MANAGEMENT DISCUSSION AND ANALYSIS
Unitech Limited (also referred to as 'Unitech' or 'the Company') is one of India'sleading real estate developers with capabilities across a wide range of verticals. Overthe years, the Company has developed a large and diversified pan-India land bank. And, thefocus in the core 'real estate development' business is to utilise this land bank andoffer products that appropriately cater to different segments of the Indian market. Lot ofemphasis is laid on creating a de-risked business with a diversified product portfolio interms of geography and type of projects. While there is stress on affordable andmid-income housing, the Company is also into high-end development in select markets.
With growth in size of its operations, many of the Company's related verticals haveattained operating scales where they need to be nurtured in a focused manner likeindependent businesses. In 2010-11, in order to create greater focus, the Company hasre-organised these other related businesses under the 'infrastructure' business umbrella.This includes construction, property and facilities management and transmission towers.
MACRO ECONOMIC ENVIRONMENT
After the slowdown in 2008-09, the
Indian economy recovered since Q2, 2009-10. And, the recovery momentum continuedthrough 2010-11 (see Chart A). With over 8% growth in every quarter, advanceestimates suggest that India's GDP growth will be 8.5% in 2010-11. This is on the back of8% growth registered in 2009-10. Clearly, this type of sustained growth will result inincrease in income levels and consequent growth in demand for real estate. Also, for theeconomy to maintain these levels of growth over a period of time, it will need to investsubstantially in developing pre-requisite physical infrastructure. Hence, one expectsseveral opportunities in the construction and infrastructure space in India in the nearfuture.
Already, in line with economic growth, construction activities have started picking up.Chart B shows that after falling to a low of 5.4% growth in 2008-09, constructionindustry value added increased by 7% in 2009-10 and by 8% in 2010-11. While these growthrates are still below pre-crisis levels, the positive trend witnessed through 2010-11re-emphasises the recovery in the construction industry in India.
While opportunities exist for infrastructure development, there is still quite some gapin terms of implementation. The existing infrastructure base in India is grosslyinadequate. A consequence of this is the high cost push inflation witnessed since thebeginning of 2010. Driven primarily by significant increase in prices of food and othercommodities, inflation has remained at over 8% since then. In addition, since thebeginning of 2011, there has been a sharp increase in price of fossil fuels and energycosts. Chart C plots the high levels of the wholesale price index based inflationsince the beginning of 2010.
Apart from the impact on input prices, this kind of commodity price based inflationaffects the real estate and construction industry in two ways. First, high levels ofinflation result in lower disposable incomes and reduce consumer sentiments. Hence, thereis often a reduction in demand for real estate. Second and more importantly, in order tocurb inflation and stabilise the economy, the Reserve Bank of India (RBI) has had to adopta conservative monetary policy. Consequently, the repo rate (the rate at which banksborrow from the RBI) has increased steadily from 5% in March 2010 to 6.75% in March 2011.With an increase in this benchmark rate, rates at which banks extend housing loans alsoincrease substantially. This makes housing finance more unaffordable and puts pressure onhousing demand.
For Unitech, the macro-economic environment provided both positive and negativesignals. On the one hand, high economic growth trajectory meant more opportunities in bothreal estate and infrastructure in the long term. On the other hand, inflation and risinginterest rates was a dampener to demand in the short term.
In this environment, Unitech focused on its internal strategic and operationalimperatives. While in the core real estate business, the focus has been on enhancingquality of implementation to efficiently monetise its large land bank; in theinfrastructure business, the Company focused on re-organising itself and strengtheningdifferent businesses within its infrastructure portfolio.
Unitech's real estate business comprises:
Residential, commercial and retail space development
Integrated township development
In-house project management
As was reported in last year's Annual Report, recovery in the real estate market beganin March 2009 with revival in demand for affordable housing. This was followed byrestoration in demand for higher-end residential housing during the second half of2009-10. Consequently, since September 2009, residential property prices have increased byvarying degree across the country. This trend continued in 2010-11. While demand forresidential housing remains healthy across segments, real estate players need to developand position their offerings correctly to best leverage the market opportunities, whichare today largely governed by end-user demand.
