• Lack of Industry status and limited finance
• Multiple taxation
In order to reduce the ill-effects of recession and to support sustainable growth,Government has been taking several initiatives but the progress has been somewhat tardy.Most important among these are:
• Repeal of Urban Land Ceiling Act (introduced in 1976)
• Amendments to Rent Control Act
• Rationalization of stamp duties and other property taxes
• Conversion of land records in electronic form
• Liberal FDI inflows into the real estate sector
• Initiative towards Real Estate Investment Trusts (REIT) and Real Estate MutualFunds (REMF).
B. THE COMPANY AND ITS BUSINESS ENVIRONMENT
Sobha Developers Limited is one of the leading real estate and construction majors inIndia with a unique business model and delivery mechanism. The Company is built on rocksolid values, benchmark quality standards, uncompromising business ethos, focused customercentric approach, robust engineering and in-house research and development, which have allcontributed to making it a strong brand in both real estate and contractual segments. Thecompany has created an enviable brand in all the segments and regions of its operationsand the brand is synonymous with high quality products and transparency in dealing withits customers.
The Company has a strong business presence in South India particularly in Bangalore.Bangalore residential real estate is largely dependent on the performance of the IT/ITESsector which was severely impacted by the global economic slowdown. However, with thegradual recovery in the economy in general and real estate sector in particular, thedemand for real estate has increased substantially during calendar year 2010, one can nowsee a greater optimism, higher employment opportunities and improvement in investorconfidence. CRISIL Research expects capital values in real estate to rise by 5-8% incalendar year 2011. So far as Bangalore is concerned, city centers are fully congested andsuburban areas have great demand potential. Development of projects in these areas willnot only reduce the burden on main cities but also ease traffic, pollution andovercrowding. Better connectivity such as signal-free outer ring roads, wider, multi-lanearterial roads, express highways, Metro Rail covering main hubs in the city, have allgiven a major thrust to housing demand in Bangalore. The buyer in Bangalore has alsobecome very selective in his choice and looks for standard features such as social,recreational, shopping and other facilities in a safe and peaceful environment. They arealso environment sensitive and look for complexes which are eco-friendly with proper wastemanagement, plantation, energy conservation and rain water harvesting.
Demand for houses in Bangalore is likely to increase in all the segments such asluxury, semi luxury, villas, townhouses and plotted developments. The company has presencein all these segments. Affordable housing segment is also growing with more public andprivate partnerships in its development. Price is expected to remain stable, given thedevelopers focus on volumes. Long term investors will return to real estate sector soon.This trend is seen not only in Bangalore but also in other centers where the Company plansto grow such as in NCR, Chennai, Coimbatore and Pune as these are turning out to be highgrowth centres. On the whole, the demand is back in the real estate sector in Bangaloreand else where. This business is poised for a better growth with a greater focus onorganized and quality development.
The Delivery Excellence
The Company has achieved a phenomenal growth since inception compared to its peers. Ithas entered the league of companies with 50 million square feet of delivery in just 15years of existence. It has so far delivered projects covering across 20 cities in India,aggregating more than 42 million square feet. Currently, over 14 million square feet ofspace is under execution in 10 cities both in real estate and contractual projects. It hasforthcoming projects of over 16 million square feet under various geographical andbusiness areas. Company’s major strength has been in residential segment and itsdelivery excellence in this segment over the period is as given:
The Company has completed and handed over 13.94 million square feet of area in thefirst 11 years of its existence until the year 2006-07, whereas it has completed andhanded over 28.74 million square feet of area in next 5 years from the year 2007-08 to2010-11, thus showing a phenomenal growth in development and delivery of projects inlatter period as compared to the previous 11 years since inception. This also shows thatthe Company is well focused on its execution and delivery capabilities.
Its sales revenue during the year under review crossed the Rs. 10 billion mark fromreal estate development with an average realization of about Rs. 4000/ - per square foot.In the real estate space, it is primarily focused on middle to high end residentialhousing in Tier I and Tier II cities. The residential projects developed by it primarilycomprise of a wide range of luxury apartment complexes, lifestyle villas and row houseswith world class infrastructure and best-in-class amenities. One of the most outstandingfeatures of Company’s sales performance has been that there has been a fastermovement of high end products in the real estate segment.
In the contracting segment, the Company is the largest developer of Grade A commercialoffice space in India through mega scale campuses built for Infosys Technologies Limited,one of the leading IT companies in India. In addition, it has undertaken and completedcontractual projects for other corporate giants such as Hewlett Packard, Dell, Timken,Mico-Bosch, HCL, Bharat Forge, Bayer, Taj Hotels & ITC Group of Hotels. The Companybagged contractual orders worth over Rs. 1.32 Billion during the current year from otherprestigious clients like Biocon, Institute of Public Enterprises( IPE), GMR, Hotel LeelaVenture, Blue Horizon Hotel and many others.
