Orbit Corporation Ltd

BSE: 532837 | NSE: ORBITCORP | ISIN: INE628H01015 
Market Cap: [Rs.Cr.] 138.12 | Face Value: [Rs.] 10
Industry: Construction

Management Discussions
Management Discussion Analysis

BUSINESS ENVIRONMENT

Indian Economy and Industry Status

India's economy grew at 4.7 per cent in FY 2013-14; the second straight year of below 5per cent growth. This marks the second consecutive year of below five per cent growth inthe previous 25 years.

Real estate sector plays an important role in the Indian economy and is one of thelargest employers after agriculture and textile. It has numerous allied industries linkedwith it.

The Indian real estate sector is highly fragmented, capital intensive in nature and isyet to receive an Industry status. Further, the sector has close linkages with the economyand is therefore highly cyclical in nature. A typical real estate project has a minimumgestation period of three to four years.

The real estate sector continued to remain fragile in FY 2013-14 as the industry isfacing headwinds such as slow approvals, recent regulatory changes in key micro market -Mumbai (pertaining to development control rules), inflation impacting cost structure,declining demand due to increasing prices, etc. The continuing slowdown in economy coupledwith rising inflation and high interest rates led to an adverse impact in savings; therebyleading to a decline in demand for real estate.

Slowdown influence on funding of projects

The slowdown in economy has resulted in developers facing lack of adequate sources forfunding of projects, which is usually done through a mix of internal accruals, customeradvances, and debt. Funds from internal accruals are likely to be limited in nature inshort to medium term due to current sluggish demand in real estate sector, impacting thecash flows from ongoing projects. Customer advances, the other source of funding, may notbe available to fund the project in the initial stages, thereby leaving debt as theprincipal source of funding for the project. The exposure of banks was on a decliningtrend due to the cautious outlook of the banks towards the sector.

To add to the existing woes, foreign investors adopted a cautious approach due tocontinuing weakness in the Indian rupee in an uncertain macroeconomic environment. Sincethese traditional sources of finance dried up, developers had to approach non-bankingfinancial companies (NBFCs) for short-term debt and private equity (PE) funds. However,funds from NBFCs and PE investors are also fading away as the returns have been on thelower side and many PE investors are struggling to exit at decent returns.

The subdued demand, increasing construction cost, rising interest expense and delays inproject approvals have dented the earnings and return ratios of real estate developers.

Outlook

The Indian economy is expected to grow at a faster pace from H2 FY14-15. A stablegovernment at the Centre will lead to a steady pace of implementation of policy reforms,thereby increasing private sector investments. Inflation is showing signs of cooling down.RBI is taking various measures to curb inflation with a view to boost business confidenceand create a more favourable investment climate resulting in availability of funds.Decline in interest rates and improvement in employment outlook will improve affordabilityand provide the much-needed stimulus to demand in the real estate sector. The abovefactors along with aggressive marketing and pricing of inventory will help real estateplayers with an improved cash flow position in the coming period.

Real estate contributed 6.3 per cent to India's GDP in FY 2012-13. The market size ofthe sector is expected to grow at a CAGR of 11.2 per cent during FY 2008-2020 to touch USD180 billion by 2020. The government of India has allocated USD 1.3 billion for RuralHousing Fund in the Union Budget 2014-15.

Recently, the cabinet relaxed FDI rules in construction sector by reducing minimumbuilt-up area as well as capital requirement and easing of exit norms. This move isexpected to boost FDI in the real estate sector, providing a fillip to the cash-starvedsector which is reeling under a slowdown since the last 2-3 years.

SEBI has also made amendments to its earlier proposal on Real Estate Investment Trusts(REITS) and Infrastructure Investment Trusts (InvIT). This could again translate into hugeinvestments in the real estate sector.

REAL ESTATE SCENARIO - MUMBAI

Mumbai's commercial relevance has been a key driver for the real estate industry.

The real estate market in Mumbai came to a near standstill in terms of new launchessince 2011, owing to an abrupt ceasing of approval process by the regulatory authority,The Municipal Corporation of Greater Mumbai (MCGM). MCGM started the process of amendingthe Development Control Regulation (DCR) in 2011 which held up the sanction of freshapprovals for over a year. With a halt on fresh approvals, the supply of fresh inventoryin Greater Mumbai region was thus restricted. Given the uncertainty pertaining to DCRguidelines, the developers also slowed down the pace of execution of ongoing projects,which in turn affected their revenue recognition. Moreover, with the receivables fromcustomers being linked to the construction progress achieved, the cash inflows wereimpacted as well. The effect was far more pronounced in cases of developers having debtladen balance sheets owing to their inability to monetize the land parcels in the absenceof requisite approvals. The Government of Maharashtra (GoM) announced the amendments toDCR in January 2012. The main revision in the DCR was the inclusion of areas likebalconies, flower beds (which were earlier free of FSI) in the calculation of FSI.However, as a compensation for this loss of FSI, DCR introduced a concept of fungible FSI,under which a developer could purchase additional area over and above the permissiblearea. With the revision in the DCR, while the approvals have started flowing in thesystem, the approval process, however, is yet to gain momentum characteristic of earlieryears.

