Nitesh Estates Ltd Management Discussions.

Socio Economic Environment

The global economic activity has gathered momentum across the globe including the developed economies and the emerging economies although lately there has been volatility in financial markets and global trade due to pronouncements about tariff barriers. The Indian economy slackened last year with GDP growth at 6.6 % compared to 7.1% in the previous year. The introduction of a major tax reform requiring the entire industry to readjust to the new GST laws did contribute to this, but since then the demand has rebounded particularly in travel and sales of passenger vehicles and consumer durables. The Reserve Bank of India has projected the GDP growth for the year 2018-19 to be around 7.3 to 7.4 per cent.

Real Estate Market

Indian Real Estate Market

There has been a series of radical and transformational reforms such as demonitisation, Real Estate Regulation & Development Act (RERA), FDI relaxations, GST, Benami Transactions (Prohibition) Amendment Act, Change in Accounting standards, all coming in a row and in quick succession. This will increase the transparency of Indian real estate transactions, making it more credible and attractive with only organized players on the ground. Home ownership being a priority ambition and investment objective for Indians, these reforms will have positive implications for home buyers.

The demand for homes has stabilized at a new low and is attracting only end users and investors are staying away from the market. The cycle time for purchase decisions has become long.

Real Estate Regulation & Development Act (RERA) came into effect and in the state of Karnataka with notification dated 10th July, 2017. This law will enforce unprecedented transparency and accountability requirements for developers and will increase the confidence of the consumers. The Goods and Service Tax (GST) and Benami Transactions (Prohibition) Amendment Act will also have a major impact on the operations of the real estate developers.

Ministry of Housing and Urban Poverty Alleviation (MoHUPA) has introduced in June 2015, an interest subsidy scheme called Credit Linked Subsidy Scheme (CLSS) under Pradhan Mantri Awas Yojana (URBAN)-Housing for All, for purchase/construction/extension/ improvement of house to cater Economical Weaker Section (EWS)/Lower Income Group (LIG)/Middle Income Group (MIG), given the projected growth of urbanization & the consequent housing demands in India. The qualifying criteria for affordable housing have been relaxed. This effectively increases the size of affordable housing market across India. This segment saw several new launches and were marketed under the buzzword of "smart", "millennial", "efficient" homes.

Sectors such as IT and ITeS, retail, consulting and e-commerce have registered high demand for Office space in recent times. The Office space absorption in 2016 across the top eight cities amounted to 29 million square feet (msf) with Bengaluru recording the highest net absorption during the year. Information Technology and Business Process Management sector led the total leasing table with 52 per cent of total space uptake in 2016. Mumbai is the best city in India for commercial real estate investment, with returns of 12-19 per cent likely in the next five years, followed by Bengaluru and Delhi-National Capital Region (NCR).

Bengaluru Real Estate Market

Bengaluru is proving to be a shining spot for the real estate industry. It has witnessed phenomenal migration in last few decades to become the Silicon Valley of India with a 40% share of IT industry. Due to good market drivers – IT/ITes sector – which ensures strong macro-economic dynamics, most home buyers _nd Bengaluru a perfect place to settle and retire. There has been a Significant decline in the absorption, however Bengaluru has been affected to a lesser extent as compared to the other cities in India. The average yield rental yields are comparatively better ranging between 2-4% as compared to cities like Mumbai where yields are in range of 1-3%.For investors looking for less volatile market in a long term, Bengaluru provides an attractive investment option.

The Company

Company Overview and Market Positioning

Nitesh Estates Limited ("Nitesh Estates" or "Company") is an integrated property developer and one of Indias most recognized luxury real estate brands with presence in multiple asset classes: Residential, Commercial, Hotel and Shopping Mall. Since inception, the Company has brought over 21.60 mn sq. ft. of area under development. The Company made its Initial Public Offering in May 2010 and was listed on the Bombay Stock Exchange and the National Stock Exchange.

The Company has a very strong brand equity, business processes and partnerships to attain the next stage of growth. Since inception, the Company has completed 13 projects across residential, commercial and hospitality segments covering a developable area of 3.61 mn sq. ft. Nitesh Estates currently has 17 ongoing residential projects with a total developable area of approx. 8 mn sq. ft. The revenue potential of these projects is over Rs. 3000 Crore over 3-5 years.

Nestled in the heartland of Pune, Nitesh HUB is a whole new shopping and entertainment destination in Pune spread over 1 mn sq. ft. The mall has a current occupancy level of around 70% and is expected to be fully occupied in FY 2019 In the commercial space, Nitesh Estates has 4 ongoing/upcoming commercial projects in Bangalore central business district (CBD) covering an area of over 0.45 mn sq. ft. The Company is targeting to attain an annual rental income of over Rs. 300 Crore within the next 5 years through its portfolio of income generating assets.