With an increase in demand from the IT and ITES sectors, there has been an improvementin demand for commercial property. Given the over-supply conditions in the market, thishas not resulted in any major increase in leasing rates but has significantly improvedoccupancy rates.
Unitech has a unique positioning in terms of its land bank. It has a large presenceacross all large metropolises across the four regions of India - NCR (North), Mumbai(West), Chennai (South) and Kolkata (East). In addition, it has presence in several keytier 2 cities, which are poised for good growth. The diversified land bank can be used tooffer a wide variety of products. These include:
Plots, low-rise, mid-rise and high-rise developments
Suburban as well as city centre developments
From low cost to luxury, with a focus on affordable housing
As has been stated before, the Company's focus is now on utilising this diversifiedland base to emerge as the market leader in residential property in India. Diversifiednature of the Company's projects is likely to ensure countercyclical, stable cash flows.
In 2009-10, the Company had initiated a very aggressive programme of new launches withrecord sales. With these new launches, Unitech's new order book, in terms of projects tobe executed had grown significantly. In fact, the Company has reached a different level ofoperations in terms of number of projects being executed across the length and breadth ofthe country. The new level of operations requires enhanced project management andconstruction skills and in 2010-11, the Company laid much greater emphasis on enhancingits project execution capabilities.
Segment revenue from real estate increased by 11% from Rs.2,429.93 crore in 2010-11 toRs.2,700.32 crore in 2010-11. The profit before tax, interest and unallocable overheadswas Rs.956.05 crore in 2010-11.
New Project Launches and Sales
While new launches and sales activities reduced in comparison to 2009-10, there wasstill a considerable amount of activity on this front.
Table 1 lists the total area of projects launched across different geographies. Ofthe total 10.4 million square feet (sqft) launched in 2010-11, 3.9 million sqft waslaunched in Gurgaon, 2.2 million sqft in Noida and Greater Noida, 1.4 million sqft inChennai, 1.3 million sqft in Kolkata and 1.6 million sqft in other cities.
Table 1: New Launches in 2010-11
|Particulars ||Area Launched |
| || |
(in million sqft)
|Gurgaon || |
|Noida + G Noida ||2.2 |
|Chennai ||1.4 |
|Kolkata ||1.3 |
|Other Cities ||1.6 |
|Total ||10.4 |
A total of 9.2 million sqft was sold during 2010-11. The total area sold was valued atRs.4,323 crore. With a share of 48%, Gurgaon had the largest share of sales, followed byNoida and Greater Noida with 20%, Chennai with 11%, Kolkata with 10% and other cities with11%. Table 2 gives the geography-wise details of sales in 2010-11.
Table 2: Project Sales in 2010-11
|Particulars ||Area Sold |
| || |
(in million sqft)
|Gurgaon || |
|Noida + G Noida ||1.8 |
|Chennai ||1.0 |
|Kolkata ||1.0 |
|Other Cities ||1.0 |
|Total ||9.2 |
In terms of area sold, 83% was from the residential segment while 17% was fromnon-residential. However, with a higher average realisation of Rs.6,585 per sqft comparedto the residential segment's average realisation of Rs.4,341 per sqft, the non residentialsegments share in total sales, in value terms was slightly higher at 24%.
Commercial Leasing Business
Unitech mainly operates through a lease-out model for the IT/ITeS office developments,where the focus is on regular cash flows from lease rentals, while the underlying physicalasset remains under the ownership of the Company. Hence, such development is not reflectedin the non-residential sales numbers reported in the preceding section. The commercialtenancy business has started showing very promising signs during the year. Approximately2.5 million sqft of space was leased out during 2010-11. With this the total leased areaincreased to 4.9 million sqft.
There are positive signs in this market. However, in some areas there is significantcompetition and excess supply. The Company shall balance carefully its future constructionwith the progress in leasing out, while maintaining an appropriate area of speculativebuilding becoming available for early occupation.
