A. GENERAL ECONOMIC SCENARIO
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 ourcountrys economy. Construction sector is also the second largest employer afteragriculture, employing about 25 million people. Construction Industrys contributionto GDPs growth is around 2-3 percentage points.
The following factors generally affect demand and supply in real estate sector:
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
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. Companys 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 Companys 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:
Indias Most Admired Company Award by Construction World - NICMAR
Architect and Builders Award by Construction World, for being amongIndias 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. Its 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 Companys 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 Companys"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. COMPANYS 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 Companys brand is the differentiating factor which helps it to establishconfidence in customers.
More variety of projects in the pipe line
The Companys planned projects are catering to the needs of different segments ofsociety and therefore offer good potential of demand. The Companys 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 theCompanys strategic initiatives.
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".
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
Adopting innovative marketing strategy
Brand building and sustenance
Execution, delivery and customer delight
Greater emphasis on details
Assured quality at all costs
Better product mix
Specialization and economies of scale
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
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
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.
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.
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
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|
|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|
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.
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||2.9