Omaxe Management Discussions


The Global economy had an expected bounce back in 2021 after the once-in-a-millennium pandemic tanked it badly in 2020. The recovery has not been a smooth upward curve across the board and parts of the world continue to be affected by long-term effects of the economic devastation that the pandemic left in its wake. Apart from the second and third waves of the pandemic that affected even greater numbers of people leading to loss of life and productivity, the continued disruption of supply chains combined with jump in consumption demand has led to spiralling of inflation in many countries. This prompted the central banks to consider raising the interest rates with the United States Federal Reserve raising the interest rates thrice, once in March 2022 by 25 basis points, the second time in May 2022 by 50 basis points and the third time in June 2022 by 75 basis points. It is expected that the Federal Reserve is likely to raise the rates by an aggressive 350 basis points over 2022. The long- drawn Russia - Ukraine conflict and re-emergence of COVID-19 in a big way in China have exacerbated the economic situation of the world economy with commodity prices skyrocketing and stress across supply chains. The global economy,which was expected to be bolstered from the second quarter onwards as the Omicron threat waned, is now experiencing major downside risks to the growth forecasts for 2022 that were released in the beginning of the year and before.

The economic output of the world, which went up by 6.1% in 2021 is now expected to increase by 3.2% on a YOY-basis in 2022 as per the IMFs July 2022 - World Economic Outlook projections. This revised projection is 120 basis points lower than the January 2022 expectations and 170 basis points lower than October 2021 ones. A major reason for this are the worse than expected slowdown in China (COVID-19 resurgence and lockdowns) and higher than expected inflation with IMFs inflation projections foresee an increase of 3.5% to 6.6% in Advanced Economies in 2022 and of 3.6% to 9.5% Emerging

Market and Developing Economies (EMDE). The IMFs GDP growth figures and projections for the major countries and economic groupings for the year 2021 and 2022 are captured in the table below.

Economy/ Grouping 2021 GDP Growth (A) 2022 GDP Growth (P)
Advanced Economies 5.2% 2.5%
United States 5.7% 2.3%
Euro Area 5.4% 2.6%
Japan 1.7% 1.7%
United Kingdom 7.4% 3.2%
EMDE 6.8% 3.6%
China 8.1% 3.3%
ASEAN-5 3.4% 5.3%
Russia 4.7% -6.0%
Brazil 4.6% 1.7%
Mexico 4.8% 2.4%
South Africa 4.9% 2.3%

[Source: International Monetary Funds (IMF) World Economic Outlook report of July 2022. Link: https://www.imf.Org//media/Files/Publications/WE O/2022/Update/July/English/text -en.ashx]

INDIAN ECONOMY

India witnessed a sharp recovery in the economic activity once the COVID pandemic related restrictions were gradually lifted. While Q1 FY2021- 22 did witness stringent lockdowns being imposed due to the severe second wave of the pandemic, Corporate India already had all the necessary coping mechanisms in place to manage the curbs. Even the massive third wave in Q4 FY2021-22 had a very limi ted impact. Indian economy which shrunk by 6.6% in FY2020-21, then grew by 8.7% in FY2021- 22 in real terms as per the estimates released by the National Statistical Office (NSO) in May 2022 (Source:https://pib.gov.in/PressReleasePage.aspx?P RID=1829784#:~:text=Nominal%20GDP%20or%20 GDP%20at,growth%20rate%20of%2019.5%20perc ent.). The Nominal GDP growth, i.e., on a current price basis, was 19.5%. Construction sector grew by 11.5% in FY2021-22 after declining by 7.3% in the previous year. The Services activity showed the steepest spike after being affected the most during the pa ndemic. Manufacturing was nearly flat in FY2020-21 as the production activity resumed in the second half of the year, but with the demand rebounding, it also grew handsomely at a rate of 9.9% in FY2021-22. Agricultural growth broadly rema ined the same at 3.3% in FY2020-21 and 3.0% in FY2021-22.

The other key economic highlights for the year FY2021-22 were as follows:

• India regained its position of the fastest growing large economy in the world.

• India experienced an exports boom with the merchandise exports breaching the previous records and reaching US$ 417.81 billion for the year.

The Current Account Deficit (CAD), however, went from a surplus of 0.9% in FY2020-21, when the imports fell drastically due to the pandemic, to a deficit of 1.2% in FY2021-22 (Source: https:// www.rbi.org.in/Scripts/BS_PressReleaseDisplay. aspx?prid = 53906#:~:text=Indias%20current% 20account%20deficit%20(CAD,net%20outgo%20 of%20primary%20income.).