With these new launches, Unitech currently has about 80 ongoing projects covering atotal of approx. 40 million sqft of area to be constructed and delivered in the comingyears. Of these, 31 projects covering 12.7 million sqft are from launches prior to March2009. Clearly, in terms of execution, Unitech has reached a scale that is a significantnotch above its usual operations.
Having said so, different projects are at different stages of execution.
Status of projects launched prior to March 2009
Chart D gives the various stages of execution as on 31st March, 2011 forongoing projects that were launched prior to March 2009.
The details are:
19 projects covering 17.7 million sqft area are in the handover or finishingstage. These include the following projects - The Close (South), The Close (North), WorldSpa (East), World Spa (West), Espace, Fresco, Nirvana Courtyard, Escape, Harmony andArcadia in Gurgaon; Horizon, Heights, Cascades and Habitat in Greater Noida; Gardens,Horizons, Heights and Downtown in Kolkata; South City Gardens in Lucknow
5 projects covering 3 million sqft area have their structure complete andinternal work is in progress. These include Business zone in Gurgaon; Verve in GreaterNoida; Cascades and Harmony in Kolkata; Executive Floors in Mohali
4 projects covering 2.1 million sqft have piling and structure work in progress.These include Uniworld Resort Villas in Gurgaon; Air and Gateway I in Kolkata; UnitechGolf & Country Club (UGCC) Amber in Noida
3 projects covering 0.9 million sqft are in the pre-construction stage. Theseinclude plotted development in Mohali Uniworld City.
With this, 46% of the total area has been delivered as on 31st March, 2011,while 54% is left to be delivered. In terms of regions the percentage of area delivered is61% in Gurgaon; 37% in Noida and Greater Noida; 34% in Kolkata; and 29% in other cities. ChartE plots the data.
Status of projects launched
since March 2009
Chart F gives the various stages of execution as on 31st March, 2011 forongoing projects that were launched since March 2009.
The details are:
2 projects covering 0.2 million sqft are being handed over or are in thefinishing stage. These include Commercial Tower in Greenwood City and shops in SouthCity-2, Gurgaon.
3 projects covering 3.6 million sqft have their structure complete and internalwork is in progress. These include Nirvana Floors, Gardens II and The Residences inGurgaon
21 projects covering 10 million sqft have piling and structure work in progress.These include Sunbreeze, Vistas, South City II floors, Commercial Sec 71, Uniworld Towers,and Signature Towers II in Gurgaon; Vistas, Chambers and Gateway Phase II in Kolkata;Ananda, Brahma, Palm Villas, Unihomes, Unihomes 2, Gulmohar Avenue in Chennai; UGCCBurgundy, Unihomes Ph-1 and Ph 2, Uniworld Gardens and The Residences in Noida; andUnihomes in Bhopal
15 projects covering 4.8 million sqft have pre-construction activities inprogress. These include Nirvana Country II, Exquisite, South Park, Espace Premiere inGurgaon; Singleton Floors, Unihomes, Aspen Greens in Mohali; Aspen Greens and Gardens inChennai; Gardens Galleria in Lucknow; Unihomes plotted in Greater Noida; The Willows andUnihomes 3 in Noida; Fresco in Kolkata; and Unihomes in Rewari
2 projects covering 0.2 million sqft are yet to start. These include GardensGalleria and Uniworld Gardens in Mohali
It is noteworthy that most of the projects launched post March 2009 have already seensome progress in terms of project execution. And, construction work has commenced in 73%of the area to be developed. A couple of projects are already in the handing over anddelivery stage. Clearly, the Company is focusing on fast-tracking its execution andproject delivery.
To execute such large widespread projects, the Company has mobilised a large number ofworkers across its different sites. The total construction workforce employed as on 31stMarch 2011 was over 20,000.
In order to efficiently execute the much higher scale of projects across markets,Unitech had to substantially upgrade its operations. In 2010-11, a lot of effort has goneinto further enhancing the Company's internal execution capabilities.