Recognition and Rewards
The Company has received numerous awards for its exceptional achievements and have beenduly recognized by prestigious institutions, some of which are:
• India’s Most Admired Company Award by Construction World - NICMAR
• Architect and Builder’s Award by Construction World, for being amongIndia’s top ten builders
• Best Developer From South India by Real Estate Observer
• Best Executed Project in India Award for residential project Sobha Malachite atJakkur, Bangalore jointly by CNBC, ICICI and CRISIL
• ‘Best of the Best’ Award for Employee Care Centre (ECC), built forInfosys, Pune
A seperate section on the Awards received by the Company during the year is providedelsewhere in the Annual Report.
C. BUSINESS MODEL AND DELIVERY MECHANISM
The Company has developed a unique business model in the Indian Real Estate andConstruction industry. It’s primary business is development of own real estatespaces. However, it has successfully leveraged its construction expertise to grow intoother associated business segments – Contracting, Manufacturing and Services cateringto third party customers as well. This unique business model has proved to be verysuccessful and is characterized by the following features:
• Superior control over the delivery time and quality
• Continuous enhancement of construction expertise through adoption of market
• innovations and best practices
• Stable source of revenue
• Flexibility to grow into associated businesses in future
D. INTEGRATED DELIVERY AND SUPPORT MECHANISM
The Company’s philosophy is to continuously strive towards enhancing customervalue by delivery of high quality products at the best prices, understanding thecustomers’ changing needs and catering to them in the best possible manner. Customersatisfaction is the primary motto in its philosophy. Over the years, the Company’s"Backward-integrated Delivery Model" has helped immensely to achieve thisobjective due to better control on quality, cost and delivery. The Company has a greatpotential to optimize its manufacturing capacity to increase its scale and margins in thecoming years.
The Company has developed in-house expertise in the entire gamut of constructionactivity space – including design (through a design studio of architectural,structural and MEP), planning & estimation, project execution (civil, mechanical,electrical, infrastructure, metal works, interiors) and integrated project management.Additionally, it has set up a separate quality and safety department, headed by Germanmaster masons, which ensures the best quality product for the customers.
Sobha Training Academy supports the execution team by providing intensive in-housetraining to technicians. So far, over 6,500 technicians have undergone training in theAcademy.
The Customer Relationship Management department, first of its kind in Indian realestate industry, assists customers in the purchase and possession process and workstowards enhancing customer satisfaction. The Company has set up and implemented a model inwhich a strong in-house expertise is developed for the entire range of activities in realestate and construction.
E. COMPANY’S COMPETITIVE STRENGTHS
Strong presence in the South
The Company has good knowledge of the market and regulatory environment in Southernstates where it predominantly operates. Most of its completed and ongoing projects arelocated in Tier 1 or Tier 2 cities of Karnataka, Maharashtra, Kerala and Tamil Nadu. It isalso planned to launch projects in NCR region, in line with a pursuit for a pan-Indiapresence. The Company is in to attractive real estate markets in terms of return oninvestment, product positioning and depth of demand for all segments and price points.
Established brand image and reputation
The Company’s brand is the differentiating factor which helps it to establishconfidence in customers.
More variety of projects in the pipe line
The Company’s planned projects are catering to the needs of different segments ofsociety and therefore offer good potential of demand. The Company’s sale model isrobust and time-tested.
Better cash flow visibility
With the proposed launch of 11 Million square feet of space and expected betterrealization on its projects, there is a better cash flow visibility for the Company.
Strong and stable management team with proven ability
The Company has a well experienced management team which has extensive andstructured knowledge of all processes. The team has a long term vision to carry out theCompany’s strategic initiatives.
Financial strengths
The Company follows a conservative debt policy and has reduced its debts substantiallyduring the year and has further plans to reduce it in the coming years.
Strategically located land bank
It is a distinct advantage to the Company that it has a good land bank in strategicareas which can be used by the Company in the best possible manner.
Proven execution capability
The Company is a knowledge-based organization and encourages research for projects andtraining for people. It has a strong and resourceful execution team. The Company hasexperience in developing the properties in diverse conditions, yet delivering the same ontime. The Company has trained staff and has demonstrated continuous improvement andscalability so also execution skills in various projects.
Control over supply chain through backward integration
The Company has a unique business model which gives it a comfort of total control onsome of the major inputs, its quality, delivery and services.
Attention to details
The Company has always been giving enormous importance to the motto ‘attention todetails’. It has been continuously making concerted efforts to improve the quality bypaying detailed attention to every aspect of construction from design, drawing andapproval stage to finishing and handover. The detailing is facilitated by attention tofocus, flexibility and speed. The Company believes that ultimately, the key to quality inevery aspect of our lives is, doing even little things correctly all the time, every time,so that each action produces an excellent result.
F. OVERALL STRATEGY
On the basis of learning from the past and also keeping in line with the business mottoto get pace with the potential growth phase in future, the Company has developed a tightlyintegrated strategy to achieve"Sustainable and Profitable Growth, ConsistentOperating Margin and Improving the Cash Flow".
