Majestic Auto Ltd Management Discussions.

Major Impact of COVID-19 Pandemic

The financial year 2020-21 was dominated by the COVID-19 pandemic and the ensuing global economic downturn, the most severe one since the Global Financial Crisis. The lockdowns and social distancing norms brought the already slowing global economy to a standstill. Because of this, Governments and central banks across the world deployed a range of policy tools to support their economies, such as lowering key policy rates, quantitative easing measures, loan guarantees, cash transfers and fiscal stimulus measures. India recognised the disruptive impact of the pandemic and charted its own unique path amidst dismal projections by several international institutions of the spread in the Country given its huge population, high population density and overburdened health infrastructure.

Faced with an unprecedented pandemic, loss of scores of human lives captured this worst-case scenario. Moreover, epidemiological research highlighted the importance of an initial, stringent lockdown, especially in a country where high population density posed difficulties concerning social distancing. Therefore, India’s policy humane response that focused on saving human lives, recognised that the short-term pain of an initial, stringent lockdown would lead to long-term gains both in the lives saved and in the pace of the economic recovery. The scores of lives that have been saved and the V-shaped economic recovery that is being witnessed bear testimony to India’s boldness in taking short-term pain for long-term gain.

COVID-19 has severely hit commercial real estate business and the sector has come to a standstill. With a screeching halt to site visits, discussions, documentation and closures, the real estate industry is facing a tough time for the last few quarters and the sector’s recovery will take at least a couple of years.

1. Industry Structure & Developments

The year gone by has been a period of unprecedented challenges and uncertainties caused by the pandemic. This was compounded by its cascading effect in every facet of the economy and the industry.

The real estate industry too, witnessed changes. This was as a result of systemic structural reforms and policy changes. The commercial segment in particular has exhibited an exodus to work from home culture for IT offices. On the other hand there have been benefits of lower borrowing costs.

2. Indian Real Estate: Opportunities and Challenges /Threats/ Strategies Opportunities

This Financial year had been predicted to be a year of recovery for the Indian real estate sector. However, all such anticipations were thwarted as the Covid-19 pandemic forced the central and state governments to impose stringent measures, including a nationwide lockdown for multiple months, which had a devastating impact on most businesses, and real estate was no exception. Economy across the world is indeed recovering in 2021 and as we foresee a return of IT companies to physical office space, rather than virtual meetings as employees work from home. Following are the trends that are expected to dominate the real estate market for the rest of this year.

Low Borrowing Rates

Over the past 12 months, the RBI has cut interest rates and they now stand at historic lows. This has brought Lease

Rental Discounting rates down to as low as 7.70% in some banks. This has brought down the biggest cost head in our business, and this trend is likely to continue throughout 2021-22.

Availability of Investment Opportunities

As Work from Home continues and tenants vacate offices, there are opportunities for acquisition of commercial properties at lower valuations and lower borrowing costs.

Government Initiatives

The Government has shown its commitment to the real estate industry in more ways than one in the Budget 2021. The recent Government announcement in the Budget to ease the norms for debt financing of REITs and Infrastructure Investment Trusts (InVITs) will pave the way for the Country to have parity with developed nations for institutional financing in real estate assets and also help investors get higher returns.

Challenges/Threats

The real estate sector is facing an acute working capital crisis which is essential to keep the business moving. The real estate industry has pinned hopes on Government intervention to salvage the loss created by the COVID-19 crisis with substantial fiscal stimulus to get the growth trajectory back on track. The real estate market in India is currently in the midst of fairly challenging times. In the last few years, there have been a few noticeable macro shifts that have challenged the realty sector. The key challenges that the Indian real estate industry is facing today are, inter alia, as follows: Impact of COVID-19 Pandemic

Indian real estate sector, which was already struggling to re-emerge from the past turbulence of structural changes, policy reforms, and the liquidity crisis, was set to witness major improvement.

Unfortunately, the year 2020 seems to be different. Countrywide lockdown until June and in some states till July, has halted all activities. As evident, project sites are shut, site visits have stopped, and construction activity has come to a grinding halt. Commercial real estate has also not been immune to the COVID-19 fallout. Corporate occupiers are seen delaying their leasing decisions.

