CHD Developers Ltd Management Discussions.

Indian economy

It was one of the most exciting year for the Indian economy owing to the path-breaking events which strengthened Indias position in the global ecosystem. A year which started out on a subdued note owing to the overhang of the demonetisation drive ended on a positive note with the Indian economy registering a robust 7.7% in the last quarter of 2017-18 – the fastest in seven quarters, signalling a strong turnaround and reclaiming its position as the fastest growing major economy of the world. During the year, India took the bold step of completely resetting its indirect tax system to a comprehensive GST regime (July 2017) while continuing to experience the impact of the demonetisation shock of November 2016. Moreover, the Governments path-breaking and investment inducing policies enabled India to take centre stage in the global village as its rankings improved considerably.

India emerged as the most competitive country in South Asia, appearing at No. 40 in the global competitiveness ranking of 137 countries by the World Economic Forum.

India jumped up 30 notches into the top 100 rankings on the World Banks ‘ease of doing business index, consequent to major improvements in indicators such as resolving insolvency, paying taxes, protecting minority investors and getting credit.

India topped management consulting firm AT Kearneys 2017 Global Services Location Index for the eighth consecutive year and extended its lead over other countries from 0.47 last year to 0.76 in 2017.

Going forward, economic experts suggest that India would maintain its growth momentum. According to World Banks India Report, Indias GDP growth rate is expected to increase to 7.3% in 2018-19 and 7.5% in 2019-20.

RETURN TO THE HIGH-GROWTH PATH

Quarterly growth

In Jan-Mar 2018, Indias economy recorded its best quarterly growth since Apr-June 2016, as the effects of demonetisation waned. Growth was also aided by the low base of Jan-Mar 2017.

Annual growth

Despite the pick up of growth in the fourth quarter, the economy grew at its slowest pace since 2013-14 due to the lingering effects of demonetisation in the first half and disruption caused by implementation of GST in July 2017

The real estate sector

The real estate sector is one of the most globally recognised sectors. In India, real estate is the second largest employer after agriculture. The real estate sector comprises four sub sectors - housing, retail, hospitality and commercial. The growth of this sector is well complemented by the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations.

The real reality

Indias residential real estate market hasnt had it easy in recent years. Short-term demand factors have stalled growth and low consumer demand at current prices has accentuated the problem. Absorption rates have stagnated, causing high levels of overhang across all major cities. The customers financial strength and confidence was further shattered with the banning of two high-value currency notes in November 2016 The introduction of the GST in July 2017 further hit the already ailing real estate sector. Developers could not pass on the higher tax burden amidst sliding demand. Not surprisingly, property prices tumbled in many cities. Even plummeting prices havent been able to entice Indias home-buyers. According to real estate consultancy firm Knight Frank, home purchases in the country fell to a seven-year low in 2017 despite sliding prices. real estate market in the last 10 years. Costs of both land and key inputs (primarily steel and ready-mix concrete) have sky-rocketed. Raw material prices have grown by a factor of 2 to 3 times since 2005. Land prices have increased even more dramatically. This means that developer margins are lower than ever before.

Structural reforms

In 2017-18, Indias real estate sector witnessed two major reforms come into force -- the Real Estate Regulatory Authority (RERA) and the Goods and Services Tax (GST). RERA: This reform came into force on 1 May, 2017. RERA was passed to ensure accountability, infuse transparency and bring uniformity in real estate practices. GST: While a landmark tax such as the GST is expected to have far-reaching implications for sectors across the economy, its impact on real estate as a whole is likely to be a mixed bag.

Light at the end of the tunnel

All is not lost for the real estate sector. There are signs of light at the end of the tunnel. At the bottom: According to a UBS report, Indias residential real estate sector is at the cusp of a gradual demand revival aided by a_ordability at 15-year-best levels, high expectations of property price increases over the next one to three years, reasonable comfort on personal finances and implementation of new regulations aimed at regaining buyer confidence. As a result, going forward, residential property sales are expected to gradually recover over the medium term. Attracting eyeballs: Foreign investments into Indias real estate rebounded after a two-year lull, indicating revival in a sector thats among the largest job creators for the economy. Foreign direct investment in construction development, including townships, housing and built-up infrastructure, stood at Rs. 2,453 crore ($385 million) in April-December 2017 - up 250% from Rs. 703 crore (US$105 million) in the year ago-period, according to data from the Department of Industrial Policy and Promotion A raft of policy measures catalysed this revival. They include a housing law that protects the interests of buyers, demonetisation, the GST and crackdown on benami property (or property held via proxy). They were aimed at hobbling the shadow economy and widening the tax net. While these measures had a short-term negative impact on the industry, they encouraged the inflow of foreign funding.