Revenue Growth
•New project launches in existing locations and focus on higher market share
• Entry into new cities
• Increased growth in the contractual business
• Higher capacity utilization in factories
Brand Focus
• Adopting innovative marketing strategy
• Brand building and sustenance
Execution, delivery and customer delight
• Greater emphasis on details
• Timely delivery
• Assured quality at all costs
Cost control
• Better product mix
• Specialization and economies of scale
• Reducing wastage
• Time management in execution
• Better labour productivity
• Proper debt equity ratio, to reduce cost of borrowing and capital
• Matured systems of checks and balances in processes
Land policy
• Proper due diligence
• Timely risk assessment and management
• Monetization as per needs
As an integrated approach in core strength, the Company has planned and initiated largeprojects with over one million square feet of development in Chennai. It has also made aconcrete plan to launch township projects in new markets of NCR, Pune and Coimbatore. Ofthe 11 million square feet area of development planned in next year, over 90% would be inthe residential segment.
G. KEY CHALLENGES
There are certain key challenges and threats that need to be actively addressed andmitigation steps to be taken as and when required. These challenges can be summarized asfollows:
• Increasing input material costs leading to higher cost of construction.
• Hardening of interest rates with a potential risk of lower demand, delay ingetting project funding and higher interest cost for the Company
• Increasing labor cost and shortage of skilled and technically qualified manpower
• Land prices still continue to be high
• Lack of desirable progress in development of infrastructure specifically in theareas of roads, water and sewage systems, power, etc.
• Absence of industry status and institutional financing for land procurement
• Bureaucracy and lack of transparency in land dealings
H. RISK MANAGEMENT
The Company has a risk management policy in place and is continuously working towardsimproving the same. The risk management process, inter-alia, provides for review of therisk assessment and mitigation procedure, laying down procedure to inform/report to themanagement in time and periodical review of the procedures to ensure that identified risksare adequately controlled through a properly defined process.
The potential risks include:
• Assets Risks - Purchase, pricing, deployment, efficiency and usage
• Market Risks - Price, customers tastes, sentiments, preferences, income andlocation
• Competitor Risks - Quality, quantity, price, discounts and level- playing
• Human Resource Risk - Ability to attract, train, motivate, retain and rewardpeople
• Interest Rate and Credit Risk - Fluctuation in interest rates and monetarysituations
• Information Technology (IT) Risks - IT resource planning, managing, controlling,Disaster Recovery Plan (DRP)
• Land purchase Risks - Risks related to legal titles, ownership, transfers
• Project execution Risk - Project management, time, cost, quality and delivery
• Raw material Risks - Availability and pricing of raw materials and other items
• Regulatory Risks - Tax & tariff regulations, environment regulations etc.
• Statutory approval Risk - Legal clearance for building plans and governmentalclearances
I. INTERNAL CONTROL SYSTEM
The Company has an appropriate internal control system for the business processes, withregard to the efficiency of operations, financial reporting, compliance with applicablelaws and regulations. Clearly defined roles and responsibilities for all the managerialpersons have been established. The Company practises quality management system for design,planning and construction that complies with International quality standards. Alloperating parameters are periodically monitored and well controlled. Concurrent internalaudits and checks ensure that responsibilities are executed effectively. The AuditCommittee of the Board of Directors reviews the effectiveness of internal controls andsuggests improvements for strengthening it, whenever required.
J. OPERATIONAL REVIEW
The Company has taken several initiatives during the year to make it more lean,operationally efficient and innovative. Some of the initiatives are as follows:
• Continued focus on innovation, quality, execution, cost control and delivery
• Selective monetization of land bank and sale of developed plots
• Aggressive marketing strategy
• Rationalization to reduce costs
PROJECT DETAILS
This year is a very special year in the history of company on many important counts.Firstly, the top line is highest ever achieved in the history of the company. In fact, theCompany is the Rs. 1000 crore real estate company of South India. Most importantly, thegrowth has been more in the higher end apartment sale. Secondly, it has delivered maximumnumber of projects in last financial year and this is a record. It completed and handedover 36 projects aggregating 6.32 million square feet of space in the last year. Thirdly,the Company added more than fifteen new clients in contractual business during the year.Further, it has drawn a detailed plan to enter new territories such as NCR, Chennai andMysore in the next financial year which will give it an advantage of better visibility andfurther revenue growth in real estate development.
Summary of the completed and current projects as on March 31, 2011 is as follows:
(a) Completed Projects
All the completed residential projects are located in Bangalore, Thrissur andCoimbatore, The completed commercial projects are located solely in Bangalore and thecontractual projects are located in eighteen cities across India.
i. Contractual Projects
The Company has completed construction of 191 projects on a contractual basis ineighteen cities, covering 24.27 million square feet of Super Built up area. Typically,under a contractual assignment, it undertakes to perform construction for third parties onpre-agreed terms and conditions. The scope of work in contractual projects includesdesigning, civil and finishing works, electrical works, plumbing works, metal and glazingworks as well as interior works. In certain cases, it undertakes finishing and interiorsrelated work on structures that have already been built by otheRs.
ii. Residential Projects
Till date the Company has developed and constructed 58 residential projects inBangalore, Thrissur and Coimbatore aggregating 7,547 units and covering approximately16.57 million square feet of Super Built-up area.
iii.Commercial Projects
The Company has till date completed a total of 13 commercial projects measuring 1.84million square feet of Super Built up area.
