Socio Economic Environment

The global economy has been going through a tough and uncertain phase with weak world output growth. This is primarily due to falling commodity prices (in particular crude oil), loss of growth momentum in the advanced economies and continued headwinds in the emerging economies. However, India has been among the few exceptions, with its economy growing at one of the fastest rates globally on the strength of domestic absorption. Despite global headwinds and a second consecutive year of less-than-normal monsoon, the Indian economy is expected to register a robust growth of 7.6% in FY2016, up from 7.2% in FY2015.

In India, lower commodity prices, a range of supply-side measures and a relatively tight monetary stance have resulted in a faster- than-expected fall in inflation, making room for interest rate cuts. Headline inflation based on consumer price index (CPI) declined to 4.9% during April 2015-January 2016 as compared with 5.9% during FY2015. Wholesale price index (WPI) remained in the negative territory since November 2014 and was (2.8)% during April 2015-January 2016 as compared to 2.0% in FY2015. With the easing of inflation and moderation in inflationary expectations, the RBI reduced the repo rate by 25 bps in June 2015 to 7.25%, by 50 bps in September 2015 and then by another 25 bps in April 2016 taking the repo rate down to 6.5%.

Economic growth in India is continued to be driven by a pick-up in domestic demand and private consumption (assuming a normal monsoon), prevalence of low inflationary environment and lower interest rates. According to the Economic Survey 2015-16, the Indian economy stands out as a haven of macroeconomic stability, resilience and optimism, and can be expected to register GDP growth in the range of 7-7.75% in the coming year.

The Current Situation Index (CSI) and the Future Expectation Index (FEI) of consumer confidence have declined by 4.1% and 3.6%, respectively since March 2015 quarter. However, both CSI and FEI have increased marginally (1.2% and 2.2%, respectively) since December 2015 on account of increase in positive perceptions on economic conditions, income and prices. The overall Employment Index increased 41.6% y-o-y to 252 in March 2016. IT - Hardware and Software (+76% y-o-y) continues to chart the steepest year-on- year growth. In terms of region, Bangalore (+64%) leads all cities by the way of long-term growth followed by Chandigarh (+57%) and Mumbai (+53%).

Real Estate Market Indian Real Estate Market

Overall economic growth, rapid urbanization, rising household incomes and emergence of nuclear families are the key drivers for the growth of real estate market in India. About 10 million people move into cities every year resulting into a shortage of 18.8 million houses. This is expected to result in significant growth in the real estate sector demand.

However, the last few years have been very challenging for the real estate sector with declining sales, mounting debt and delay in projects. To promote the growth in the real estate and infrastructure sectors, the Government has taken commendable steps and unleashed a number of landmark reforms to provide a fresh impetus to these sectors.

The Government of India's vision of 'Affordable Homes' to all and the launch of 100 Smart City projects in India provide a major thrust to the real estate and infrastructure sectors in India. SEBI's notification on the Real Estate Investment Trusts (REITs) Regulation has paved the way for introduction of an internationally acclaimed investment structure in India. The Government also amended the rules for Foreign Direct Investment (FDI) in the construction sector by reducing minimum built up area as well easing the exit norms. These relaxations are expected to go a long way in attracting more investments and improve the business environment in the real estate sector in India. Furthermore, introduction of the new land acquisition law and the appointment of a real estate regulator through the much awaited Real Estate (Regulation and Development) Bill will help boost confidence of the investors as well as the consumers.

The Real Estate (Regulation and Development) Bill will have a profound impact on the Indian real estate industry. Nitesh Estates is in the process of reviewing and modifying the internal processes such that the Company is ready before the time that the applicable clauses become effective. The Bill intends to bring greater transparency in the sale of developed property. This will infuse comfort to customers and investors and will eventually be beneficial to all stakeholders. The Bill makes the real estate developers far more accountable for timely completion of projects, compliance with the promised specifications and usage of the amount received

from the customers for the project by locking of 70% of the value through an escrow mechanism. However, the Bill is silent about the regulation of the approval mechanism that the various Government departments and utility service providers are responsible for. There may be short term operational challenges during the implementation phase but in the longer term the Bill is expected to induce investor and consumer confidence through transparency, accountability and standardization.

