Emami Realty Ltd Management Discussions.

Indian real estate sector overview

The real estate sector is one of the most globally-recognised sectors. In India, real estate is the second largest employer after agriculture and is slated to grow at a rate of 30% over the next decade. The real estate sector comprises four sub-sectors - housing, retail, hospitality, and commercial. The growth of this sector is complemented by the growth of the corporate environment and the demand for office space as well as urban and suburban accommodations. The construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy.

India’s fragmented property sector is undergoing a radical change, as far-reaching reforms drive consolidation. These variations, combined with the most affordable housing prices in decades, will trigger the real estate sales manifold as mentioned herein below. Market share of the Organised Developers could double within a span of 7-8 years from 8-10% to 20%, resulting in a sales CAGR of 30%. High-class developers are expected to benefit disproportionately from this cyclical upturn, provided they target the residential market.

Various factors like low house prices, decade-low mortgage rates and stable income growth have resulted in the best affordability for 15 years. This in turn should lead to a volume upswing, with policy support being the trigger point. Developers can also address the affordable-housing market, made feasible by tax incentives and less competition.

India is expected to witness an upward rise in the number of real estate deals in 2018, on the back of policy changes that have made the market more transparent. The Indian real estate sector has witnessed high growth in recent times with the rise in demand for office as well as residential spaces. India stood third in the US Green Building Council’s ranking of the top-10 countries for LEED-certified buildings, with over 752 LEED-certified projects across 20.28 million gross square metres of space. The construction development sector in India received FDI equity inflows to the tune of US$24.67 billion in the period between April 2000 and December 2017. (Source: IBEF, DIPP)


The Indian real estate market is expected to reach US$180 billion by 2020 from US$126 billion in 2015. Emergence of nuclear families, rapid urbanisation and rising household income are likely to remain the key drivers for growth in all spheres of real estate, including residential, commercial and retail. More than 70% of India’s GDP will be contributed by the urban areas while the overall housing sector is expected to contribute ~11% to India’s GDP by 2020. Private equity investments in real estate are estimated to grow to US$ 100 billion by 2026 with Tier-I and II cities being the prime beneficiaries. SEBI has approved the REIT platform that will help create an opportunity worth H1.25 trillion in the Indian market over the next few years. The growing flow of FDI into Indian real estate is encouraging transparency. Developers, in order to attract funding, are revamping their accounting and management systems to meet due diligence standards. (Source: IBEF, Business Standard)

Opportunities and Threats

Governmental initiatives

The Government of India along with several State Governments has taken numerous initiatives to encourage the development in the sector. The Smart Cities initiative which plans to build 100 ‘Smart Cities’ has unleashed a plethora of opportunities for real estate companies. Below mentioned are some of the other major initiatives undertaken by governmental bodies:

• The Indian Government approved the launch of ‘Housing for All by 2022’ mission. Under this, 30 million houses will be built in India by 2022, mostly for the economically-weaker sections and low-income groups, by leveraging PPPs and interest subsidies.

• In February 2018, creation of National Urban Housing Fund was approved with an outlay of US$ 9.27 billion.

• Under Pradhan Mantri Awas Yojana (‘PMAY’) - Urban 1,427,486 houses have been sanctioned in 2017-18. In March 2018, construction of additional 3,21,567 affordable houses was sanctioned under the scheme.

• The Central Government has extended the Credit Linked Subsidy Scheme till March 2019 and further relaxed the carpet area norms for MIG category I to 120 square metres from the existing 90 square metres and for category II, from 110 to 150 square metres.

• The Central Government announced a new PPP policy to promote private investments in affordable housing in line with its Housing for All by 2022 scheme. Also, Smart Cities Mission received an allocation of H2.04 lakh crores, covering 99 cities.

(Source: IBEF, Grant Thornton)

• The Central Government has granted infrastructure status to affordable housing which will enable these projects to avail the associated benefits such as lower borrowing rates, tax concessions and increased flow of foreign and private capital.

(Source: PIB)

• Though the Benami Transactions (Prohibition) Act, 1988 has been on the statute book since more than 28 years, the same could not be made operational because of certain inherent defects. With a view to providing effective regime for prohibition of benami transactions, the said Act was amended through the Benami Transactions (Prohibition) Amended Act, 2016. (Source: PIB)

• The PMAY was launched with the aim to provide housing at an affordable price to the weaker sections of the society, lower income group people, urban poor and rural poor. This envisions construction of around 20 million houses at an affordable price by March 31, 2022. The scheme is getting financial assistance of US$ 31 billion from the Central Government.

RERA and its implications

A major slowdown in residential property markets from 2013 onwards – combined with poor customer experience with disorganised and unscrupulous developers – has led to significant government reforms, the landmark one being the implementation of the Real Estate Regulation Act, 2016 (RERA) in 2017. RERA is customer driven and provides a major boost to transparency, increases working capital requirements, and significantly raises the property sector’s overall entry barriers. Its objective – to enhance customer confidence in purchasing under-construction real estate projects – comes at a cost to developers; higher working capital and the risk of significant liabilities. RERA safeguards the customers in two important ways: developers must secure all project approvals before launching any sales process, and 70% of all project cashflow – excluding land costs – must be spent on construction. Both these initiatives make it difficult for the developers to rotate capital into multiple projects. Prior to RERA, developers used to front-load customer cashflow vis--vis the actual construction-expenditure outgo.