Enhancing Internal Execution
Clearly, both in terms of sales and projects under execution, Unitech is now operatingat a higher level. On the one hand, various measures being undertaken to enhance internalcapabilities focus on reducing construction time as well as cost. On the other hand, thereis also a concerted effort at increasing controls and supervision to deal more efficientlywith project related issues across geographies. In this pursuit, there is alsoconsiderable effort at defining ways of working, which is unique to Unitech. At a macrolevel, the initiatives focus on the following:
Product Standardisation: There is a concerted effort to have a welldefined set of practices across all projects. This converts localised methods of projectmanagement into a high volume standardized "manufacturing style" of operations.Such well-structured common set of processes and procedures also helps maintain a certainuniform standard of product delivery and builds on efficiencies arising from economies ofscale and reduction in project execution times
Process Changes: Apart from standardisation, several initiatives arebeing implemented on the ground in terms of process changes to reduce lead time
In house architectural design:
Architectural design especially for the mid-affordable housing segment is beingundertaken in house for faster turnaround.
In house engineering design: In 2009-10, Unitech had acquired astructural design firm to enhance in-house engineering design capabilities. Today, thisengineering team is being actively utilised in project execution. Benefits accrue in termsof faster turnaround and lower costs. This team also critically evaluates designsdeveloped by external firms with a focus on cost reduction
Expanding the contractor base:
With number of projects increasing and also the Company's presence widening in multiplecities, Unitech is actively growing its contracting base in different cities to be able tomeet all its subcontracting requirements
Higher mechanization: In addition to growing the vendor base there areseveral initiatives to improve vendor efficiencies. First, there is a proactive attempt atincentivising contractors to deploy more equipment and hence improve product delivery.Second, standardised methods are being deployed to qualify new vendors and evaluatepresent vendor performance. Third, is to coach vendors in better work practices
Performance incentives: These are being restructured for the projectmanagement teams
In addition to these, a more regularised and systematic review mechanism has been putin place for all projects. This includes both centralised review at the Head Office andon-site reviews. Through these reviews an audit process for the on-ground execution of newprocesses has been institutionalised. For each of these reviews, specific parameters havebeen put in place.
Human resource continues to be the backbone of Unitech's business. The Company laysstrong emphasis on attracting and retaining the best talent. Personal developmentalinitiatives including training, both technical and managerial, are regularly conducted toenhance human potential. Employee strength grew significantly during the year and as of 31stMarch 2011, Unitech had 1472 employees on its rolls.
Unitech's infrastructure division includes:
Existing infrastructure businesses comprising general construction, and design,manufacturing, erection and commissioning of transmission towers.
Development of hospitality projects, amusement parks, logistic parks, SEZs andindustrial parks
The infrastructure services business including facilities and propertymanagement services and township management services.
The demerger of this business, which was proposed in April 2010, is still in theimplementation phase. While shareholders' approvals and creditor consents were obtained on6th and 7th August 2010, respectively, the Company is still in theprocess of obtaining statutory clearances.
In the hiatus, the division has focused on organisational developments and businessdevelopment. A new CEO has been appointed. He has over 20 years experience ininfrastructure related activities.
A brief description of various businesses in the infrastructure portfolio is givenbelow:
Infrastructure: This comprises the general construction business and thetransmission towers business.
In the general construction business, Unitech has expertise across real estate projectsincluding townships, residential complexes, corporate offices, shopping centres andhospitality projects. It has a proven track record in building industrial civil structuresand in transportation projects, such as highways, flyovers and bridges. The Companypioneered the introduction of high-strength steel and ready-mix concrete to the industry.With an increased focus on real estate development, Unitech had slowed down theconstruction business in the recent years. It is now being re-emphasised under theinfrastructure platform. And, segment revenues were Rs.34.83 crore in 2010-11. Thebusiness is in re-building mode. It is building its order book by supporting theconstruction needs of the real estate division of Unitech.
The Company is in the business of design, manufacturing and erection of transmissiontowers primarily for the power sector, through its subsidiary Unitech Power TransmissionLimited (UPTL). This business is supported by a state-of-the-art manufacturing facility atNagpur.
UPTL offers a wide range of services including site survey, soil investigation, accessroads, foundations, tower design, tower testing, mobilization of manpower and equipment,testing and commissioning.