The Ritz-Carlton, one of the worlds finest brands for luxury hospitality, partnered with the Company to bring Indias _rst Ritz Carlton Hotel in Bengaluru. Operational since October 2013, The Ritz-Carlton is an epitome of luxury and Nitesh Estates development capabilities & has become an important landmark in the city.

Nitesh Estates has a comprehensive corporate governance framework with an eminent Board and strong management team with Significant experience across industries. In line with best in class corporate governance practices, the Company has a high proportion of independent directors.

Operational Performance

During the year, the Company sold 90,055 sq. ft. of area with a Sales Value of Rs. 62.38 Crore exclusive of taxes. The average realization for the year was Rs. 6,927 per sq. ft., which is one of the best in the Bengaluru real estate industry. The Company sold 49 units in the mid-income, high-income and luxury residential segments. The collections were at Rs. 53.13 Crore in FY2018.

Financial Performance in IND AS (Figures)

Nitesh Estates generated revenue of Rs. 56.07 Crore, compared with FY 2017 revenue of Rs. 311.84 Crore. The Earnings before interest, tax, depreciation and amortization (EBITDA) was Rs. (-) 114.61 Crore as compared to Rs. -19.13 Crore in the previous year. The Profit/(Loss) after Tax during the year was Rs. (256) Crore.

There were 10 projects under income recognition during the year with Unrecognized Income of Rs. 87 Crore. The Company expects increased revenue going forward owing to various projects getting to advanced stages of construction.

Revenue Breakup: - IND AS (Figures)

Rs. Lakhs FY2018 % share FY2017 % share
Property Development 2114 37.70 26390 84.63
Contractual Activities/ Other Operating Income 2 0.04 24 0.08
Income from Sale of Land 0 2650 8.50
Maintenance Income 807 14.39 1192 3.82
Lease Rent 702 12.52 523 1.56
Misc- Other Income 2004 35.35 705 1.42
Total 5629 31484

Financial Condition IND AS (Figures)

Rs. Lakhs

Particulars March 31, 2018 March 31, 2017
Sources of funds
a. Shareholders funds (8951) 12900
b. Minority Interest - -
c. Loan funds 130592 104771
Total 121641 117671
Application of funds
a. Fixed assets (net) 67350 67065
b. Investments 4341 8871
c. Net current assets 47304 41660
d. Deferred tax/ miscellaneous expense, among others 2646 75
Total 121641 117671
Particulars 12 months ended March 31, 2018 12 months ended March 31, 2017
Profit before tax (26709) (14009)
Add: Adjustments 25477 12402
Add: Net working capital 1234 1610
Less: Income Tax paid - -
Net Cash flow from operating activities (13572) 21588
Net Cash flow from investing activities 439 3633
Cash flow from _nancing activities 13524 (26634)
Net cash in_ow / (out_ow) 393 (1410)

Liquidity

As of March 31, 2018, the Company had cash and cash equivalents of Rs. 6,40,46,632-/-. On a standalone basis, the Company had a total debt of Rs. 4,98,14,35,363-/- and the net worth was at 3,41,45,67,244. The Company is closely monitoring the debt levels and plans to reduce the high cost debt from the cash generated from on-going projects and exiting some non-core assets in the portfolio from time to time.

Business Strategy

Complying with Real Estate Regulation and Development Act

The main motive behind establishment of Real Estate Regulation and Development Act (RERA) is to ensure that real estate transactions happen in an efficient and transparent manner and to protect the interest of the consumers along with establishment of an adjudicating mechanism for speedy dispute redressal. Nitesh Estates has geared up its internal processes for becoming compliant with the requirements of RERA.

Growing the residential business segment in Bangalore

Bangaluru continues to be one of the most attractive real estate markets in India. Rightly called the ‘Silicon Valley of India, the city has 40% of Indias IT industry. The presence of large IT multinationals, together with the largest number of high-tech start-ups of any Indian city, is providing added impetus to Bangalurus entrepreneurial growth. Most of the demand in Bangalore is consumer driven. Nitesh Estates is one of the most recognized real estate developers in Bangaluru. The Company is focused on expanding its market share in the Bangaluru market through its strategy of offering a range of products varied by price, location and type of homes.

Revenue diversification and expansion of rental income

Nitesh Estates has been strategically focused on diversifying its revenue to include recurring income stream. In line with this strategy, the Company acquired a shopping mall in Pune, Nitesh Hub.. During FY2016, Nitesh Estates also signed a platform partnership agreement with Goldman Sachs to invest in income generating assets. Total assets/investments under the partnership will be upto $250-$300 million. The Company intends to expand its rental revenue to Rs. 300 Crore annually in next 5 years. Nitesh Estates also has 4 ongoing/ upcoming commercial properties in Bangaluru central business district (CBD) covering an area of over 0.45 mn sq. ft.