(b) Current Projects
Currently, the Company is developing residential projects in four cities andcontractual projects in nine cities across India.
i. Contractual Projects
The Company is currently executing construction of 38 contractual projects for variouscorporate and other entities in a number of cities such as Bangalore, Mysore, Mangalore,Hyderabad, Pune, Chennai, Trivandrum, Coimbatore and Ooty, aggregating 7.42 million squarefeet of Super Built up area.
ii.Residential projects
The Company is presently developing 17 residential projects in Bangalore, Thrissur,Coimbatore and Pune which are at various stages of construction, aggregating 6.38 millionsquare feet of Super Built up area comprising of 2,838 units.
iii. Commercial Projects
The Company is presently developing six commercial projects in Bangalore, Thrissur andCoimbatore, which are at various stages of construction, aggregating 0.61 million sq. ft.of Super Built up area.
K. FINANCIAL RESULTS AND OVERALL BUSINESS PERFORMANCE OF THE COMPANY
The overall performance of the Company during the current financial period has beenexcellent. The Net Sales of the company stood at Rs. 14,560.89 million for the year endedMarch 31, 2011 showing an increase of 30.71% from Rs. 11,139.92 million during last yearand net profit before tax was Rs. 2,434.96 million for the year ended March 31, 2011resulting an increase of 52.00% from Rs. 1,602.71 million during the correspondingprevious year.
The summarized analysis of financial statements, viz. the Profit and Loss account andBalance Sheet is given below:
Profit and Loss Account
1. Income
The Company operating in the area of real estate development and construction focuseson residential and contractual projects. For the purpose of analysis, its revenue can besegregated as follows:
| | ( Rs. in Million) |
| Income from Operations | Year ended March 31 | Growth |
| 2011 | 2010 | % |
| Income from property development, sale of land & development rights | 10,386.89 | 8.024.58 | 29.44 |
| Income from contractual activity | 3,202.24 | 2,098.73 | 52.58 |
| Income from manufacturing | 927.33 | 982.79 | (5.64) |
| Share in profits of partnership firm (post tax) | 76.79 | 67.73 | 13.38 |
| Total | 14,593.25 | 11,173.83 | 30.60 |
The increase in revenue was primarily on account of better sales volume and betterrealization from the second half of the current financial year and also due to selectivemonetization of land. The Company has achieved an overall growth of about 30.60% in thetotal revenue during the year. The increase in net revenue was primarily on account ofimprovement in real estate and contractual business.
2. Other Income:
Other Income has increased from Rs. 52.91 million in the year ended March 31, 2010 toRs. 82.26 million for the year ended March 31, 2011, mainly due to receipt of sale ofscrap etc.
3. Expenditure
The total expenditure during the year and also the percentage of expenditure withrespect to the net revenue of the year is as follows:
| | | | ( Rs. in Million) |
| Year ended March 31,2011 | % | Year ended March 31,2010 | % |
| Revenue from operations (net) | 14,560.89 | 100.00 | 11,139.92 | 100.00 |
| 3.1 Cost of sales | 8,607.76 | 59.12 | 6,497.21 | 58.32 |
| 3.2 Personnel expenses | 1,035.17 | 7.11 | 768.27 | 6.90 |
| 3.3 Operating and other expenses | 1,857.20 | 12.75 | 1,502.72 | 13.49 |
| 3.4 Financial expenses | 429.33 | 2.95 | 498.82 | 4.48 |
| 3.5 Depreciation / Amortization | 277.73 | 1.91 | 323.10 | 2.90 |
| Total | 12,207.19 | 83.84 | 9,590.12 | 86.09 |
The detailed analysis of expenditure is given below:
3.1 Cost of Sales
| | | | ( Rs. in Million) |
| Year ended March 31,2011 | % | Year ended March 31,2010 | % |
| Net Revenue | 14,560.89 | 100.00 | 11,139.92 | 100.00 |
| Cost of sales | | | | |
| Land Cost | 1,713.44 | 11.77 | 1,464.82 | 13.15 |
| Construction cost | 5,490.21 | 37.71 | 3,847.24 | 34.54 |
| Raw material | 700.67 | 4.81 | 665.86 | 5.98 |
| Production expenses | 237.18 | 1.63 | 213.15 | 1.91 |
| Decrease/ (increase) in inventories | 466.26 | 3.20 | 306.14 | 2.75 |
| Total Cost of Sales | 8,607.76 | 59.12 | 6,497.21 | 58.33 |
a) Land Cost
The Company, while obtaining clear and marketable titles free from all encumbrances andtransfer of legal title in its name, charge the amount to land cost from loans andadvances paid to the seller/ intermediary. When income is not recognized for the undividedshare of land, it is transferred to work-in-progress.