While there was a setback in operations in North Africa particularly in the Company'slong term market of Libya due to social and political unrest, UPTL witnessed a stronggrowth in revenues. Segment revenues grew by 91.6% from Rs.95.83 crore in 2009-10 toRs.183.63 crore in 2010-11. While, profits before interest and un-allocable overheadsdoubled from Rs.7.1 crore in 2009-10 to Rs.14.44 crore in 2010-11.
Development: This comprises development of SEZs and IT parks, hospitality projects,amusement parks, logistics parks and industrial parks. The aim is to develop theseprojects for future monetisation.
The Company has 40% ownership of 4 IT / ITES SEZ and 1 IT Park and 36% ownership inanother IT/ITES SEZ. These projects are located in prime strategic locations in Gurgaon,Noida, Greater Noida and Kolkata. Unitech Corporate Parks Plc.(UCP), a special purposevehicle created to invest in commercial property assets in India, holds 60% stake in theseprojects. During 2010-11, there has been a revival in demand for IT office space. As of 19April 2011, the total area leased out in these projects was 3.7 million sqft, while anadditional 1.2 million sqft had pre-leasing commitments. With this, the total leasingincluding commitments was 4.9 million sqft.
The Company has proven development experience in the hospitality space. It hasdeveloped the Radisson, New Delhi (5 star, 256 rooms), Radisson, Varanasi (5 star-117rooms) and the Marriott Courtyard, Gurgaon (4 star, 199 keys). Today, its hotel projectson NH8 in Gurgaon and in Kolkata are in advanced stage of construction. The strategy forthe hospitality segment is to develop hotels to be managed by global operators foreventual monetization through sale to private investors, business trusts or REITs.
In addition, there is now emphasis on developing clubs, which are complete destinationsincluding sporting, recreational, socialising and dining facilities. The Company's peoplestrength in the hospitality segment has been strengthened with international specialistsin club development also coming on board.
Unitech has also developed two amusement parks, which are operational. These are:
Entertainment City (Noida):
This is spread over an area of approximately 148 acres comprising of theme parks,shopping malls, food courts, multiplex cinema and other entertainment attractions. It islocated strategically in the heart of Noida and is well connected with Delhi through theNoida Toll Bridge and by metro rail. The project is being executed in phases. Theamusement park, arrival village and the shopping mall are already operational and the nextphase of the project is under implementation.
Adventure Island and Metro Walk (The Rohini Amusement Park): This isspread over 62 acres in North West Delhi. This project is being implemented in thefollowing phases:
o Phase1: This includes the amusement park - Adventure Island and the retail mall-Metro Walk with 200,000 sqft of retail space. This phase was commissioned in 2006-07.
o Phase 2: This includes a water park which is planned for development in 2013-14. Theshare of Unitech's revenues from amusement parks increased from Rs.54.11 crore in 2009-10to Rs.57.82 crore in 2010-11.
Infrastructure Services: This includes property and facility management servicesand township management services.
Unitech provides property management services for IT/ITeS SEZs, commercial property,residential property, townships, retail developments and golf courses. While some of thebilling is done directly by Unitech, the services are provided through its propertymanagement subsidiary - Unitech Property Management Private Limited (UPMPL).
Table 3: Unitech Limited's Abridged Profit and Loss Statement, Consolidated
| || ||(Rs. Crore) |
| ||2010-11 ||2009-10 |
|Income from operations ||3187.09 ||2931.33 |
|Income from sale of investments ||0 ||25.51 |
|Total Revenues ||3187.09 ||2956.84 |
|Operating Expenditure ||2263.23 ||1860.18 |
|PBDIT (excluding other income) ||923.86 ||1096.66 |
|Depreciation ||31.86 ||34.11 |
|PBIT (excluding other income) ||892.00 ||1062.55 |
|Other income ||105.03 ||58.45 |
|Interest ||145.47 ||199.98 |
|PBT ||851.56 ||921.02 |
|Tax ||270.38 ||226.38 |
|PAT ||581.18 ||694.64 |
|Minority Interests ||-10.38 ||-3.14 |
|Profit / (Loss) of associates ||-5.51 ||-0.48 |
|Prior Period Adjustments ||2.37 ||-15.97 |
|PAT (net) ||567.65 ||675.05 |
Total billing for services provided by this division increased by 27.8% from Rs.133crore in 2009-10 to Rs.170 crore in 2010-11. As of 31st March, 2011, thisdivision had 144.7 lakh square feet of developed property under management, of which 84lakh sqft was residential property, 30 lakh sqft was commercial, 28 lakh sqft was SEZs andremaining 2.7 lakhs sqft was for retail purposes. It also had 780 acres of townships and118 acres of golf courses under its management.