Crises and global effects of pandemics are described as an unforeseen event which have negatively affected project development in the real estate sector, sales operations of existing real estate, costs estimates, values and rates of return of existing real estate sector in general.

Impact of NBFC Crisis

Nation’s real estate sector saw a fall after banks limited lending activity post the NBFC crisis in the year 2018 and the situation worsened further in the year 2020 due to a sharp demand crisis and COVID-19 pandemic. Not just the real estate sector but a large number of other industries indirectly related to this sector have also suffered the heavy winds of low demand. There is an urgent need to approach the challenge of liquidity suffered by this sector, especially after the NBFC cash crisis.

Other Challenges are as follows:

As corporate occupiers come back to the market, there is currently an excess supply of office space in our vicinity. Though we enjoy a dense location and a marquee property, rental income may be lower in the first few months and first few leases. As the second wave of COVID-19 hit Delhi NCR quite severely, even though the situation has been better for months and corporates have started returning to offices, new leasing activity has not kicked off yet. Corporates are afraid of the uncertainty in the next few months, and the fear of a third wave still dominates their decision.

The Road Ahead/Positive Approach

The year 2021 was slated to be a year of recovery, and the confidence was seconded by the vaccination drive rolled out by the Union Government. However, the recent upsurge of infections in various pockets of India has compelled the investor community to remain in a cautious mode.

As India continues with its Coronavirus vaccination drive, the positive impact of the inoculation programme will also be seen in the Country’s real estate segment.

The rise in Covid cases will push companies to continue with flexible policies to reshape offices to suit the modern workforce. All kinds of companies will work to change office models according to their workforce preferences. The new purpose will be finding a balance in the work-life mix and facilitate the changing work pattern. A new concept of satellite workspaces is emerging to help the buyers to find a better work-life balance with offices near their residential spaces.

2021-22 will be a year to strive to retain the current clients and maintain occupancy levels. There might be some discounts involved in the short term, but at this time it is important to survive the challenging period so we can be among the stronger players when the market rebounds.

3. Segment-wise/ Product-wise Performance

You are already aware that, your Company has significant presence in Noida, UP

Your Company along with its subsidiary/associate companies etc. have range of Commercial real estate leasing, Factory space leasing, and Facility Management business.

Commercial real estate has seen serious challenges in the year as corporate adapt to a work from home culture. While lock-in period leases continue to be fruitful, others have either vacated or negotiated rental discounts.

Even the tenants that have honored their lock in period rentals have utilized lesser space and hours, therefore impacting facility management income.

Factory space occupiers have been more stable as they continue to use their space as before.

The Company operates in single segment only, therefore, the segment wise reporting is not applicable.

4. Outlook and Strategy

Our business continues to exhibit a stable performance amidst these challenging times, with significant lock-in period tenants continued to use their space. We also benefitted from lower borrowing costs.

The rental business has been witnessing some short-term temporary dislocations due to the pandemic and the lockdown restrictions with tepid new leasing activity. We continue to maintain a positive outlook on this segment for the long term and expect normalcy to return in due course.

The key elements of the strategy of the Company are the following:

Cost Optimization and Cash Management:

The Company strives towards creating efficient cost structures in line with the scale of the business. It has successfully reset its cost base by significantly reducing cash overheads and the finance costs by tight controls and rate negotiations. It expects to sustain these cost structures into this next growth cycle. We expect to generate healthy cash flows to further deleverage the balance sheet and increased shareholders’ value.

Company to consider sale /exit from non-core assets / slow moving investments if fetching better value and to reduce the debt.

The Company is improving its financial parameters through better performance and ensures repayment of principal amount to reduce the interest burden.

5. Outlook on Risks and Concerns

The Company is exposed to a number of risks such as economic, regulatory, taxation and environmental risks as well as sectoral investment outlook. Some risks that may arise in the normal course of business and could impact its ability to address future developments comprise credit risk, liquidity risk, counterparty risk, regulatory risk, commodity inflation risk and market risk. A new challenge emanating from the COVID-19 pandemic has also emerged which could affect business. The Company’s strategy of focusing on key products and geographical segments is exposed to economic and market conditions. The Company has implemented robust risk management policies that set-out the tolerance for risk and your Company’s general risk management.