The cost pressure in terms of land and raw material prices continues to remain firm.Moreover, the delayed launches have already made a dent in the project returns. In June2013, RBI lowered the risk weight on residential real estate borrowings from 100% to 75%,which could provide some breather to developers on the interest rates front. However therecent tightened liquidity position in the banking system may nullify this impact to alarge extent. Moreover, most of the banks have increased their base rates in the recentpast, which in-turn would lead to an increase in acquisition cost for the buyers therebyresulting in slower off-take.

Despite the challenging market scenario, the capital rates in the city's residentialmarket have remained largely firm in the past supported by limited supply as well asincreasing cost pressures but the off-take was substantially low.

BUSINESS OVERVIEW AND OPERATING PERFORMANCE

Orbit Corporation Ltd. is engaged in the business of real estate development in MumbaiMetropolitan Region (MMR), with significant operations in the Island City of Mumbai. Wetarget the premium realty market in Mumbai on the strength of our brand and projectexecution skills, providing international quality to our customers.

Our customers are from the higher strata of the society and comprise of High Net-worthIndividuals and Eminent Personalities from Corporate Houses. Our business model isprimarily driven by redevelopment of cessed and dilapidated buildings in the Island Cityof Mumbai.

We believe that the demand in areas of our operation is inelastic to price, but at thesame time we constantly strive to deliver value to our customers by providing them withinnovative and premium housing solutions thereby helping us differentiate our productofferings.

KEY PROJECTS

Orbit's projects portfolio, consists of luxury residential apartments being developedin South Mumbai, South Central Mumbai and suburban areas.

South Mumbai

Orbit commands the highest market share in terms of area under development in premiumlocations such as Napeansea Road, Malabar Hill, Kemps Corner. These projects areultra-luxury projects with unmatched values of Quality Luxury and Neighbourhood in SouthMumbai. Orbit Laburnum is also at an initial stage of development under this category.

Orbit has delivered two award winning projects at Napeansea Road, viz. Villa Orb andOrbit Arya. It has also executed projects like Shivam and Orbit Heights in this area.

Orbit Haven, another ultra luxury project in the same area is in an advanced stage ofconstruction. Villa Orb Annexe is at an initial stage of development under this category.

Orbit has super luxury projects at Prarthana Samaj, Babulnath, Nana Chowk and Gamdeviwhich provides with modern features in true sense. Orbit Enclave is at an advance stage ofconstruction.

We have a strong future pipeline of projects in South Mumbai and we will continueevaluating various proposals for redevelopments in these localities and identifyopportunities for value creation for our shareholders while delivering exquisiteresidential solutions to our customers.

South Central Mumbai

We have two ongoing luxury projects at an advanced stage of construction in theBusiness District, Lower Parel viz. Orbit Terraces and Orbit Grand. Another projectnamely, Orbit Eternia has been delivered in the year 2012.

Project at Lalbaug, is at planning stage and will be launched in phases in due course.

Mumbai Suburbs

As part of extension of the Company's strategy to leverage its brand value in thepremium mid-segment residential market, we have initiated projects in the Mumbai suburbanareas like Andheri and Bandra Kurla Complex (BKC). Orbit Residency Park in Sakinaka,Andheri, (being executed by our Subsidiary Ahinsa Buildtech Pvt. Ltd.) is progressing wellas planned.

We have also executed two commercial projects, Orbit Plaza and Orbit WTC, asbuilt-to-suit office spaces in the vicinity of BKC.

Orbit Mandwah Project

We are also planning to develop a gated township with high-end amenities and featuresat Mandwa, Alibaug. The project named Orbit Mandwah, is being executed by our subsidiaryOrbit Highcity Pvt. Ltd. The project is an extension of our premium offerings providingluxurious villas to our high-end customers at just 16 minutes away (by sea route) from theGateway of India.

OPERATING PERFORMANCE

Sales (Volume & Value)

Financial year 2013-14 has not been encouraging for the economy, so as to the Companyin overall sales, both in volume and value term affected.