The focus of this business is to primarily grow with the Unitech portfolio and afterhaving attained a certain scale, compete in the open market.
Table 3 lists the summarised profit and loss statement for Unitech Ltd, as aconsolidated entity.
While analysing Unitech's financial performance, it is important to understand theimplications of the 'percentage of completion' accounting method followed by real estateconstruction companies. In a nutshell, this method takes into account revenues and costsin proportion to the percentage of work done in completing a project. Consequently,revenue and cost recognition of a project happens over a period of time.
The salient features of the performance are:
With a number of projects launched in 2009-10 starting to contribute to revenueafter crossing the revenue recognition threshold, income from operations increased by 8.7%to Rs. 3,187 crore in 2010-11.
However, due to change in the mix of projects that contributed to revenue,operating profits or PBDIT reduced by 15.8% to Rs.924 Crores in 2010-11
Company reduced its loan funds by 2.6% to Rs. 5,850 Crores as on 31 March 2011.
The Company has a healthy balance sheet with a net debt to equity ratio of 0.47.As of 31st March, 2011, Unitech's net worth was Rs. 11,583.62 Crores.
Profit after tax (PAT) after accounting for minority interest, profit or loss ofassociates and prior period adjustments was Rs. 568 Crores in 2010-11.
The Earning per Share (EPS) for 2010-11 was Rs. 2.24 on an expanded equity baseof Rs. 523.26 Crores. Total paid up capital is represented by 261.63 Crores equity sharesof Rs. 2 each.
The Board of Directors have recommended a dividend of Re. 0.10 per equity shareof face value of Rs. 2 each for 2010-11, subject to approval of the shareholders of theCompany in the ensuing Annual General Meeting.
INTERNAL CONTROLS AND THEIR ADEQUACY
Unitech has a proper and adequate system of internal controls to ensure that all assetsare safeguarded and protected against loss from unauthorised use or disposition, and toensure that all transactions are authorised, recorded and reported correctly andadequately.
The Company's internal controls are supplemented by an extensive programme of internalaudits, review by management and documented policies, guidelines and procedures. Theinternal control is designed to ensure that financial and other records are reliable forpreparing financial information and for maintaining accountability of assets. Allfinancial and audit control systems are also reviewed by the Audit Committee of the Boardof Directors of the company.
RISKS AND CONCERNS
The Company is exposed to different types of risks such as credit risk, market risk(including liquidity risk, interest rate risk and foreign exchange risk), operational riskand legal risk. The Company monitors credit and market risks, as well as portfolio andoperational risk through the oversight of senior management personnel in each of itsbusiness segments. Legal risk is subject to the review of the Company's legal departmentand external advisers. The Company is exposed to specific risks in connection with themanagement of investments and the environment within which it operates. The Company aimsto understand, measure and monitor the various risks to which it is exposed and to ensurethat it adheres, as far as reasonably and practically possible, to the policies andprocedures established by it to mitigate these risks
Statements in this Management Discussion and Analysis describing the company'sobjectives, projections, estimates and expectations maybe 'forward looking statements'within the meaning of applicable laws and regulations. Actual results might differsubstantially or materially from those expressed or implied. Important developments thatcould affect the company's operations include a downtrend in the real estate sector,significant changes in political and economic environment in India or key financialmarkets abroad, tax laws, litigation, labour relations, exchange rate fluctuations,interest and other costs.