Outlook

The Indian real estate market is expected to touch US$ 180 billion by 2020. Housing sector is expected to contribute around 11% to Indias GDP by 2020. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for Indias growing needs.

Projects in progress

CHD Vann

As the name suggests, Vann (Jungle in Hindi) is where natures beauty, fragrance and serenity will awaken your body, mind and soul.

Spread across over 10 acres, Vann brings a fresh new perspective to life in a metro, with a forest cover of 5 acres providing an incredible experience of forest living right in the heart of a thriving city. The sole aim is to develop a lifestyle that has its roots in nature. Located at Sohna Road, Gurgaon, Vann is perfectly suited for those who want a serene lifestyle with the utmost convenience.

At Vann, the centrepiece of the residential apartment is the lofty double height ceiling which gives you the luxury of ample sunshine and unobstructed view of the forest from two levels. All the towers are of varying heights which make sure that they all get beautiful views throughout the year.

106 Golf Avenue

106 Golf Avenue offers you a lifestyle indulged by a privileged few.

It presents the perfect opportunity to exercise supreme afluence with the splendour and awe of a golf life. The lush green acres not only provide the perfect ambience to indulge in a game of pitch & putt, but also endow a life of absolute bliss and serenity.

Adorned with a golf course, this idyllic expanse of 12.34 acres has within its vast greenscape, one of the finest exclusive residential neighbourhoods. Sublime aesthetics of this exclusive residential project and the very best of leisure and recreational facilities redesigns the perception of opulence.

CHD Green Park Residences

CHD Green Park Residences promises elegant English living in the heart of Karnal. This project promises to create a unique world in itself with all state-of-the-art amenities like lush green park, schools, food court, hospital and fitness centre just a stone throw away, making it difficult for the residents to leave this residential abode.

Human Resource

CHDs 120+ energetic and experienced team is the cornerstone of its success – for they essentially transform boardroom strategies into on-ground realities. As a result, the Company has put in place well-defined people-centric policies to facilitate the knowledge enhancement and career growth of its people. The Companys HR team looks into four key areas: Attract the best talent available in the industry Develop talent by entrusting of roles / responsibilities and honing skills Engage talent by improving standards and inculcating problem-solving techniques Inspire talent by embracing the vision and mission of the Company Knowledge enhancement: Aligned to its comprehensive talent management programme, the Company developed and implemented its training calendar, which was formulated on need-based training and skill development exercises – imparted by in-house and external area experts. This enabled the Company to provide the necessary platform to every employee for skill development. Career progression was ensured through a transparent performance management system, which aimed to fill gaps, hone skills and improve communication.

Employee engagement: In keeping with the Companys philosophy that an engaged employee is an enthused team member, the HR team provided a number of engagement forums which provided a platform for every abreast of changing business realities and emerging organisational challenges.

Internal control

The Company has a sound system of internal controls in place to ensure the achievement of goals, evaluation of risks and reliable financial and operational reporting. This efficient internal control procedure is driven by a robust system of checks and balances that ensures safeguarding of assets, compliance with all regulatory norms and procedural and systemic improvements on a periodic basis. The Company uses an ERP (Enterprise Resource Planning) package supported by in-built controls. This guarantees well- timed financial reporting. The audit system periodically reviews the control mechanism and legal, regulatory and environmental compliances. The internal audit team also checks the effectiveness of internal controls and initiates necessary changes arising out of inadequacies, if any. All financial and audit controls are also reviewed by the Audit Committee of the Board of Directors.