No new projects were launched during the year under review in view of the uncertaintypertaining to DCR guidelines. We have slowed down the pace of execution of the ongoingprojects, which in turn affected our revenue recognition. In view of revision in the DCR,the approvals have started flowing in the system. However it is yet to gain momentum, acharacteristic of earlier years.

Future sales from the ongoing projects viz. Orbit Enclave, Orbit Terraces, Orbit Grand,Orbit Residency Park, Orbit Laburnum, Orbit Haven, and Villa Orb are expected to keep theorder book healthy. Orbit Bloom, Orbit Midtown, and Orbit Mandwah are expected to besignificant contributor to the order book over the medium term.

Financial Highlights
Particulars UoM FY14 FY13
Total Income Mn 489 3109
EBIDTA Mn (738) 1032
EBIDTA Margin % (151) 33
Profit Before Tax Mn (2266) 22
PAT (attributable to OCL) Mn (1562) 75
PAT Margin % (320) 2

Profitability

Financial year 2013-14 saw an abnormal dip in revenues due to reasons explained aboveviz. activity was meager in view of new DCR regulations and slow approvals, no newlaunches of projects, higher input / finance cost aggravated the problems and relativelylower sales prices coupled with abnormal events in the form of revenue write offs affectedthe EBIDTA / PAT margins substantially.

THE OUTLOOK

1. The year 2013-14 was a drag for the Indian economy with poor macroeconomicconditions. Slowing income growth, sustained weakness in the rupee, skyrocketing inflationand high borrowing rates combined to make consumers vary of spending.

Despite this, residential property prices continued to exhibit upward movement even asthe weakening rupee steadily eroded the purchasing power.

2. The presently cautious market sentiment is likely to continue, as headwinds togrowth will prevail at least until the first half of 2014.

However, the second half is likely to witness gradual revival in absorption.Residential real estate capital values will increase in a subdued range of 10-12%year-on-year pan-India for the whole year.

3. With scarce availability of land in MMR, redevelopment will emerge as another growthdriver in a scenario, the cost-and-time-intensive complexities with regards to landacquisition, unfavourable land development policies and number of approvals andsignificant procedural delays was a cause of concern.

The developers have an opportunity for redevelopment as only 50% of the residentialunits are in good condition, while the remaining are either merely liveable or indilapidated condition.

4. In general, 2013-14 was not a good year for India's residential real estate market.Property prices remained high in most cities, largely because developers were hit hard bythe vastly increased costs of construction and debt. Because of the rising input costs andcompromised sales, they were prevailed upon to cut back on project launches. In line withthe need of the hour, those that did happen were mostly in the mid-income and budget homessegments. Luxury housing took a severe body blow and movement of premium and super-luxuryproperties in the metros slowed down considerably.

In the early part of 2014-15, sentiments on MMR residential property market will remaincautious, but in view of better affordability of people and returns on investment it willpick up.

5. The Mumbai Metro has all the hallmarks of being a game-changer for the city'stransportation and realty landscape.

OPPORTUNITIES

1. Rapid urbanization and demographic changes, especially within emerging markets, willlead to substantial growth in the real estate investment industry over the next few years,according to Real Estate 2020: Building the future, a new report from PwC. At the sametime as the industry's opportunities grow, so too will assets invested into the sector, itsaid.

The report also finds that private capital will play a critical role in funding thegrowing and changing need for real estate.

2. The city has assumed world fame because of increase of corporate outsourcing fromindustrialized countries and Mumbai is known for its cosmopolitan atmosphere, where peoplenot only from different part of the country come and settle but from all over the world.

3. Often regarded as the "City of Skyscrapers", Mumbai is intertwined withnumerous roads, flyovers, airport, railways, and port. The city is known for its highlyadvanced amenities which include reputed Educational Institutes, Advanced Hospitals, ITparks, etc. Apart from that, the city has the abundance of Shopping Malls, Super Market,Multiplexes, Theatre and other avenues of recreations which influence the people to settlein Mumbai.

4. Mumbai has emerged as one of the most preferred destinations for property investmentin the wake of its booming real estate market. Not only the residents of India prefer toinvest in the properties of Mumbai, but the NRIs are also investing with an aim to gainmaximum return with the upbeat market condition.

5. BJP, the ruling party with absolute majority, in its election manifesto has giventop priority to the housing sector, and aims to bridge the housing shortage gap throughits vision, "Housing For All, by 2022". Further, it was proposed to develop 100smart cities, which were to be enabled via latest technology and infrastructure.Additionally, it was also proposed to rationalise the tax regime, and to liberalise theFDI in select sectors.