Fiscal deficit for the year was higher than the forecast at 6.9%. FY2021-22 average Consumer Price Inflation for the year was 5.5% (Source: http s://www.livemint.com/economy/cpi-inflation- accelerates-to-a-17-monthhigh-in-march-116497 77130513.html).

The outlook for the FY2022-23 has turned bleak since the factors such as inflation-led return of hawkish monetary policies across the globe, prolonged Russia - Ukraine conflict and supply chain disruptions in China have raised prospects of a major slowdown in the global economy. India is also expected to be affected badly, especially because of the commodity price surges. The Reserve Bank of India has projected a much lower growth rate of 7.2% in FY2022-23.

With the inflation projected to be 6.7%, the projected nominal GDP growth will be 13.9% vs. 19.5% in FY2021-22 (Source: https://www. hindustantimes.com/business/rbi-maintains-india-s- gdp-growth-estimateat-7-2-for-202223-101654664 381687.html).

REAL ESTATE SECTOR

The Indian Real Estate sector is projected to grow to US$ 1 trillion in market size by 2030 and US$ 650 billion by 2025 from US$ 200 billion in 2021. It is the second highest generator of employment after Agriculture sector and contributes 7% to the GDP. The Real Estate sectors contribution is set to go up to 10% by 2030. The industry can be divided into Housing, Commercial & Office, Hospitality and Other (logistics, co-living, industrial, etc.) segments.

The Real Estate rode high on end-user homebuying demand, low interest rates and conducive market conditions to see a stellar performance in the reported financial year. Even the second and third waves of the pandemic that hit during the year could not reverse the resurgence that began after the lockdown and restrictions were mostly withdrawn as the first wave neared completion. This resilience has been developed by the sector after experiencing major regulatory upheaval in the last one decade and the hit from pandemic during the first wave.

RESIDENTIAL

Annual Residential Segment Performance

[Source: Multiple reports from Knight Frank Research. Link: https://bit.ly/3j2ddrS]

Period FY2020-21 FY2021-22 Growth
Launches (000 Units) 166 235 41%
Sales 172 240 40%
(000 Units)
Unsold Inventory (000 Units) 442 437 -1%

The rebound in Housing segment from the pandemic was quick and impressive. A set of factors contributed to this resurgence, well after a decade of slowdown. The low interest rate regime, subdued housing prices, emergence of Tier-II and Tier-III cities, and government incentives including interest rebates for affordable housing, stamp duty reductions, tax incentives and more. From a behavioural standpoint, the need for a larger house was felt acutely by everyone during the pandemic, which pushed people to consider using their savings to invest in a real estate asset. And the interesting aspect of this growth in housing segment is that it is largely driven by genuine buyers and not investors or speculators. New launches have also returned in a big way and have kept pace with the sales growth. Hence, the unsold inventory has declined only marginally by 1% from 442 thousand units to 437 thousand units.

Among the key markets, NCR has bounced back in a big way with 65% YOY sales growth in 2021 and 123% YOY sales growth in Q1 2022. Bengaluru also showed impressive sales momentum with 61% growth in 2021 and 34% in Q1 2022. Among the smaller markets within the top 8, Hyderabad had stellar YOY sales growth of 142% in 2021 and Ahmedabad in Q1 2022 at 35%. Mumbai continued to be the largest residential market in terms of sales even though its contribution to the unit sales in Top 8 markets reduced from 33% in FY2020-21 to 25.4% in FY2021-22.

COMMERCIAL - OFFICE

Annual Office Segment Performance

Period 2020 2021 Variance
Net absorptions (million square feet) 39.4 38.1 -3%
New completions (million square feet) 35.5 38.7 9%
Vacancy (%) 15.5% 17.2% 1.7%

[Source: Multiple reports from Knight Frank Research. Link: https://bit.ly/3j2ddrS]

Period Q1 2021 Q1 2022 Variance
Net absorptions (million square feet) 8.6 10.8 25%
New completions (million square feet) 10.5 11.9 13%

The effect of pandemic on the Office sector has waned gradually over the multiple waves and is now no longer a serious threat as most people are double vaccinated and restrictions on movement are practically nil. The Companies have gradually resumed work from office either completely or few days in a week. With the key segments such as BFSI, IT Services and Manufacturing experiencing fast paced growth, the demand for office spaces received a big boost. Co-working segment has been the fastest growing on account of the major investments pouring into the start-ups. Out of the total of 100 unicorn start-ups in India, 44 were born in 2021 and 14 in 2022 and together they were worth US$ 93 billion and US$ 19 billion. In terms of the geographical markets, Bengaluru, continued to be the largest market in 2021 and Q1 2022, however, there was no major surge in absorption of capacity. Markets such as NCR, Pune, and Hyderabad saw significant growth in this period in comparison to decline in other markets.