Financial performance(based on Consolidated Financial Statements) The Company registered a heartening performance in 2017-18. Despite the subdued environment prevailing in the real estate sector owing to structural reforms, rising costs and depressed demand, it from Rs. 5.81 crore in 2016-17 to Rs.1.32 crore in 2017-18. Even as business remained subdued, the Company focused on deleveraging its Balance Sheet –the managements efforts in optimising the coupon rate on external funds paid interesting returns – the average cost of debt declined from 12.74% in 2016-17 to 11.36% in 2017-18. Also, the interest liability for the year declined from Rs. 10.17 crore in 2016-17 to Rs. 9.65 crore in 2017-18. During the year under review the Company raised funds through Preferential issue a by way of issue and allotment of 1.5 crore Equity Shares of Face Value Rs.. 2/- each and 4.5 crore warrants convertible into equivalent no. of equity shares of Face Value Rs..2/- each. Consequently, the paid up Undiluted Equity Share Capital of the Company increased from Rs.. 22.72 crore as on March 31, 2017 to Rs.. 25.72 crore as on March 31, 2018. The Company will use these funds to accelerate the progress of its four on-going projects and to retire part of its high cost debt. This should help it in improving business prospects and strengthening the organisations core.

Risk management

As with any organisation, CHD is also exposed to business risks that might affect its interests, if left unchecked. The Company has a comprehensive risk management system, which analyses the nature of the risk, and prepares mitigation strategies. This framework ensures efficient risk monitoring, identification, assessment and mitigation of external as well as internal risk. The Board of Directors provides oversight and also reviews the Risk Management Policy. Additionally, an independent audit by internal auditors offers a second assessment on potential risks and mitigation measures.

Economy risk

Progress of the real estate sector is closely influenced by the state of the economy. Risk mitigation: After the set-back in the first half of 2017-18 owing to policy-led structural reforms, the Indian economy stepped back on track registering a 7%-plus GDP growth in the second half. Subject experts are of the opinion that this momentum could sustain in the current year.

Confidence risk

Confidence of the average Indian who forms a major proportion of the home buyer community needs to be restored for creating demand.

Risk mitigation: The GST regime and RERA have been acclaimed as a path breaking achievement by India, although their launch did result in short-term disruption. With these policies well in place, confidence in the real estate sector is building up – foreign direct investment has grown significantly. This reality, over time, will shore confidence of the Indian home buyer.

Demand risk

Indians need to have more money, in addition to confidence, to liquidate inventory and create demand. Risk mitigation: Despite the temporary disruption in the real estate sector over the last few years, the basic drivers for real estate demand namely, urbanisation, nuclear families, growing aspiration and improving lifestyle remain intact. Moreover, the sharp drop in real estate prices owing to the prevailing gloom coupled with the increased earning of the average Indian (owing to improved corporate earnings) is expected to drive demand over the coming years.

Geographic risk

The Companys concentration in the NCR region could impede its growth. Risk mitigation: The NCR market continues to be a growing and expanding market with real home buyers (not investors). During April-to-June 2017, Delhi NCR witnessed close to 2 million square feet of office space absorption. Traction in office space cascades to an uptick in demand for residential apartments. With better facilities such as utilities, roads and better connectivity, the demand for real estate in this area is expected to grow.

Delivery risk

Delivery, in real estate, is key to success and sustainable growth. Risk mitigation: The management has taken strategic decisions to alter its business model which promises to strengthen its delivery commitment. For one, it has decided to outsource construction activities to reputed and experienced EPC contractors who will shoulder the entire responsibility of project construction to the end. And two, the Company has outsourced its marketing function to experts in the field who have the experience and expertise to match the project with the customer segment accurately.

Growth risk

The Company needs project launches to grow business. Risk mitigation: The Company has launched CHD Green Park Residences, part of 200-acre integrated township – CHD City, Karnal, with an aim of completely selling the project over the next 24-30 months. Moreover, the Company has planned a slew of other projects which will be launched with the improving sentiment of the residential real estate market.

Funding risk

Real estate is a capital intensive business. Risk mitigation: The Company has raised Rs. 87 crore through issue of equity shares and warrants on preferential basis to the promoter group and investors. These funds will be utilised in meeting the construction cost of four projects in Gurugram (Gurgaon) and Karnal. Of this, we have received Rs. 38 crore and will receive the balance in the next 18 months from date of allotment. Further as the progress of the projects should help in securing payments from their customers strengthening organisational liquidity.