kbc global ltd Management discussions

BUSINESS ENVIRONMENT

It has been a near-normal year after two years of pandemic induced challenges but the global economy continues to face headwinds of rising inflation and tapered growth. According to The World Economic Outlook (WEO) update, the world economic output growth slowed down to 3.4% in CY2022, after growing by 6.0% in CY2021. The rise in central bank rates to fight inflation and Russias war in Ukraine continue to weigh on economic activity with its impact likely to spill over to CY2023 as well. The rapid spread of COVID-19 in China also dampened growth in CY2022, but the reopening has paved the way for a recovery. Stronger-than-expected private consumption and investment amid tight labor markets and greater than anticipated fiscal support helped the major economies.

The IMF expects growth in CY2023 to be 2.8% with a gradual pick-up in CY2024. The economic activity is expected to remain sluggish mainly due to slow down in advanced economies. For advanced economies, growth is projected to decline sharply from 2.7% in CY2022 to 1.2% in CY2023 amid financial sector turmoil, high inflation, ongoing effects of Russias invasion of Ukraine, and three years of COVID. The growth in US slowed down in the second half of the year to end at a mere 0.9% in CY2022 and is expected to remain at 1.0% in CY2023 due to the steeper path of Federal Reserve rate hikes. Interest rate risk, the root cause of financial sector turmoil could mean a tough road ahead. Growth in the Euro area is expected to bottom out at 0.7% in CY2023 reflecting the effects of faster rate hikes by the European Central Bank, lower wholesale energy prices, and additional announcements of fiscal purchasing power support in the form of energy price controls and cash transfers. For emerging market and developing economies, growth is projected to rise modestly, from 3.9% in CY2022 to 4.0% in 2023. Growth in emerging and developing Asia is expected to rise in CY2023 to 5.3% after the deeper than expected slowdown in CY2022 to 4.3% attributable to Chinas economy. Growth in China is projected to rise reflecting rapidly improving mobility and full reopening. Indias economy on the other hand, will slow down from 6.8% in CY2022 to 5.9% in CY2023 as per world economic outlook, impacted by rising global inflation and the resultant interest rate hikes. Global inflation is set to fall, although more slowly than initially anticipated, from 8.7% in CY2022 to 7.0% in CY2023 as the massive and synchronous tightening of monetary policy by most central banks should start to bear fruit. Commodity prices have generally seen a correction since October 2022. Oil prices also are projected to fall by 24% by IMF in CY2023, whereas non-fuel commodity prices are expected to remain broadly similar. There are numerous downside risks to weigh on outlook like stalling recovery in China, escalation of war in Ukraine, sudden repricing in financial markets, and geopolitical fragmentation. Also, high post-pandemic debt burden will pose to be an ongoing challenge for many countries over the next few years. The upside though can come through pent-up demand boost fueled by excess private savings from pandemic fiscal support and in many cases, still-tight labor markets and solid wage growth; or through faster disinflation as easing in labor market pressures in some advanced economies due to falling vacancies could cool wage inflation.

INDIAN ECONOMY

The Indian economy continues to remain fairly resilient in the last year despite the global head winds. However, it will see a moderation in growth in FY24 to 5.9-6.3% as per various estimates as against 6.9% in FY23. Rising borrowing costs and slower income growth will weigh on private consumption growth, and government consumption is projected to grow at a slower pace due to the withdrawal of pandemic-related fiscal support measures. Despite this, India will remain one of the fastest growing economies in a challenging global environment.