BUSINESS OPERATIONS

Omaxe is a leading and reputed name in residential, commercial and mixed use properties in 8 states including Delhi, Uttar Pradesh, Punjab, Haryana, Madhya Pradesh, and Rajasthan among others. It has presence across 27 cities in these states. The Company caters to a varied segment of customers across the income-range with targeted offerings that address each segments need. Its product portfolio consists of residential projects (affordable housing, group housing, premium apartments), integrated and hi-tech townships, office and commercial projects including malls, and others. The Company also provides construction contracting services.

Omaxe has delivered real estate projects over the years that are top-quality, diversified, and with an impeccable delivery track record. This has enabled the Company to be one of the leading names in the industry & perform better than the industry average over the years.

As on March 31, 2022, Omaxe has delivered 129.25 million square feet of construction, which comprised of 97.45 million square feet of own real estate projects & 31.8 million square feet of construction contracting services.

Over the FY2021-22, the Company completed delivery of 3.1 million square feet in comparison to 2.71 million square feet in the previous year. These deliveries were projects based in cities such as Chandigarh, Lucknow,

Faridabad, Bahadurgarh, Indore, Noida/Greater Noida and Vrindavan.

The sale numbers achieved by the Company in FY2021- 22 were 1.58 million square feet generating revenue of Rs 1,266 crores. The corresponding numbers in FY2020- 21 were 2.73 million square feet and Rs 2,051 crores respectively. The break-up of these sales figures across residential and office and commercial segments is 66.5:33.5 in volume terms and 36.8:63.2 in value terms, respectively. The average realisation numbers for the segments were Rs 4,443 per square feet and Rs 15,048 per square feet respectively translating into a growth of 67.5% and decline of 51.9% respectively. Marquee projects of the Company that saw major sales were in Chandigarh, Lucknow, Faridabad, and others.

New Launches during FY2021-22

With the construction activity & demand environment showing a significant improvement, the Company also launched 0.91 million square feet over FY2021-22, a growth of 5.8% over the 0.86 million square feet of area launched in the previous financial year. These new launches were in cities such as Lucknow, New Chandigarh, and Faridabad. From the newly launched projects, the Company sold 0.51 million square feet of real estate at a value of Rs. 399 crores.

The groups net worth as of the end of FY2021-22 stood at Rs 1,244.96 crores.

Financial Performance

Particulars FY 2020-21 FY 2021-22
Total Income 514.59 637.94
EBITDA -79.81 -26.71
Profit before tax -304.64 -194.34
Profit after tax -235.21 -161.61

Total Income from Operations: The total income of the Company on a consolidated basis which was Rs 514.59 crores in the previous financial year went up by 24.0% to touch Rs. 637.94 crores in FY2021-22.

EBIDTA: The EBIDTA performance was also improved with a lower loss of Rs 26.71 crores in comparison to a loss of Rs 79.81 crores in FY2020-21.

Profit before tax: Consequently, the Company also generated a Profit before tax of Rs (-) 194.34 crores for the FY2021-22 as against a Rs (-) 304.64 crores PBT in FY 2020-21.

Profit after tax: Net Profit showed an improved performance with the loss of Rs 235.21 crores in FY2020-21 declining to a loss of Rs 161.61 crores during FY2021-22.

KEY CHANGES IN FINANCIAL RATIOS

The reasons that have impacted and led to a significant movement in financial ratios have been stated below for the information of the shareholders.