b) Construction Cost
Construction cost mainly consists of materials towards civil, electrical and finishingworks. Due to more number of projects (real estate) and works carried out during the year,the overall construction cost has increased to Rs. 5,490.21 million in the current yearfrom Rs. 3, 847.24 million in the previous year resulting in increase in construction costfrom 34.54% of net revenue in the previous year to 37.71% of net revenue in the currentyear. This increase was mainly due to increase in the cost of materials and itsprocurement.
c) Raw Materials
It represents the total raw material cost of manufacturing divisions. The raw materialscosts are increased to Rs. 700.67 million from
Rs. 665.86 million during the previous year mainly due to increase in prices of rawmaterials and logistic costs.
d) Production Expenses
This expense represents the production expenses of the manufacturing divisions. Itincludes the following heads of expenses for the manufacturing divisions during the year.
Production and productivity were affected partially due to cessation of activities inthe Interior Division factory during March 2011
e) Decrease/ (increase) in inventories:
Inventory consists of Building materials, work in progress, stock in trade-flats andfinished goods at factories.
The costs associated with un-recognized revenue are transferred to work-in-progress.This includes the construction cost, land cost, etc. Closing inventory is less by Rs.466.26 million as on March 31, 2011 as compared to Rs. 306.14 million as on March 31,2010, mainly due to the effect of reduction in the closing work in progress and increasedstock-in-trade of property reflected in the closing inventory of the current year. Therevenue from the work-in-progress will get realized in subsequent years based on the salesmade of those projects which were lying as work-in-progress as on the last day of theyear.
3.2 Personnel Expenses
The personnel expenses have increased to Rs. 1,035.17 million in the current year fromRs. 768.27 million during last year. These expenses include salaries & bonus,contribution to funds, gratuity & leave encashment provision, staff welfare and otherexpenses.
| | | | ( Rs. in Million) |
| Concrete Products | Interior | Glazing | Total |
| Particulars | Year ended March 31 | Year ended March 31 | Year ended March 31 | Year ended March 31 |
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 |
| Direct wages | 6.23 | 4.75 | 85.18 | 84.23 | 69.29 | 92.81 | 160.70 | 181.79 |
| Power and fuel | 5.20 | 5.02 | 10.70 | 9.34 | 3.11 | 2.70 | 19.01 | 17.06 |
| Labour charges & Other direct expenses | - | 0.17 | 22.69 | 13.13 | 34.78 | 1.00 | 57.47 | 14.30 |
| Total | 11.43 | 9.94 | 118.57 | 106.70 | 107.18 | 96.51 | 237.18 | 213.15 |
The total strength of employees has increased from 1,852 as on March 31, 2010 to 2,224as on March 31, 2011 resulting in an increase of 20.08% in absolute strength over previousyear. Personnel expenses have gone up from 6.90% of the net revenue during the last yearto 7.11% of the net revenue in the current year. Increase in personnel expenses was notonly on account of higher number of employees employed during the year but also due toincrease in salaries, increments and other consequential benefits given to employees. Inspite of the negative business sentiment that was seen in the preceding years, the Companyannounced its annual increments of salaries to employees during the first quarter of thecurrent year. Increment rate was about 10% which was above industry average for theperformance year.
3.3 Operating and other expenses
The operating expenses have increased to Rs. 1,857.20 million in the current year fromRs. 1,502.72 million of the previous year. The Company had taken several steps to reducefixed costs of operation, reduce operational overheads and improve the efficiency. Effortswere made to reduce wastages at all levels. As a result, the operating and other expenseswhich were about 13.49% of net revenue during last year have come down to 12.75% of netrevenue during the current year.
| | | | ( Rs. in Million) |
| Particulars | Year ended March 31,2011 | % | Year ended March 31,2010 | % |
| Net Revenue | 14,560.89 | 100.00 | 11,139.92 | 100.00 |
| Electricity charges | 51.00 | 0.35 | 36.06 | 0.32 |
| Insurance charges | 20.41 | 0.14 | 17.49 | 0.16 |
| Sales tax & others | 634.46 | 4.35 | 509.74 | 4.57 |
| Freight outwards | 28.05 | 0.19 | 28.11 | 0.25 |
| Donation | 36.21 | 0.25 | 99.87 | 0.90 |
| Registration expenses - flats | 191.75 | 1.32 | 210.20 | 1.89 |
| Rent | 128.08 | 0.88 | 112.45 | 1.01 |
| Legal and professional charges | 113.92 | 0.78 | 117.21 | 1.05 |
| Repairs and maintenance | 33.51 | 0.23 | 25.80 | 0.23 |
| Advertisement and sales promotion expenses | 228.53 | 1.57 | 123.13 | 1.11 |
| Bad debts written off | 18.25 | 0.13 | - | - |
| Traveling and conveyance | 83.10 | 0.57 | 59.90 | 0.54 |
| Miscellaneous expenses | 289.93 | 1.99 | 162.76 | 1.46 |
| Total | 1,857.20 | 12.75 | 1,502.72 | 13.49 |
4.Operating profits (Profit before interest, depreciation and tax)
The company has earned an operating profit of Rs. 3,143.02 million, representing 21.59%of total revenues as compared to Rs. 2,424.63 million, representing 21.77% of totalrevenues during the previous year. Reduction in operating profit is marginally less by0.18% over the previous year. It shows that while achieving increased turnover, theoperations were carried out more efficiently and economically in order to maintain theoperating profit at almost the same level.