Capital market activities in 2015 have been at peak levels with a number of PE deals in the residential and office projects. As a sign of increasing investor confidence, entity-level investments and platform-level deals were also recorded.

The residential segment has seen slow absorption rates across markets resulting in an increase in the inventory levels and stagnation in prices. However, the demand in the mid-income segment remains better than that for the other segments and there is a shift of demand with units of smaller size and correspondingly lower value. Developers' initiative of offering attractive schemes and deal terms, coupled with lowering of interest rates by the RBI has supported investment decision for a lot of home buyers.

The office space absorption in India stood at 35 million sq. ft. which was the second highest number after CY2011. Given the low supply, CY2016 is expected to see consistent demand for commercial spaces. After the opening up of commercial real estate sector to FDI, a shift in the ownership patterns is expected as PE funds and MNC developers increase their stake in projects.

The retail real estate segment has witnessed low supply and development of new quality retail space. In CY2015, industry focused on consolidation of retail real estate by brands and retailers who closed their loss making stores and focused on profit making stores. CY2016 is expected to see more investment in already built, quality retail spaces. New quality malls are expected to become operational indicating the long term attractiveness of India consumption story.

The hotel & hospitality segment has shown early signs of an operational improvement in CY2015 driven by the economic recovery in India. This led to some acquisition and consolidation activity. CY2016 is expected to carry through the momentum generated in CY2015.

Bangalore Real Estate Market

Bangalore's rapid progress in technology and global connectivity helped drive real estate growth. The Bengaluru Real estate market has been one of the most attractive investment destinations in FY2016 when compared with the other cities in India, across all segments. It is the only city which has witnessed an increase in its market size from last year. But absorption levels in the residential segment have not increased and consequently the price points have also remained unchanged. There has been a rise in the inventory levels but this situation is easing as the new projects launched are also seeing a decline.

The Company

Company Overview and Market Positioning

Nitesh Estates Limited ("Nitesh Estates" or "Company") is an integrated property developer and one of India's most recognized luxury real estate brands with presence in multiple asset classes: Residential, Commercial, Hotel and Shopping Mall. Since inception, the Company has brought over 17.80 mn sq. ft. of area under development. The Company made its initial public offering in May 2010 and was listed on the Bombay Stock Exchange and the National Stock Exchange.

The Company has a very strong brand equity, business processes and partnerships to attain the next stage of growth. Over the years, the Company has completed 16 projects across residential, commercial and hospitality segments covering a developable area of 6.12 mn sq. ft. Nitesh Estates currently has 15 ongoing residential projects with a total developable area of 7.18 mn sq. ft. The revenue potential of these projects is over Rs. 3,560 Crore over 3-5 years.

During the year, the Company signed a platform partnership agreement with Goldman Sachs to invest in income generating grade-A office buildings, shopping malls and luxury hotels across Tier I cities in India. Nitesh Estates currently has one operational shopping mall, Nitesh Hub in Pune. The mall has a current leased out to the extent of 50% and is expected to be fully leased out in FY2017. This property is expected to generate an annual rental revenue of Rs. 45 Crore.

In the commercial space, Nitesh Estates has 4 ongoing/upcoming commercial projects in Bangalore central business district (CBD) covering an area of over 0.45 mn sq. ft. The Company is targeting to attain an annual rental income of over Rs. 300 Crore within the next 5 years through its portfolio of income generating assets.

The Ritz-Carlton, one of the world's finest brands for luxury hospitality, partnered with the Company to bring India's first Ritz Carlton Hotel in Bengaluru. Operational since October 2013, The Ritz-Carlton is an epitome of luxury and Nitesh Estates development capabilities. In a very short span of time the hotel has won coveted awards including Conde Nast and Travel + Leisure.

Nitesh Estates has a comprehensive corporate governance framework with an eminent Board and strong management team with significant experience across industries. In line with best in class corporate governance practices, the Company has a high proportion of independent directors with 6 out of the 10 directors being independent.

Operational Performance

During the year, the Company sold 0.326 mn sq. ft. of area with a Sales Value of Rs. 222 Crore. The average realization for the year was Rs. 6,799 per sq. ft., which is one of the best in the Bengaluru real estate industry. The Company sold 151 units in the mid-income, high-income and luxury residential segments. The collections were at Rs. 191 Crore in FY2016.