Indias GDP grew by 6.9% in FY23 due to steadfast domestic demand, governments unwavering focus on infrastructure spending and low base effect. Volatile commodity prices have impacted profitability, particularly of MSMEs, while export-oriented sectors face headwinds from a slowdown in their major markets. The headwinds of higher input cost and challenging global environment will continue in FY24 also. The increase in repo rate by RBI by 250 bps since the beginning of FY2023 to contain inflation is expected to slow down the growth rate as the full effect of rate hikes will be felt in FY2024. RBI though is expected to continue its accommodative stance to growth as seen in its April 2023 Monetary Policy Committee meeting where rates were maintained. Indias banking system has been largely insulated from recent failures of certain banks globally. Interest rate risk, the root cause of stress at some banks in the US, is relatively lower for Indian banks. Loans which form about 70% of asset book of banks in India are largely floating in nature. Also, the base interest rates in India are higher than global peers, making the sensitivity of investments to mark-to-market losses relatively lower. Consumer inflation is expected to moderate from 6.8% in FY23 to 5.2% in FY24, owing to a high-base effect. A good rabi harvest would help cool food inflation and a slowing economy to moderate core inflation. The World Bank expects the government to meet its fiscal deficit target of 5.9% of GDP in FY24 and narrow the current account deficit to 2.1% from an estimated 3% in FY23 on the back of robust service exports and a narrowing merchandise trade deficit. While the short-term outlook seems to be challenging given the rising interest rates, external supply shocks and geopolitical tension, we do believe the government is doing the right things to ensure a sustainable growth path for the country. The union budget presented this year was very supportive of the long-term growth of the real estate sector in India through its focus on urban infrastructure and the digital economy.

The governments sharply expanded capital expenditure target for the year is expected to create job opportunities and higher economic activity.

REAL ESTATE SECTOR

The post-pandemic picture for real estate sector is a paradigm shift from before. The pandemic has reinstated the importance of home ownership and the attitude of customers towards residential properties has seen a substantial shift. Preference for larger sized apartments, inclination towards reputed developers and a rising demand for townships projects are just some of the emerging trends. Fiscal 2023 was a milestone year for the Indian Real estate sector with all-time high sales. The sector showed healthy growth on the back of a high base achieved in fiscal 2022. The demand pick-up seen in the second half of fiscal 2021 has continued into fiscal 2023 and is expected to continue in fiscal 2024. The number of launches are also increasing and touched a decadal high last year, inventory is continuing to show a decline or stability across Tier-1 cities, indicating a healthy demand momentum. While the residential segment witnessed strong performance, commercial office sector continues to remain sluggish with demand not yet reaching the pre-pandemic levels. The challenges to office space demand has been the work from home trend and slowdown in global economic growth. The global slowdown directly impacts sectors like IT/ITeS which is the major occupier of office space in India. Retail real estate sector though, is back to full swing with consumption recovering beyond pre-pandemic levels and should continue the momentum.

RESIDENTIAL REAL ESTATE MARKET

The residential market has sustained the momentum seen in the latter half of fiscal 2022. The robust performance of the sector during last year signifies the strength of the underlying demand for property. The demand is driven by healthy economic recovery post pandemic, healthy affordability compared to historic levels and other favorable macroeconomic factors. The industry though faced headwinds of steep rise in raw material costs, consumer inflation and a sharp increase in borrowing costs. Heightened savings during the lockdowns, relatively little income disruption in the mid and high-income categories and a comparatively strong economic growth outlook have sustained demand in the Indian residential market. With the 250 BPS repo rate hike by central bank to fight inflation, and consequent increase in home loan rates during the fiscal 2023, residential real estate demand was uncertain. The same was seen in other markets around the world. However, residential demand in the country has not only remained resilient but surged to a nine year high in terms of annual sales in CY2022 as per property consultant Knight Frank1. The housing sales were 41% higher yoy in terms of units sold in CY22 as against CY21. According to the Knight Frank affordability matrix, the affordability declined in CY22 as against CY21 due to the rate hikes and price increase. However, all markets except Mumbai, are recorded to be well below the threshold of comfortable affordability of 50%, a level exceeding which banks rarely underwrite a home-loan. Mumbai was the only city that recorded a higher than threshold affordability ratio at 53%, although it has improved the most since CY2010. The affordability had increased dramatically since CY2015 due to declining interest rates. An EMI/Income ratio of over 50% is considered unaffordable according to the matrix and most cities had witnessed a dramatic increase in affordability in this period due to decadal low interest rates and decline in home prices. While the trend has reversed, the affordability continues to remain better than historic levels. Healthy absorption in residential units coupled with rise in input costs led to an increase in prices in many micro markets. Across the 4 major markets of NCR, MMR, Bengaluru and Pune, the prices have increased by 7% on average in CY22. If this significant sales velocity is sustained in residential realty, the upward price revision may continue as the median home loan rates have still not breached the pre pandemic levels of CY2019. The requirement for work from home setups has also emerged as a factor influencing homebuyer preferences. The demand for real estate is also seen beyond Tier-1 cities and it is likely to lead the sectors growth in the coming years. The resurgence in demand has also put residential development into overdrive with the annual volume of units launched, also reaching nine-year highs. Notably, the inventory for the sector, which had seen a correction every year in the last 9 years has now stabilized. However, with improved demand inventory in terms of quarters-to-sell (QTS) is still continuing to show an improvement. QTS is lowest at 7.2 at the end of CY22, an improvement from 10 a year ago, and denotes a healthy market scenario. The industry continues to consolidate with residential developments steadily shifting into the hands of stronger developers who have been able to weather the economic storm created by the pandemic. As per credit rating agency CRISIL Ratings limited, the share of large listed developers has increased to ~24% in fiscal 2023 from ~14% before the pandemic and their share will continue to increase as share of new launches by these large listed developers was 40- 45% in last fiscal.