5.Financial Expenses
Financial expenses include interest on term loans, bank loans etc. and bank charges.The Company has charged interest and finance charges to profit & loss account to theextent of Rs. 429.33 million and Rs. 498.82 million for the year ended March 31, 2011 andMarch 31, 2010 respectively. Finance expenses represented about 2.95% of total revenue inthe current year as compared to 4.48% in the last year which was possible mainly due toreduction in borrowings. Average interest cost of debt was contained at 12.91% during theyear.
6.Depreciation and Amortization
The Company has provided for Rs. 277.73 million and Rs. 323.10 million towardsdepreciation and amortization during year ended March 31, 2011 and March 31, 2010respectively, representing 1.91% and 2.90% of total revenue in respective year. Thedepreciation amount as a percentage of average gross block (excluding land) is 9.12 % and11.50% for the year ended March 31, 2011 and 2010 respectively.
7.Net profit
The net profit after tax has increased from Rs. 1, 366.62 million for the year endedMarch 31, 2010 to Rs. 1, 824.60 million for the year ended March 31, 2011 showing anexcellent growth rate of about 33.51% in net profit over previous year.
| (Rs. in Million) |
| For the year ended March 31 |
| Particulars | 2011 | 2010 |
| Total Revenue | 14,560.89 | 11,139.92 |
| Profit before Tax (PBT) | 2,435.96 | 1,602.71 |
| Profit after Tax (PAT) | 1,824.60 | 1,366.62 |
| PBT as % of total revenue | 16.73% | 14.39% |
| PAT as % of total revenue | 12.53% | 12.27% |
The Company has performed well during the year and is able to improve its profit beforetax (PBT) rate from 14.39% of total turnover during the previous year ended March 31, 2010to 16.73% of total turnover during the current year ended March 31, 2011.
The Company’s revenues, EBIDTA margins and profits have significantly grown duringthe year as compared to previous year as shown below: Revenue and Profit Scenario
| | (Rs. in Million) |
| For the year ended March 31 | Growth |
| Particulars | 2011 | 2010 | % |
| Real Estate Income | 10,464 | 8,092 | 29 |
| Contractual Income | 4,130 | 3,082 | 34 |
| Earning before interest, depreciation and taxes(EBIDTA) | 3,143 | 2,425 | 30 |
| Profit before taxes(PBT) | 2,436 | 1,603 | 52 |
| Profit after taxes(PAT) | 1,825 | 1,367 | 34 |
Note: Real Estate income includes sale of land and development rights and share ofprofits from a partnership firm. Contractual income includes income from manufacturing aswell.
Revenue and PAT are growing at a Compounded Annual Growth Rate (CAGR) of about 31% and34% respectively since the financial year 2008-09. The Company’s performance in termsof profitability has improved considerably over a period of 3 years
Balance Sheet
With a net worth of Rs. 18,566.23 million and Debt Equity Ratio of 0.65 as on March31,2011, the Company has consistently improved its financial position and the leverageratio. The Company has met stakeholders’ interests in time during the year includingcommitments towards repayment of loan, interest servicing to banks and payment ofstatutory dues.
1. Shareholders Funds
The share capital remained constant at Rs. 980.64 million as on March 31, 2011 whileReserves and Surplus have increased from Rs. 16, 104.04 million as on March 31, 2010 toRs. 17,585.59 million as on March 31, 2011 showing a healthy capital gearing ratio.
2. Loan Funds
Secured loans saw a reduction from Rs. 14,465.85 million as on March 31, 2010 to Rs.12,026.17 million as on March 31, 2011 showing a better debt equity ratio in the currentyear. Unsecured loans marginally went up from Rs. 74.50 million as on March 31, 2010 toRs. 83.48 million as on March 31, 2011,
3. Fixed Assets
Gross Fixed assets grew marginally to Rs. 3, 147.69 million from Rs. 2,942.11 millionmainly on account of additions in the asset blocks of plant and machinery, buildings,computers etc.