GST impact

Real estate sector will invite GST at the rate of 12% with full input tax credit. According to the schedule of GST rates for services as approved by the council, real estate sector will comprise construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly. The value of land is included in the amount charged from the service recipient. These will be charged @ 12% with full input tax credit. In other words, it means all under-construction properties will invite a GST of 12%. However, GST will not be applicable for ready-to-move-in properties. However, there are still some variations for under-construction properties and confusion regarding the same. There are various stages for under-construction properties and GST will be dependent on it.

Given the weak property-pricing cycle, end- result has been a proliferation of "GST-Free" with developers reducing their own net realizations. The major positive impact has been that forcing developers to take responsibility for input taxes will make their entire supply chain far more organized, as the prevalence of cash transactions will fall.

Segment-wise or product-wise performance

The Company has only one reportable segment, namely development of Real Estate property and one geographical segment, namely within India.

During the year under review, your Company reported a total revenue of H12,029.91 Lakhs against H11,887.81 Lakhs reported in 2016-17, an EBIDTA of H21,691.49 Lakhs against H17,983.88 Lakhs reported in the previous year. The Company reported a profit after tax of H378.85 Lakhs in 2017-18 against profit after tax of H1,462.02 Lakhs reported in the previous year.

The consolidated revenue of your Company during the year under review is H11,824.88 Lakhs compared to H11,051.72 Lakhs in the previous year, an EBIDTA of H21,908.14 Lakhs against H17,729.89

Lakhs reported in the previous year. The Company reported a consolidated profit after tax of H361.33 Lakhs in 2017-18 against H1,343.23 Lakhs reported in the previous year.

Despite unfavourable market conditions, construction activities across all our ongoing projects were in full swing. In order to drive sales, we announced no GST for our Emami City Project at Kolkata.

Risk and Concerns

Economic risk: Economic volatility could affect profitability. Mitigation: A robust Balance Sheet ensures that the Company possesses considerable cover against fluctuations. The Company is positioned in high growth markets, strategically selecting projects based on market and location demand.

Industry risk: Disruptions (material, labour and regulations) could impact operations.

Mitigation: The Company’s core strength lies in robust project planning and execution, enhanced by strong procurement and people management.

Funding risk: One of the major challenges in this industry is to procure low cost funds, the unavailability of which hinders the progress of the projects.

Mitigation: Being part of a respected conglomerate, mobilizing debt at a cheaper rate places us in an advantageous position to mitigate the risk.

Land availability risk: Delay in availability of land may result in project delays resulting in loss of revenues and profits.

Mitigation: The Company’s strategic business model of entering into joint agreements with land owners and developing projects not only incentivises land owners to provide their land (as they earn higher returns) but also reduces the capital deployed by the Company.

Project completion risk: One of the biggest problems in this sector is delay in the completion of projects and handover to the customers.

Mitigation: The strict policies followed by the Company along with partnerships with specialised partners (Larsen and Toubro) helps deliver projects on time.

Quality risk: Quality of raw materials used can affect the Company’s end product.

Mitigation: The Company strives to achieve excellence and is driven to provide its customers with quality products. The Company uses ISI certified, best-in-class raw material from producers of established reputations.

Cash fiow risk: Being a capital-intensive industry, any unavailability of cash may disrupt operations.

Mitigation: Most of the upcoming projects of the Company are expected to generate steady cash flows.

Discussion on financial performance with respect to operational performance/ financial highlights

A comparative table showing the synopsis of the Profit and Loss statement for 2017-18 v/s 2016-17 is provided hereafter:

(Rs in Lakhs)
P & L Snapshot* 2017-18 2016-17
Total revenues (H Lakhs) 11,824.88 11,051.72
Total expenses (H Lakhs) 11,567.25 9,552.05
EBIDTA (H Lakhs) 21,908.14 17,729.89
EBIDTA margin (%) 185.27 160.43
EBIT (H Lakhs) 21,865.26 17,694.77
EBIT margin (%) 184.91 160.11
Profit /(loss) before tax (H Lakhs) 257.63 1,499.67
Profit/(loss) after tax (H Lakhs) 361.33 1,343.23
Basic EPS 1.29 5.53


Internal control systems and their adequacy

Our internal control systems are adequate and provide, among other things, reasonable assurance of recording transactions of operations in all material respects and of providing protection against misuse or losses from unauthorized use or disposition.

Human resources

The Company’s business is managed by a team of competent leaders. The Company imparts adequate training and appropriate working environment to retain the best talent. The Company enjoys excellent relations with its people and has not faced any employee unrest.

Cautionary statement

This statement made in this section describes the Company’s objectives, projections, expectations and estimations which may be ‘forward looking statements’ within the meaning of applicable securities laws and regulations. Forward-looking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realised by the Company. Actual results could differ materially from those expressed in the statements or implied due to the influence of external factors which are beyond the control of the Company. The Company assumes no responsibility to publicly amend, modify or revise any forward-looking statements on the basis of any subsequent development, information or events.