Parameter FY 2020-21 FY 2021-22 Change Explanation
Debtor Turnover 1.30 1.60 23% -
Inventory Turnover 0.06 0.06 11% -
Interest Coverage Ratio 0.34 0.48 44% Reduction in outstanding debt combined with improved operating performance resulted in a significant improvement in the interest coverage ratio.
Current Ratio 1.17 1.10 -6.0% -
Debt Equity Ratio * 0.99 0.81 -19% -
EBITDA Margin% -15.51% -4.19% 11.32% Revenue increase and cost control have resulted in improvement in EBITDA margin.
Net Profit Margin% -45.71% -25.33% 20.37% Improvement in operating margins due to higher revenue and reduced finance charges due to debt reduction resulted in better net profit margin.
Return on Net Worth% -16.74% -12.98% 3.76% -

*Debts consist borrowings and does not include lease liabilities

Key Strategies

The key to continued success of Omaxe is the consistent adherence to the following key strategies it has focused on with some minor adjustments in line with the market trends.

Strategic Land Acquisitions: Omaxe has always been ahead of the market in identifying and acquiring land parcels in potential growth locations before the competition. It was among the first to see the growth opportunity in Tier-II and Tier-III markets. Similarly, it built an impressive portfolio of unfancied micro-markets within big cities that later became much sought after. The early entrant position gave the Company a cost advantage over the competition, which has become a competitive advantage for the Company that it uses to beat the competition by offering comparatively lower prices or commanding a premium due to better location. At the same time, the Company believes in stoploss principle by disposing of those land parcels that are a drain on its financials to ensure efficient allocation of capital to strategic assets.

Emphasis on Tier-II and Tier-III Cities: With a highgrowth phase of the Indian economy over the last three decades, the economic prosperity has spread deeper in the country and is not limited to only the big cities. This has translated into bigger aspirations and demand for quality in Tier-II and Tier-III cities. Omaxe saw this transition much before the competition and entered these markets, which only had local unorganized players catering to them. With a superior quality and on-time delivery, the Company was successful in bettering the local players as the value proposition for the customers was obvious. Many parts of the Companys traditional markets continue to offer such opportunities that it can exploit in the foreseeable near future.

Diversified Product Mix: This strategy to address varied customer segments and consumer needs not only offer a wider canvas to the Company for generating growth, but they also help it weather a demand slump in a segment by diverting focus to others. Omaxe therefore caters to the real estate market with various products such as Residential, Commercial, Office, Hospitality, Integrated Townships, Hi-tech Townships, etc. The Company studies the changing customer needs continuously to ensure it can adapt the product mix to address them better and earlier than the competition.

Focus on Customers and Quality Delivery: Customer First, Quality and On-time Delivery are an integral part of the Omaxes value proposition. These values are ingrained and emphasized continuously to all the stakeholders of Omaxes ecosystem to ensure best service and experience to its customers across all interfaces. The Company has adhered to all the customer friendly provisions of the RERA in letter and spirit where some of the norms were followed even before they were mandated under RERA. The Companys success has been built on these values since its inception. The Company intends to continue this focus and further build on it to ensure success going forward as reputation and trust are the most important factors for the customers.

Strong Balance Sheet: In addition to better operational performance, the Company manages the quality of its balance sheet through efficient capital allocation and timely servicing of debt. A clean balance sheet helps it secure capital at better- than-peer rates even under challenging environments creating a positive feedback loop of superlative performance.

OPPORTUNITIES

There exists an acute shortage of housing in urban areas with the existing number estimated to be ~10 million units. By 2030, an additional 25 million units of affordable housing are needed to shelter the growing urban population.

Tier-II and Tier-III cities will be the focal points in the growth of the real estate sector both from a Housing and Commercial segment perspective. The key trends that are fuelling this growth are the spurt in local economies due to re-migration, major infrastructure investments in these cities, industrial corridors, changing consumer behaviour and aspiration levels that match metros and ample availability of land and labour at a much lower cost. A key reflection of the growth potential of these cities can be seen in the fact that more than 45% of 61,000+ start -ups in India are in Tier-II and Tier-III cities.

Data centres are a key sub-segment within the Commercial & Office segment, which are seeing an increased demand. The demand for real estate space for data centres is projected to expand by 1518 million square feet by 2025, as per a report from Savills India.

Organised Retail is another key segment within the Commercial & Office segment that has been and can be a growth driver for a long time to come because even with a 15% CAGR from 2020 to 2025, the share vs unorganized retail will only jump from 12% to 18%. The real estate stock for Organized Retail is expected to increase by 28% to 82 million sq. ft. by 2023.

The infrastructure and Real Estate Investments Trusts (REIT) have improved the capital availability for the sector, specifically for the quality projects from reputed developers. As per the rating agency, ICRA, Indian real estate sector is likely to raise more than Rs 3.5 trillion (US$ 48 billion) through this route in 2022, as compared to cumulative US$ 29 billion raised till date.