4. Investments
Trade and non-trade investments of the Company increased from Rs. 429.35 million as onMarch 31, 2010 to Rs. 516.09 million as on March 31, 2011
5. Deferred Tax Assets (Net)
Deferred tax assets/liability represents timing differences in the financial and taxbooks primarily arising from depreciation of assets with different rates and expendituredisallowed under section 43 B of the Income Tax Act, 1961, which are allowed in the yearof payment. Deferred tax assets are recognized only to the extent that there is reasonablecertainty that sufficient future taxable income will be available against which suchdeferred tax asset can be realized. Deferred tax assets (net) increased from Rs. 51.52million as on March 31, 2010 to Rs. 73.79 million as on March 31, 2011.
6. Current Assets, Loans and Advances
Inventories were brought down from Rs. 10,173.94 million as on March 31,2010 to Rs.9,726.35 million as on March 31, 2011. A major portion of inventory was attributed towork-in progress which was reduced from Rs. 9,882.39 million as on March 31, 2010 to Rs.9,193.91 million as on March 31, 2011.
Sundry Debtors were Rs. 3,913.93 million and Rs. 4,165.80 million as on March 31, 2011and March 31, 2010 respectively. Since the ownership of apartments is transferred toclients only upon full settlement of their dues, the Company considers the debtors as goodand realizable.
Loans and Advances were Rs. 21,516.60 million as on March 31, 2011 as compared to Rs.20,093.23, million as on March 31, 2010. Advances are primarily towards amounts paid inadvance for purchase of land or for other value and services to be received in future. TheCompany considers the advances/deposits towards land as good since these advances arebacked by arrangements/ memoranda of understanding / agreements executed by the Companyand the Company/seller/intermediary in the course of obtaining clear and marketable titlesfree from all encumbrances.
With good collection efforts, the overall debtors were brought down from Rs. 4,165.80million as on March 31, 2010 to Rs. 3,913.93 million. As on March 31, 2011.
Cash and Bank Balances reduced from Rs. 800.36 million as on March 31, 2010 to Rs.275.35 million as on March 31, 2011 mostly held in current account and deposit accountsmaintained at various banks. The deposit accounts represent deposits for short tenures,margin money deposits towards loan escrow account and other non-fund based utilization oflimits.
7. Current Liabilities and Provisions
Current Liabilities include sundry creditors for supply of materials and provision ofservices, bank overdraft, advance from customers and interest accrued but not due andother liabilities. This has increased from Rs. 5,613.19 million as on March 31, 2010 toRs. 6,455.31 million as on March 31, 2011. Advance from customers in current liabilitiesdenote monies received for the delivery of final products on future dates and amountreceived towards this income is yet to be recognized in the books of accounts.
Provisions include proposed dividend, corporate dividend tax, provision for leaveencashment and gratuity, provision for taxation etc. Total Provisions were Rs. 537.09million and Rs. 931.70 million as on March 31, 2010 and March 31, 2011, respectively.
The Company has considerably improved its financial position during the year showingimprovement in all the important ratios and financial parameters such as in Profitability,Liquidity, Leverage and Cash Flow.
1. Liquidity
The Company broadly defines liquidity as its ability to generate sufficient funds fromboth internal and external sources to meet its obligations and commitments. It hasfinanced capital requirements primarily through funds generated from its operations andborrowings. Working capital requirements were met by short term borrowings and internalaccruals
2. Leverage
The debt equity ratio of the company as on 31st March 2011 is at 0.65 as compared to0.85 as on March 31, 2010.
Equity and debts positioning
| (Rs. in Million) |
| As on March 31 |
| Particulars | 2011 | 2010 | 2009 | 2008 |
| Equity Share capital | 981 | 981 | 729 | 729 |
| Reserves | 17,585 | 16,104 | 10,166 | 9,154 |
| Debts | 12,110 | 14,540 | 19,122 | 17,630 |
| Net Worth | 18,566 | 17,085 | 10,895 | 9,883 |
| Debt Equity Ratio | 0.65 | 0.85 | 1.76 | 1.78 |
Debt Equity ratio has come down substantially from 1.78 as on March 31, 2008 to 0.65 ason March 31, 2011 showing a healthy and improved leverage ratio. The Company’s grossdebts which were at Rs. 14,540 million at the beginning of the year has been reduced toRs. 12,110 million as at the year end which indicates that we have been able to achieve agood positive cash flow from operations during the year to repay the debt. The targeteddebt equity ratio is 0.50 to 0.60 by the end of the next fiscal. The Company is confidentof achieving this target.
3. Cash flow
The table below summarizes the Company’s cash flow for the periods indicated:
| | (Rs. in Million) |
| Particulars | 2010 -11 | 2009 -10 |
| Net cash generated from / (used in) operating activities | 4,143.60 | 3,277.63 |
| Net cash generated from / (used in) investing activities | (218.68) | (124.07) |
| Net cash generated from / (used in) financing activities | (4,449.93) | (2,563.71) |
| Net cash increase / (decrease) in cash and cash equivalents | (525.01) | 589.85 |
(i) Operating Activities
Net cash generated from operating activities was Rs. 4,143.60 million in Fiscal 2011.Net cash generated from operating activities consisted of profit before tax of Rs.2,435.96 million as adjusted for interest expenses of Rs. 352.36 million and non-cashitems such as depreciation and amortization of Rs. 277.73 million. This amount waspartially offset by a decrease in cash generated from working capital movements which wasprimarily due to increase in loan and advances amounting to Rs. 506.26 million. Meanwhile,there was also a Rs. 863.74 million decrease in inventory, Rs. 251.87 million decrease indebtors and a Rs. 862.32 million increase in current liabilities and provisions.