OFFICE MARKET

CY2022 was a volatile year for the Indian office market which was dented by fears of global economic slowdown. These global headwinds not just weighed down growth projections for the Indian economy, it also weighed on some leasing transactions particularly in Q4CY22. Nevertheless, the Indian office space market concluded CY2022 with a significant 36% YoY growth in transaction volumes to 51.6 million sq. ft. and a 28% YoY growth in completions to 49.4 million sq. ft. Consequently, the occupancy levels have remained steady at 17.1%.

BUDGET 2023 TAKEAWAYS

The union budget presented this year was supportive of the long-term growth of the real estate sector in India through its focus on urban infrastructure and the digital economy. The Governments rising focus on infrastructure capex will create a backdrop of opportunity for the real estate sector. Some of the key measures include:

Housing for All

The Government allocated 79,000 Crore, 66% higher than last years allocation, under the Pradhan Mantri Awas Yojna (PMAY) initiative which will be used for both urban and rural markets. The government plans to complete its target of over 4 Crore houses across both urban and rural markets, which will be allocated to persons eligible under the scheme. In addition, it plans to make the land and construction approval process more efficient.

Urban Development Plan

The Real estate sector is expected to benefit from emphasis laid on development and urban planning in Tier 2 and Tier 3 cities in the budget. The National Housing Bank (NHB) will oversee the proposed Urban Infrastructure Development Fund (UIDF). This will help public agencies develop infrastructure in Tier 2 and Tier 3 cities. A 10,000 crore budget has been proposed for this fund. Furthermore, five centres of excellence for urban planning have been proposed, which will provide the sector with a channel to hire trained professionals. A committee of urban planners, economists, and institutions will be formed to make recommendations on urban sector policies, capacity building, planning, implementation, and governance. Municipal Bonds The budget also proposed property tax reforms to provide cities with incentives to improve their credit ratings for municipal bonds. These bonds have the potential to alleviate urban infrastructure woes while also improving real estate sentiment in these areas.