Investment in systems and technologies

Information Technology continues to support all aspects of business and operations at Nitesh Estates through continued investment in enterprise wide SAP platform including data analytics.. The Company continues to explore and implement new emerging technologies for furthering business objectives. IT forms the core of all communication and information exchange for ongoing monitoring and effective decision making.

Selective geographic expansion

The Company believes that deep insights into the community and clientele and a thorough understanding of the policies, priorities and processes of the local Government are essential factors that drive success. In line with this belief, Nitesh Estates has chosen to operate in the South Indian market. Majority of the ongoing and upcoming projects are located in Bengaluru, where the Company has strong experience of executing several projects since its incorporation. Furthermore, Bangaluru is considered to be one of the best real estate markets in India. Nitesh Estates is also selectively pursuing opportunities in other southern cities such as Chennai, Kochi and Goa.

Managing and promoting talent

Nitesh Estates culture is focused on customer-centricity, collaborative team work, result orientation, entrepreneurial mindset and developing people. One of the key growth strategies at Nitesh Estates is to manage and promote talent by providing growth opportunities, rewards, respect, learning and fun. The Companys employees are both an important stakeholder group and key players in its business. With their skills and achievements, the Company is driving a culture of innovation, sustained growth and Profitability for Nitesh Estates.

Opportunities and Threats

Opportunities in all segments of real estate development are driven by the macroeconomic forces on account of the unique current situation where a large part of the population consists of people less than 24 years of age, that is people who are young and productive. The bene_ts to the economy, commonly termed as the demographic dividend is bene_tting the real estate sector. The other macroeconomic force is the rapid rate of urbanization on account of migration of population to cities, the growth centres. Implementation of Real Estate Regulation and Development Act (RERA) will bring in more transparency to the real estate transactions and boost buyers confidence. The disposable income has been steadily increasing and there is easier availability of consumer finance coupled with a declining interest rate trend. All the aforesaid aspects result in opportunities in all segments of real estate.

The key threats to real estate business emanate from the cyclicality of the business owing to the tide and ebb in consumer and business confidence. Going forward, with the e-commerce market in India making itself look attractive, can pose a serious threat to the retail real estate. Other immediate challenges to the business are from:

environmental risks such as depletion of water table

potential impact of global slowdown on the Bengaluru IT/ITES industry increase in cost of commodities and building materials

increase in interest rates which could result in depressed demand from customers and at the same time increase our interest burden

shortage of labour and skilled technical manpower and the consequent upward pressure on cost of human resources regulatory and policy changes results in higher costs and delays in approvals related with projects

Risk management

The Company has an established enterprise risk management framework to optimally identify and manage risks, as well as to address operational, strategic and regulatory risks. The ability to anticipate risks and respond effectively is critical for achieving the Companys objectives and provides value to stakeholders. The risk management process also addresses long term strategic and operational planning, talent acquisition and retention, treasury management, financial reporting and controls, information technology and security, environment health and safety compliance, legal, taxation, communication, regulatory compliance and code of conduct for employees. The Company believes that risk is an integral part of every business and promotes a culture of building ability to anticipate and manage the risks effectively and converting them into opportunities. Risk assessment is conducted by the risk management committee and the program is reviewed periodically by the Audit Committee.

There are several areas of risk related with:

the macroeconomic environment the title of land and joint development partners the information technology systems and disaster recovery

the project management resulting in deviation from planned time, quality, cost and safety the availability and cost of building materials the changes in statutes and processes in decision making by the Government the availability of finance and the cost of financing

the human resources their availability, costs and compliance with the code of ethics of the Company the vendors and business partners the assets of the Company the customers and the competitors

Internal Control Systems

Nitesh Estates has an elaborate internal control system which monitors compliance to internal processes. It ensures that all transactions are authorized, recorded and reported correctly. Well established and robust internal audit processes, both at business and corporate levels, continuously monitor the adequacy and effectiveness of the internal control environment across the Company and the status of compliance with operating systems, internal policies and regulatory requirements. In the networked IT environment of the Company, validation of IT security continues to receive focused attention of the internal audit. The Company has appointed PricewaterhouseCoopers its internal auditor. The Internal Auditors independently evaluate the adequacy of internal controls and concurrently audit the majority of the transactions in value terms. Independence of the audit and compliance is ensured by direct reporting to the Audit Committee of the Board.

In order to ensure compliance with the Companys Act related with Internal Financial Control (IFC), the Company appointed KPMG to carry out a study on the processes of the Company and suggest remedial measures if any. Certain process changes were instituted and KPMG reported that the Company is compliant with the requirements of IFC. For the subsequent periods, internal audit has been mandated to specifically carry out audits with respect to the compliance with IFC requirements.