6. The development of Mumbai has drawn the attention of property investors from aroundthe world. The city is viewed as a haven for property investment as it is the commercialcapital of the country. Besides, the reason behind Mumbai enjoying such a great influenceamong the property investors is the heavy returns on the invested capital in very shortspans of time.

RISK & CONCERNS

1. The Indian real estate industry is deeply affected by the decision of Reserve Bankof India with respect to the recent tightening of the liquidity position in the bankingsystem, because it is just not the single industry but there are many industries which areassociated with it and we cannot deny the fact that in the coming time the pressure willincrease not only on individuals but on Companies or sectors associated too and that willultimately slow down the demand.

This reaction will directly affect the demand and will put the developers in fundcrisis condition and the overall real estate sector has to bear this crunch. The heavyinvestment projects will find fewer buyers due to increase in the property cost.

2. The input cost like material cost, metal cost, transportation cost, etc has risen 30to 35 percent in last two years. Apart from these there has been considerable increase inwages in the last two years.

3. Frequent changes in the policies of the regulatory authorities may adversely impactthe real estate scenario and hence our business and prospects.

4. Expected some major reforms which have been pending for long and how it will workand affect to the business and prospects of the sector, such as setting up of the realestate regulator, reforming the existing LARR Act, 2013, rolling out of Real EstateInvestment Trusts (REITs), faster execution of National Land Record ModernisationProgramme (NLRMP) and introduction of a single window clearance mechanism.

ORGANIZATION

Human Resources

We, at Orbit Corporation Limited consider people as our greatest Asset. We motivate ouremployees by encouraging them to enter into healthy competition, to which delivery is theresult for the Company and growth is the result for each employee on personal front. Westrive to work at root levels for flowering the core competencies thereby aligning them toour business goals.

Though dedicated completely towards work, the employees here in Orbit, also celebratesvarious festivals and other cultural and educational events organised time to time by theHuman Resources department. This ensures that the employees feel a balance work life whichin turn improves their personality both professional and personal. We continuouslyencourage our employees to undergo training and be a part of various forums for furtheringtheir careers.

Training Programs

S. No. Training Type Man Hours Cost
1 Behavioural / Soft Skill 216 28090
2 Technical / Domain 208 83312
Total 424 111402
Statement of changes in Human Resources
Particulars OCL only OCL + Outsourced + Subsidiaries
Opening number of employees as on 1st April 2013 255 265
Added 32 32
Attrition 60 63
Closing number of employees as on 31st March 2014 227 234

SEGMENT REPORTING

The Company's business activities fall within single segment, viz. real estate andredevelopment and predominantly operates in domestic market. Accordingly, disclosurerequirements under Accounting Standard (AS) 17 segment reporting, is not applicable.

FORWARD LOOKING STATEMENTS

• Certain statements in the Management Discussions and Analysis describing theCompany's objectives, projections, estimates, expectations or predictions may beforward-looking statements within the meaning of applicable Securities laws andregulations. Actual results could defer from those expressed or implied as thesestatements may be based on certain assumptions of future events over which the Companyexercises no control.

• Such risks and uncertainties include, but are not limited to our ability tomanage growth, competition, attracting and retaining skilled professionals, time and costoverruns, regulatory approvals, market risks, domestic and international economicconditions, changes in laws governing the Company including the tax regimes and exchangecontrol regulations.

• Important operations include material availability and prices, cyclical demandsand pricing in the Company's principal markets, change in Government regulations, taxregime, economic developments within India and other incidental factors.

• Our revenues and expenses are difficult to predict and can vary significantlyfrom period to period, which could cause share prices to decline.

• Our projects are subject to risks from natural disasters like earthquakes andfloods.

• When used in this report, the words 'anticipate', 'believe', 'estimate','expect', 'intend', 'will' and other similar expressions as they relate to the Companyand/or its businesses are intended to identify such forward-looking statements.

• The Company undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, future events, orotherwise.

   
Futures & Options Quote
Future Data Not present
Key Information

Key Executives:

Ravi Kiran Aggarwal , Chairman & Exec. Director

Pujit Aggarwal , Managing Director & CEO

Abdul Sattar , Director

Urvashi Saxena , Additional Director


Company Head Office / Quarters:

The View 1st Floor,
165 Dr Annie Besant Road Worli,
Mumbai,
Maharashtra-400018
Phone : Maharashtra-91-022-30446910 / Maharashtra-
Fax : Maharashtra-91-022-24911028 / Maharashtra-
E-mail : invetor@orbitcorp.com/info@orbitcorp.com
Web : http://www.orbitcorp.com

Registrars:


 
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