Foreign Direct Investment (FDI) in Real Estate sector has been growing with Construction becoming the third largest sector in terms of FDI inflow.

THREATS , RISKS, AND CONCERNS

Increase in interest rates by the Reserve Bank of India to manage runaway inflation, can subdue the demand and increase the cost of capital.

With the central banks across the world reining in the liquidity, investments and capital availability may become a major concern going forward, especially from a cost perspective.

Ripple effects of global economic slowdown affecting economic growth in India that would in turn affect real estate demand.

Commodity inflation driving increase in raw material costs can exert a significant drag on the profitability of the sector.

INTERNAL CONTROL SYSTEMS

The Company has employed a professional Internal Audit team to conduct regular audits that check for compliance with set policies and procedures, and prevent any type of fraud, misappropriations, and unauthorized activities. It also updates these policies and procedures based on revised regulatory norms and to ensure adequacy in line with changing business environment. The overall systems and controls put in place by the Company ensure accurate and timely reporting of all financial transactions and projects.

The Company also ensures compliances to company law, listing and other applicable regulations. External auditors for statutory audits, and oversight of the audit committee of the Board complete the comprehensive system of checks and balances.

HUMAN RESOURCES

Omaxe has always focused on the Human Capital as its biggest asset. Hence, it has invested time and resources in creating a conducive work environment, to develop a capable and motivated organization, and to ensure timely availability of workforce to ensure the Company can maintain its superior track record of delivery and operational performance. Team Omaxe is inspired and well-trained to provide an excellent customer experience and complete projects in a timely and cost-effective manner. The key management practices put in place by the Company to achieve the desired people goals are open communication channels, rewards and recognition, responsive performance management systems, and a robust grievance redressal process.

The Company ended the financial year on March 31, 2022, with a total strength of 468 comm itted

CORPORATE SOCIAL RESPONSIBILITY

As a responsible Corporate Citizen, the Company has been resolute in its social commitments towards the community as reflected in various initiatives that it has undertaken over the years. The Company puts its full strength behind these socio-economic development initiatives and its employees also contribute wholeheartedly with time and resources. At Omaxe, the Company conducts its CSR activities directly as well as indirectly through various Not- for-Profit Organizations.

The key themes and objectives of the Companies CSR initiatives over the years have been Education, Sustainability, Skill Development, Gender Parity, disaster Management (including rehabilitation, relief & reconstruction activities), Protection of National Heritage, Art & Culture and Social & Health Development. During the FY2021-22, Omaxe continued its CSR activities in disaster Management (including relief, rehabilitation & reconstruction activities) & Protection of National Heritage, Art & Culture.

In line with its vision, the company carried out the following initiatives in this fiscal year:

• Omaxe Foundation distributed tracksuits and masks at Govt Secondary School and Arya Kanya Gurukul

• Omaxe Foundation distributed masks and tracksuits to the children of construction workers

• COVID-19 relief related activities

OUTLOOK

The pandemic threat is behind, but the worsening geopolitical situation and inflation are casting a long shadow on the global and domestic economies. This may result in a sizeable impact on the demand scenario for the real estate sector. However, the momentum gained in 2021 and residual unfulfilled demand are likely to help deliver moderate growth during the year.

Some key trends forecasted by Knight Frank for the year 2022 are as follows:

5% increase in housing prices during the year. However, input cost escalations will continue to put pressure on the profitability.

The key consideration factors for the home buyer that have gained in importance are good air quality, green cover or proximity to it, and access to good healthcare.

Hiring trends in the IT sector indicate a significant increase in demand for office space from the IT industry.

The start-ups shall continue to flourish even in an environment where investment flows are likely to be restrained. Hence, growth of Coworking segment is likely to continue.

Demand for data centre capacity will increase manifold due to the data localisation norms and 5G rollout in 2022.

The Company is also well-poised to take advantage of these and other long-term trends. Its presence in the high-growth markets of NCR and projects focused on Tier-II and Tier-III cities make an attractive portfolio. In addition, Omaxes well- diversified product portfolio means it can immensely benefit from the good prospects of both, Housing and Commercial-Office segments. The Company remains committed to delivering a superlative customer experience and leveraging the reputation and trust it has built over the years to accelerate its growth in tune with the market.