The Company strives to continuously strengthen the internal control systems by adopting standard operating procedures and by delegating roles and responsibilities to various Department heads for effective implementation of the same. This is to ensure that the Company conducts its business with highest standards of statutory, legal and regulatory compliance.

Outlook

In 2017, Indian real estate industry saw the biggest policy changes. Policies like GST and RERA are on their way to full implementation. The long term outlook still remains attractive due to economic growth, increasing urbanization, employment opportunities, a_ordability, favorable demographics, urbanization, and preferred location by NRIs, expats and IT/ITES professionals. Further, income tax bene_ts, interest subvention scheme, lower interest rates and availability of _nancing options support the growing demand. Management would adopt a cautious approach and observe the developments closely while making decisions. The key focus for us in the following year would be:

Focus on execution and revenue recognition: There are 12 residential projects currently in execution having a developable area of 5.87 million sq ft. There are another 5 residential projects having a developable area of 2.16 million sq ft which are in various stages of design and approval and are targeted for launch during the coming quarters. This represents a huge growth in the intensity of the business and correspondingly on the revenue and Profits of the Company. We are now focused on staying ahead on the cash collection cycle and accelerate execution. The consumers are highly discerning and the market is competitive. For success in the market place timeliness and quality of delivery are the di_erentiators.

Compliance with RERA: The Company has been focusing on operational changes to be compliant with RERA. The process includes identi_cation of process which has to undergo change, modification and roll out Standard Operational Procedure (SOP) to be compliant.

Design and Innovation: The Company has always focused on building a strong brand recall and di_erentiating itself from the competitors by continuous investments in new design and innovation for projects. Our association with leading _rms like KPF, WATG, Callison, RK Associates and CnT help us develop projects which provide our customers a unique living experience.

Cash-_ow Management – Tight control on accounts receivables and accounts payables with the objective of reducing the interest burden.

Customer Relationship – Enhance customer experience at each of their touch points starting with at the stage at which we interact with them to assist in selection of a home till the time it is handed over.

Human Resources Development

Nitesh Estates employs people across all functions. The Company strives to be an Employer of Choice. High quality recruitment supports the talent management practices of the Company. The Company continues to foster a high performance culture by recognizing good performers and providing them with career enhancing opportunities. Several HR initiatives have been taken for the strategic alignment of the HR function with the business objectives. These initiatives encompass employee engagement, learning & development besides improved internal communication mechanism with employees.

Our registered and corporate Office is located in Bengaluru. This houses employees who oversee our financial, administrative, design and planning and other reporting functions. We have not experienced any material strikes, work stoppages, labor disputes. Our work-force consists of our permanent employees, consultants and labor work force that work at projects through sub-contractors. The function-wise break-up of our employees is as below.

Functions 2018 % 2017 %
Administration & Secretarial 34 16.75 35 12.73
Business Development & Liason 10 4.93 11 4.00
Company Secretarial Department 3 1.48 4 1.45
Construction Management 42 20.69 63 22.91
Contracts & Procurement 4 1.97 6 2.18
Pre-Construction - Design & Planning 6 2.96 8 2.91
Facility Management 18 8.87 30 10.91
Internal Audit 8 3.94 8 2.91
Internal Support (HR, IT and F&A) 20 9.85 35 12.73
Legal 7 3.45 8 2.91
MD & COOs Office 5 2.46 9 3.27
Pune Mall 19 9.36 22 8.00
Sales & Marketing & Customer Service 27 13.30 36 13.09
Grand Total 203 100 275 100

For the development of some of our projects, we also engage third party consultant engineers, architects, interior designers and landscape designers. In addition to our employees, we also engage the services of contractual workers which include tradesmen, car drivers, housekeeping personnel and other skilled, unskilled and semi-skilled workers. Our consultants, contractors and sub-contractors who work on our projects also employ a Significant labor force.

Cautionary Statement

StatementsinthisManagementDiscussionandAnalysiscontain"forwardlookingstatements"including,butwithoutlimitation,statements relating to the implementation of strategic initiatives, and other statements relating to Nitesh Estates future business developments and economic performance. While these forward looking statements indicate our assessment and future expectations concerning the development of our business, a number of risks, uncertainties and other unknown factors could cause actual developments and results to differ materially from our expectations. These factors include, but are not limited to, general market, macro-economic, governmental and regulatory trends, movements in currency exchange and interest rates, competitive pressures, technological developments, changes in the financial conditions of third parties dealing with us, legislative developments, and other key factors that could affect our business and financial performance. Nitesh Estates undertakes no obligation to publicly revise any forward looking statements to reffect future / likely events or circumstances.

For and on behalf of the Board of Directors
Sd/-
Place: Bengaluru Nitesh Shetty
Date: May 30, 2018 Chairman & Managing Director
DIN:00304555