BUDGET 2023 KEY TAKEAWAYS FOR CLIMATE CHANGE

The Union Budget FY 2023-24 promises sustained economic growth through its vision for the Amrit Kaal Blueprint for an empowered and inclusive economy. The focus is on sustainable growth for continued recovery from the global economic slowdown, caused due to the COVID-19 pandemic and the Russia- Ukraine war. The multi-pronged approach adopted by the Budget includes targeted capital investment, with a thrust on green infrastructure, to help facilitate GDP growth. There is a 33% increase in capital investment outlay, and an estimated GDP growth of 5.9-6.2% forecasted for FY 2023-24. The thrust on the infrastructure sector to drive growth is also evident in the 66% increase in the outlays for the Pradhan Mantri Awas Yojna (PMAY), setting up of the Urban Infrastructure Development Fund (UIDF), and many other sector-linked initiatives. Green Growth is one of the 7 priority areas of the Budget FY 2023-24. The initiatives for the same are spread across industries including agriculture, Oil and Gas, Infrastructure, Transport, etc. to enable inclusive and sustainable growth. The recently launched Hydrogen Mission with an outlay of 19,700 crores4, will aide Indias transition to a low carbon economy. Under the Galvanizing Organic BioAgro Resources (GOBAR)-Dhan Scheme an investment of 10,000 crores has been estimated, to facilitate circular economy through the setting up compressed biogas plants. Whether it be through setting of Bio-Input Resource Centres, or through increasing battery storage capacity, infrastructure development is a major focus area of Green Growth.

OPPORTUNITIES

Housing Demand

The pandemic has nudged a lot of fence-sitters to convert into first-time home buyers and existing ones to upgrade to larger homes by re-establishing the security that homeownership offers, resulting in rising housing demand across segments. An expected economic recovery along with the belief of housing prices bottoming out amongst consumers and rising income levels are some of the factors which will drive the housing demand going ahead. Hybrid working models will also continue to drive demand for larger homes. Employers are expected to continue to offer flexibility to their employees in order to attract and retain talent.

Sector Consolidation

The highly fragmented Indian real estate sector has been in a prolonged consolidation phase from the past few years and the pandemic has been one important factor pushing weaker players out of business. The disruptions in the real estate sector have ensured that no new player has an easy entry into the sector. As the sector moves towards fewer big players in each region, the consolidation presents a lucrative opportunity for the existing real estate developers to cater to the rising housing demand.

Affordable Housing

Affordable housing continues to remain a significant opportunity for developers and key focus area of the government. While the tax benefit for first-time homebuyers and tax holiday for developers in affordable housing segment was rolled back in Budget 2022, we believe it will not deter homebuyers decision of purchasing homes and demand will continue to be strong in affordable housing segment. Interestingly, the share of launches in the affordable segment across the top 7 cities of India, has dropped from 26% in CY2021 to 20% in CY2022, according to ANAROCK Research. The affordable housing segment could see a meaningful uptick in demand with an expected economic recovery and rising income levels.

Digital Real Estate Sales

Digital marketing has emerged as an important tool for real estate developers for their sales and customer outreach. Post-pandemic, the marketing activities are not just limited to tap new customers or brand recognition, but establishing a personal touch through digital means. With the tech-enabled tools to close real estate purchases online, developers have been able to record healthy sales even during the lockdown. Digital collaboration tools can be leveraged by the developers to interact with potential customers, showcase project brochures, facilitate virtual site tours, and focus on NRIs to propel the sales. Emerging tools such as virtual reality, augmented reality, AIpowered chatbots are being extensively used to establish personalized services with prospective customers. Going ahead, it will be imperative for the developers to adapt to a tech-savvy future and the proportion of real estate business generated online is expected to only rise further.

THREATS AND CHALLENGES

Regulatory Hurdles

Real estate sector is a highly regulated sector and any unfavorable changes in government policies and the regulatory environment can adversely impact the performance of the sector. There are substantial procedural delays with regards to land acquisition, land use, project launches and construction approvals. Retrospective policy changes and regulatory bottlenecks may impact profitability and affect the attractiveness of the sector and companies operating within the sector.

Monetary Tightening and Funding Issues

There has been a contrasting trend in real estate lending over the past few years wherein reputed, low leveraged developers continued to enjoy easy access to liquidity as the lenders remained selective and weaker developers struggled with limited sources of capital. Real estate sector performance is closely linked to economic recovery and its monetary policies. The Reserve Bank of India has so far maintained accommodative stance. Going ahead, we expect to see monetary policy remain tight and gradually ease as the central bank tries to support the economic recovery and also balance inflation.

SEGMENT WISE PERFORMANCE

During the year the revenue from real estate segment stood at 1,017.60 Lakhs as compared to revenue of 3,362.59 Lakhs of FY 2021-2022. Also Contractual income of the company for FY22-23 is 4,046.66 lakhs as compared to income of 3,006.98 Lakhs.