6. Internal Control Systems and Adequacy

The Company’s internal controls are commensurate with nature, size and complexities of operations. These internal control systems ensure compliance with all applicable laws and regulations and facilitate optimum utilization of available resources as also protect the interests of all stakeholders. The Company has clearly defined policies, standard operating procedures (SOPs), financial and operational delegation of authority (DOA) and organizational structure for its business functions to ensure a smooth conduct of its business.

7. Discussion on Financial Performance with respect to Operational Performance

The details of the financial performance of the Company are reflected in the Balance Sheet, Statement of Profit & Loss and other Financial Statements, appearing separately. Highlights are provided below:

(Rs. in Lakhs)

Particulars March 31, 2021 March 31, 2020
Total Income 3,088.48 4,380.48
Profit Before Tax 958.76 1,366.35

The financial performance of the Company has been further explained in the Board’s Report of the Company for the Financial Year 2020-21 appearing separately.

The financial statements have been prepared in accordance with the requirement of Companies Act 2013, and applicable accounting standards issued by the Institute of Chartered Accountant of India.

8. Human Resources

The Company’s core focus areas are building organisational capability and capacity, leveraging and nurturing key talent, encouraging meritocracy and enhancing people utilisation in alignment with its business strategy. The Company is undertaking the following steps:

Strengthening and diversifying the leadership: Leadership teams have been ramped up by bringing specialists from real estate and other industries who will enhance all domains. Key hirings have been implemented across functions including Finance, Business Development, Project Management and execution, Marketing, IT and Hospitality.

Revitalising the organisation by hiring young and talented professionals in all key areas.

Strengthening the development and execution team to gear-up for the future.

Various training and coaching programmes are being implemented to refresh and enrich its existing talent pool. The Company leverages diversity of knowledge, qualification, skill, professional experience, culture, geography and sectoral understanding to enhance its competitiveness. The Company believes in creating an inclusive environment, where diverse perspectives can enrich strategic perspectives. To enhance inclusiveness at work, our ‘gender sensitivity’ workshops sensitise the environment in strengthening our conduct towards women colleagues. The Company’s holistic wellness programme sensitised employees around work-life balance and importance of a healthy lifestyle, emotional, physical well-being and prevention of diseases. Regular medical checks, structured monthly health programmes, health bulletins, health talks and awareness campaigns were periodically conducted. The Company also rolled out a structured program to vaccinate all its employees and their families along with contractors’/ partners’ staff & their families.

9. Details of significant changes in key financial ratios along with detailed explanations thereof, including:

S. No. Particulars Financial Year 2020-21 Financial Year 2019-20
1 Debtors Turnover 9.82 13.17
2 Inventory Turnover 9.34 15.23
3 Interest Coverage Ratio 4.00 3.71
4 Current Ratio 1.10 0.55
5 Debt Equity Ratio 0.09 0.15
6 Operating Profit Margin in percentage 41.40% 42.72%
7 Net profit margin in Percentage 27.73% 4.97%
8 Details of any change in Return on Net worth as compared to the immediately previous Financial Year along with a detailed explanation thereof 3.94% 1.04%

10. Cautionary Statement

Certain statements in the Management Discussion and Analysis describing the Company’s views on the industry, expectations/ predictions and objectives etc. may be forward looking within the meaning of applicable laws and regulations. Actual results may differ from those expressed or implied in these statements. The Company’s operations may, inter-alia, be affected by the supply and demand situations, input prices and availability, changes in Government regulations, tax laws, government or court decisions and other factors such as industry relations and economic developments, possible risk of lockdown and/or restrictions in certain geographies with the resurfacing of Covid-19 etc. Investors should bear this in mind when considering the above statements.

On behalf of the Board of Directors
Majestic Auto Limited
Mahesh Munjal
Date: November 2, 2021 (Chairman & Managing Director)
Place: Noida (DIN: 00002990)