In March 2016, the Company signed JDA for two additional residential projects which are currently under design and approval stages. These two projects have a total revenue potential of over Rs. 300 Crore.

Financial Performance

Nitesh Estates generated revenue of Rs. 261 Crore, compared with FY2015 revenue of Rs. 291 Crore. The Earnings before interest, tax, depreciation and amortization (EBITDA) was Rs. 13 Crore as compared to Rs. 69 Crore in the previous year. The Profit/(Loss) after Tax during the year was Rs. (51) Crore and Net Loss was Rs. (73) Crore.

There were 7 projects under income recognition during the year with Unrecognized Income of Rs. 165 Crore. The Company expects increased revenue going forward owing to various projects getting to advanced stages of construction.

Revenue Breakup

Rs. Crore FY2016 % share FY2015 % share
Property Development 239.78 94.64 264.4 92.0
Contractual Activities 3.25 1.28 16.9 5.9
Maintenance Income 7.88 3.12 6.2 2.1
Lease Rent 2.44 0.96 - -
Total 253.35 287.5

Financial Condition

(Rupees in Crore)

Particulars March 31, 2016 March 31,2015
Sources of funds
a. Shareholders' funds 236.88 327.82
b. Minority Interest - -
c. Loan funds 1,205.23 417.62
Total 1442.11 745.44
Application of funds
a. Fixed assets (net) 329.56 76.60
b. Investments 104.85 112.15
c. Net current assets 1,006.11 555.72
d. Deferred tax/ miscellaneous expense, among others 1.62 0.97
Total 1442.11 745.44

 

Particulars 12 months ended March 31,2016 12 months ended March 31,2015
Profit before tax (50.61) 38.96
Add: Adjustments 58.21 27.59
Add: Net working capital (138.73) (102.59)
Less: Income Tax paid (4.71) (1.35)
Net cash flow from operating activities (135.84) (37.39)
Net cash flow from investing activities (563.97) (25.12)
Cash flow from financing activities 711.68 53.91
Net cash inflow / (outflow) 11.87 (8.6)

Liquidity

As of March 31, 2016, the Company had cash and cash equivalents of Rs. 39 Crore, total debt of Rs. 1,205 Crore and resulting net debt of Rs. 1,166 Crore. The Company's net debt to equity ratio is 4.4x. During Q1 FY2017, the Company retired some high cost debt thereby reducing the average cost of borrowing from 15.5% in March 2016 to 14.7% currently. Net Debt as of June 30, 2016 was Rs. 915 Crore.

Business Strategy

Growing the residential business segment in Bangalore

Bangalore continues to be one of the most attractive real estate markets in India. Rightly called the 'Silicon Valley' of India, the city has 40% of India's IT industry. The presence of large IT multinationals, together with the largest number of high-tech start-ups of any Indian city, is providing added impetus to Bangalore's entrepreneurial growth. Most of the demand in Bangalore is consumer driven. Nitesh Estates is one of the most recognized real estate developers in Bangalore. The Company is focused on expanding its market share in the Bangalore market through its strategy of offering a range of products varied by price, location and type of homes.

Revenue diversification and expansion of rental income

Nitesh Estates has been strategically focused on diversifying its revenue to include recurring income stream. In line with this strategy, the Company acquired a shopping mall in Pune, Nitesh Hub. This mall is expected to generate about Rs. 45 Crore of annual rental income. During FY2016, Nitesh Estates also signed a platform partnership agreement with Goldman Sachs to invest in income generating assets. Total assets/investments under the partnership will be upto $250-$300 million. The Company intends to expand its rental revenue to Rs. 300 Crore annually in next 5 years. Nitesh Estates also has 4 ongoing/upcoming commercial properties in Bangalore central business district (CBD) covering an area of over 0.45 mn sq. ft.

Investment in systems and technologies

Information Technology continues to support all aspects of business and operations at Nitesh Estates through continued investment in enterprise wide SAP platform including data analytics. The Company continues to explore and implement new emerging technologies for furthering business objectives. IT forms the core of all communication and information exchange for ongoing monitoring and effective decision making.