HUMAN RESOURCES DEVELOPMENT

The Company had 66 permanent employees as on March 31, 2023 at various levels. The Company has a HR Policy in place and encouraging working environment. The Company has continued to focus on various aspects like employee training, welfare and safety thereby maintaining a constructive relationship with employees.

DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE

Performance highlights

KEY FINANCIAL RATIOS

In accordance with SEBI (Listing Obligations and Disclosure requirements 2018) (Amendment) Regulations 2018, the Company is required to give details of significant changes (Change of 25% or more as compared to the immediately previous financial year) in key sector specific financial ratios:

Ratios	FY 2022 - 2023	FY 2021 - 2022	Explanations
Trade Receivables Turnover	1.29	1.58	Revenue from operations were reduced during the year and Trade Receivables were increased due to the unbilled revenue component of civil works contracts. Hence, this ratio was declined
Current Ratio	8.74	3.23	During the year, the company has advanced loan to its Subsidiary company, therefore the amount of current assets has comparatively increased from last year and accordingly the deviation is more than 25%.
Debt - Equity Ratio (in times)	0.14	0.64	The amount of average total equity has increased due to conversion of FCCB at the option of the holder, accordingly, there is deviation in the ratio of more than 25%.
Net Profit Margin %	- 13.97 %	15.49 %	The company has reported loss for the current financial year, hence the ratio has decreased more than 25%.

OUTLOOK

The outlook for the real estate sector appears positive in 2023 with growth expected in both the commercial and the residential segments. Different research reports on the sector and views from real estate players indicate a positive momentum in 2023.

As per a year-end report from real estate services firm JLL, the office, residential as well as warehousing segments have performed extremely well in 2022 and are expected to continue their upward trajectory in 2023 as well. Similarly, as per CRISIL, amid the recession buzz, office leasing is still expected to grow 10-15 per cent in the next fiscal too and despite the growth momentum tempering, credit profiles of commercial realtors are expected to remain healthy.

As per JLL, the net absorption in office space for 2022 is likely to be up 50 per cent Y-o-Y with 2023 expected to further build on the gains of this year. As per the report, supply addition and forecast pipeline remain strong with institutional share at 30 per cent; headline vacancy is likely to inch up within a tight range.

The net absorption in 2023 for office space is expected to be at 37-40 million sqft. The report observes that there is a slight decline in space take-up by technology firms, but manufacturing, healthcare and flex are major movers in 2022 and are also expected to remain big drivers of office demand in 2023. The technology, as well as the GCC story, will continue to support the office market momentum in 2023 as well.

The JLL report observed that the residential segment has witnessed the fastest recovery with annual sales in 2022 expected to surpass 2,00,000 units, the highest in over a decade and nearing the 2010 sales of 2,16,762 units. Quarterly residential sales were over 50,000 units in each of the first three quarters of 2022. The report highlights that as incomes get adversely impacted by inflationary pressures and global headwinds, the affordability synergy prevailing in the last six months has been challenged. While affordability is likely to be impacted, the slowing momentum looks to be temporary with the countrys focus on economic growth along with the likely easing of inflationary pressures.

JLL report pointed out that the trend of launching plotted developments and independent floors is expected to grow with buyer preferences more inclined toward such products. Developers also get the advantages of faster execution and quick inventory liquidation with such products. Apart from the affordable and mid-segment, the traction is expected to take place in the premium segment as well, backed by launches by established developers in prime locations.

Similarly, as per the CRISIL report, though the demand will be below the pre-pandemic high of 42 million square feet (msf) in fiscal 2020, it would be within sniffing distance of the fiscal 2019 mark of 34 msf. As per CRISIL while the global recessionary headwinds and slower hiring in technology may lead to a possible deferment of leasing plans, thereby subduing demand growth in the next two quarters, the strength of the Indian economy and competitiveness of commercial real estate will keep the demand drivers intact. As per CRISIL, the credit profiles of commercial realtors will remain healthy in the milieu, backed by adequate leverage.