As against above, Net cash used in operating activities was Rs. 3,277.63 million inFiscal 2010. The company had a profit before tax of Rs. 1,602.71 million, which wasadjusted for and interest expenses of Rs. 438.11 million and non-cash items such asdepreciation and amortization of Rs. 323.10 million. This amount was offset by a decreasein cash generated from working capital movements which was primarily due to an increase indebtors of Rs. 612.56 million. Meanwhile, there was also Rs. 569.28 million decrease ininventory, Rs. 523.74 million decrease in loans and advances and Rs. 623.57 millionincrease in current liabilities and provisions.
(ii) Investing Activities
Net cash used in investing activities was Rs. 218.68 million in Fiscal 2011. We hadused Rs. 229.78 million for the purchase of fixed assets, which was partially offset in asmall way by way of Rs. 5.44 million, generated from the sale of fixed assets and Rs.15.61 million towards interest received during the period.
As against above position, Net cash used in investing activities was Rs. 124.07 millionin Fiscal 2010. We had used Rs. 650.00 million for the purchase of investments and Rs.139.41 million for the purchase of fixed assets, which was partially offset by Rs. 650.00million, generated from the sale of investments.
(iii) Financing Activities
Net cash used in financing activities was Rs. 4,449.93 million in Fiscal 2011, whichprimarily included Rs. 6,408.27 million for the re-payment of secured loans and interestpayment of Rs. 1,732.12 million. There was also an outflow due to dividend paid amountingto Rs. 245.46 million. This amount was partially offset by Rs. 3,968.59 million comingfrom proceeds of fresh inflows from secured loans.
Net cash used in financing activities was Rs. 2,563.71 million in Fiscal 2010, whichprimarily included Rs. 6,407.21 million for the repayment of secured loans and interestpayment of Rs. 2,447.98 million. There was also an outflow due to refund of shareapplication money amounting to Rs. 474.70 million. This amount was partially offset by Rs.5,094.00 million coming from proceeds of issue of shares and Rs. 1,838.00 million freshinflows from secured loans.
L. EMERGING TRENDS AND FUTURE OUTLOOK
Improved demand for housing space during 2010 was witnessed across most residentialmarkets, mainly driven by economic recovery and positive market sentiments. Chennaiwitnessed the highest rental and capital value appreciation during the year compared toother major cities in the country mainly due to improved quality of new projects.
The residential segment in select micro markets of NCR witnessed growth during the yearwith significant increase in rental and capital values, says a Cushman & Wakefieldreport.
Bangalore Market
Bangalore’s residential market and its price have to a large extent remainedstable during 2010. The demand in the end-user driven mid-segment was considerably better.A number of projects were close to completion /ready for occupation in 2010. As such, thegenuine end-users had a variety of projects to choose from. Capital values across allmicro markets however, recorded appreciation in the range of 6-19 per cent compared to thevalues as at the end of 2009. Rental values too demonstrated stabilization during theyear. However, the micro markets in South Bangalore were observed to record significantrise across both segments on account of continued strong demand. Better infrastructurecoupled with better connectivity to prime business districts too has propelled thenorthward movement in the rentals.
Buoyant demand and positive outlook in the IT/ITES sector is likely to increase thecapital values marginally in central and northern micro markets of the city whereas othersare expected to continue with a stable trend in 2011. Rental values too are likely toremain stable in the short term
The demand for up-market homes which has been lying low for some time has triggered anew wave of buyers now. The predominant requirement obviously emanates from the top andmiddle rungs in society towards lifestyle homes that blend ethnic architecture withcontemporary features. Increase in affordability levels, improved lifestyle andinternational travels are attributed as predominant reasons for the shift in trend amongIndians to go in for spacious homes for which they are prepared to pay the extra premium.Companies have to have an ability to conceive, innovate and provide value for money at thesame time. Features like aqua gym and home automation incorporating the green buildingconcept are among the expectations of niche segment customers.
The outlook in the medium term appears bright also in the background of infrastructureimpetus, fiscal incentives and the ambitious growth targets aimed at by the Government.
M. CAUTIONARY STATEMENT
Statements in the Management Discussion and Analysis describing the company’sobjectives, projections, estimates, expectations may be "forward lookingstatements" within the meaning of applicable security laws and regulations. Actualresults could differ materially from those expressed or implied. In accordance with theCode 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 externalto the company, no representation is made on its accuracy and comprehensiveness though thesame are based on sources believed to be reliable. Utmost care has been taken to ensurethat the opinions expressed by the management herein contain its perceptions on thematerial impacts on the company’s operations but it is not exhaustive.