Selective geographic expansion

The Company believes that deep insights into the community and clientele and a thorough understanding of the policies, priorities and processes of the local Government are essential factors that drive success. In line with this belief, Nitesh Estates has chosen to operate in the South Indian market. Majority of the ongoing and upcoming projects are located in Bengaluru, where the Company has strong experience of executing several projects since its incorporation. Furthermore, Bangalore is considered to be one of the best real estate markets in India. Nitesh Estates is also selectively pursuing opportunities in other southern cities such as Chennai, Kochi and Goa.

Managing and promoting talent

Nitesh Estates' culture is focused on customer-centricity, collaborative team work, result orientation, entrepreneurial mindset and developing people. One of the key growth strategies at Nitesh Estates is to manage and promote talent by providing growth opportunities, rewards, respect, learning and fun. The Company's employees are both an important stakeholder group and key

players in its business. With their skills and achievements, the Company is driving a culture of innovation, sustained growth and profitability for Nitesh Estates.

Opportunities and Threats

Opportunities in all segments of real estate development are driven by the macroeconomic forces on account of the unique current situation where a large part of the population consists of people less than 24 years of age, that is people who are young and productive. The benefits to the economy, commonly termed as the demographic dividend is benefiting the real estate sector. The other macroeconomic force is the rapid rate of urbanization on account of migration of population to cities, the growth centres. The disposable income has been steadily increasing and there is easier availability of consumer finance coupled with a declining interest rate trend. All the aforesaid aspects result in opportunities in all segments of real estate.

The key threats to real estate business emanate from the cyclicality of the business owing to the tide and ebb in consumer and business confidence. Going forward, with the e-commerce market in India making itself look attractive, can pose a serious threat to the retail real estate. As per an ASSOCHAM report, the surge in e-commerce activities resulted in about 50% decline in footfall in shopping malls across cities. Other immediate challenges to the business are from:

• environmental risks such as depletion of water table

• potential impact of global slowdown on the Bengaluru IT/ITES industry

• increase in cost of commodities and building materials

• increase in interest rates which could result in depressed demand from customers and at the same time increase our interest burden

• shortage of labour and skilled technical manpower and the consequent upward pressure on cost of human resources

• regulatory and policy changes in higher costs and delays in approvals related with projects

Risk management

The Company has an established enterprise risk management framework to optimally identify and manage risks, as well as to address operational, strategic and regulatory risks. The ability to anticipate risks and respond effectively is critical for achieving the Company's objectives and provide value to stakeholders. The risk management process also addresses long term strategic and operational planning, talent acquisition and retention, treasury management, financial reporting and controls, information technology and security, environment health and safety compliance, legal, taxation, communication, regulatory compliance and code of conduct for employees. The Company believes that risk is an integral part of every business and promotes a culture of building ability to anticipate and manage the risks effectively and converting them into opportunities. Risk assessment is conducted by the risk management committee and the program is reviewed periodically by the Audit Committee.

There are several areas of risk related with:

• the macroeconomic environment

• the title of land and joint development partners

• the information technology systems and disaster recovery

• the project management resulting in deviation from planned time, quality, cost and safety

• the availability and cost of building materials

• the changes in statutes and processes in decision making by the Government

• the availability of finance and the cost of financing

• the human resources - their availability, costs and compliance with the code of ethics of the Company

• the vendors and business partners

• the assets of the Company

• the customers and the competitors

Internal Control Systems

Nitesh Estates has an elaborate internal control system which monitors compliance to internal processes. It ensures that all transactions are authorized, recorded and reported correctly. Well established and robust internal audit processes, both at business and corporate levels, continuously monitor the adequacy and effectiveness of the internal control environment across the Company and the status of compliance with operating systems, internal policies and regulatory requirements. In the networked IT environment of the Company, validation of IT security continues to receive focused attention of the internal audit. The Company has appointed

Deloitte Touche Tohmatsu as their internal auditor. The Internal Auditors independently evaluate the adequacy of internal controls and concurrently audit the majority of the transactions in value terms. Independence of the audit and compliance is ensured by direct reporting to the Audit Committee of the Board.

The Company strives to continuously strengthen the internal control systems by adopting standard operating procedures and by delegating roles and responsibilities to various Department heads for effective implementation of the same. This is to ensure that the Company conducts its business with highest standards of statutory, legal and regulatory compliance.

OUTLOOK

The Indian real estate industry witnessed subdued growth in FY2016. However, Bangalore market showed some resilience. The long term outlook still remains attractive due to economic growth, increasing urbanization, employment opportunities, affordability, favorable demographics, urbanization, and preferred location by NRIs, expats and IT/ITES professionals. Further, income tax benefits, interest subvention scheme and availability of financing options support the growing demand. Management would adopt a cautious approach and observe the developments closely while making decisions. The key focus for us in the following year would be:

• Focus on execution and revenue recognition: There are 15 residential projects currently in execution having a developable area of 7.18 million sq ft. There are another 6 projects, across asset classes, having a developable area of 1.76 million sq ft which are in various stages of design and approval and are targeted for launch during FY2017. This represents a huge growth in the intensity of the business and correspondingly on the revenue and profits of the Company. We are now focused on staying ahead on the cash collection cycle and accelerate execution. The consumers are highly discerning and the market is competitive. For success in the market place timeliness and quality of delivery are the differentiators.

• Design and Innovation: The Company has always focused on building a strong brand recall and differentiating itself from the competitors by continuous investments in new design and innovation for projects. Our association with leading firms like KPF, WATG, Callison, RK Associates and Chadvarkar & Thacker help us develop projects which provide our customers a unique living experience.

• Cash-flow Management - Tight control on accounts receivables and accounts payables with the objective of reducing the interest burden.

• Customer Relationship - Enhance customer experience at each of their touch points starting with at the stage at which we interact with them to assist in selection of a home till the time it is handed over and thereafter when we provide maintenance services.

Human Resources Development

Nitesh Estates employs 674 people across all functions. The Company strives to be an Employer of Choice. High quality recruitment supports the talent management practices of the Company. The Company continues to foster a high performance culture by recognizing good performers and providing them with career enhancing opportunities. Several HR initiatives have been taken for the strategic alignment of the HR function with the business objectives. These initiatives encompass employee engagement, learning & development besides improved internal communication mechanism with employees.

Our registered and corporate office is located in Bengaluru. This houses employees who oversee our financial, administrative, design and planning and other reporting functions. We have not experienced any material strikes, work stoppages, labor disputes. Our work-force consists of our permanent employees, consultants and labor work force that work at projects through sub-contractors. The function-wise break-up of our employees is as below.

Function Current % share FY2015 % share
Construction Management 91 13.50% 78 14.13%
Sales & Marketing 41 6.08% 51 9.24%
Administration & Secretarial 33 4.90% 40 7.25%
Internal Support (HR, IT and F&A) 38 5.64% 31 5.62%
Facility Management 34 5.04% 31 5.62%
Pre-Construction 7 1.04% 9 1.63%
Quality Management 7 1.04% 10 1.81%
Contracts & Procurement 9 1.34% 9 1.63%
MD & COO's Office 8 1.19% 9 1.63%
Business Development 9 1.34% 6 1.09%
Function Current % share FY2015 % share
Legal 6 0.89% 4 0.72%
Pune Mall 23 3.41% - -
Ritz Carlton Operations 368 54.60% 274 49.64%
Total 674 552

For the development of some of our projects, we also engage third party consultant engineers, architects, interior designers and landscape designers. In addition to our employees, we also engage the services of contractual workers which include tradesmen, car drivers, housekeeping personnel and other skilled, unskilled and semi-skilled workers. Our consultants, contractors and sub-contractors who work on our projects also employ a significant labor force.

Cautionary Statement

Statements in this Management Discussion and Analysis contain "forward looking statements" including, but without limitation, statements relating to the implementation of strategic initiatives, and other statements relating to Nitesh Estates' future business developments and economic performance. While these forward looking statements indicate our assessment and future expectations concerning the development of our business, a number of risks, uncertainties and other unknown factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to, general market, macro-economic, governmental and regulatory trends, movements in currency exchange and interest rates, competitive pressures, technological developments, changes in the financial conditions of third parties dealing with us, legislative developments, and other key factors that could affect our business and financial performance. Nitesh E