Sobha Ltd Management Discussions.

SOBHA DEVELOPERS LIMITED ANNUAL REPORT 2011-2012 MANAGEMENT DISCUSSION AND ANALYSIS Markets and Operating Environment Global economy The global economy was volatile in the financial year 2011-12. Issues relating to medium-term fiscal consolidation, the exposure of European banks to public and private debt, and recurring differences in the ways to resolve the Euro-debt crisis continued to weigh on the global economic outlook as the Eurozone accounts for close to one-fifths of global Gross Domestic Product (GDP). Adding to this was the devastating effect of the earthquake and tsunami on the Japanese economy, with supply disruptions weighing heavily on industrial production and consumer sentiment and spending. The looming risk to the global outlook is also on account of the geopolitical tensions centred on Iran that could disrupt oil supply and result in an increase in oil prices. Growth in emerging and developing economies evolved steadily as expected, but with considerable variation across regions. However, rising inflation is a major cause of concern for many economies. GDP growth in advanced economies declined to 1.6% in 2011 compared to 3.2% in 2010 and is expected to be even lower at 1.2% in 2012. The global economy is expected to grow by 3.3% in 2012 compared to 3.8% in 2011 as per the International Monetary Funds (IMF) January 2012 update of the World Economic Outlook (WEO). The greatest challenge for the global economy in this slow growth environment is to raise productivity without losing job opportunities for the millions who are looking for reasonably paid jobs to support their living standards. It is heartening to note that the global economy is moving from unbalanced growth to balanced growth. For instance, the US is getting back on the positive growth track. And, China has shown promising progress too. Asian countries like South Korea, India and Thailand are also growing at a fast pace. The key fiscal priority for major advanced economies should be to implement well-paced consolidation programmes focused on supporting medium-term debt sustainability. The Indian economic environment Despite the economic and financial challenges in key developed economies, India has remained a front-runner in any cross-country comparison. Even with a low growth figure of 6.9%, India is projected to be the second- fastest-growing major economy (7 %) after China (8.2 %) as per the IMF. It is estimated that the countrys economy would grow at 7.6% in FY 2013 and 8.6% in FY 2014. With over 1.2 billion people, India accounts for nearly one-sixth of the global population. While the rate of growth of population has consistently declined, Indias population increased by nearly 180 million persons during 2001-11 - the highest in the world in absolute terms. India has a high rate of self consumption. The country boasts of a vast domestic market that allows the economy to scale and attracts investors. It can rely on a well-developed and sophisticated financial market that can channel financial resources to good use, as many innovative businesses of global standards have mushroomed in India. Real Estate sector The superior economic performance of India has provided a strong impetus to the Real Estate sector, which has been witnessing heightened activity in the recent years. Substantial end user and investor interest, large scale investment in infrastructure and rapid urbanisation have contributed to the growth trajectory of Indian Real Estate domain. The housing sector alone contributes to 5-6 per cent of the Indias GDP Housing Shortage is one of the biggest challenges for India. According to Cushman & Wakefield Research, property market in India from 2011-15 is likely to witness a demand for Rs.3.94 Million new housing units growing at a Compounded Annual Growth Rate (CAGR) of 11%. The need of the hour for the Real Estate sector in India to continue its forward march and a proactive approach towards reforms and transparency. The likely establishment of the Real Estate Regulatory Authority (RERA) will serve as an important step towards advancement. The need for streamlining approval procedures with a single window clearance structure is also essential. All the stakeholders, including the government and its statutory bodies need to put their best foot forward as the demand for realty is expected to ride on the rapid urbanisation growth and Indias progress towards becoming a global economic hot spot. The Company and its operating environment Sobha Developers Ltd. is one of the leading and only backward integrated Real Estate companies in India. The Company is built on rock solid values, benchmark quality standards, uncompromising business ethos, focused customer centric- approach, robust engineering and in-house research and development, which have all contributed to making it a strong brand in both Real Estate and contractual segments. Some of the key challenges in the Companys business environment are non- availability of skilled labour, delay in plan approvals, inflationary pressures and the existing laws of acquiring lands, which are losing their relevance as they have not been amended for long. In spite of a tough, challenging global environment, increase in interest rates and tightening of liquidity, Sobha has performed credibly well during the financial year. Sobha tends to benefit largely from the low-cost land parcels which help generate better margins. The Company is also expecting that in this financial year, the RBI will be reducing the interest rate by 100 to 150 basis points. The RBI has already taken its first step in this direction. We hope that more such rate cuts will be in the offing in the coming months so that we see better days ahead. Projects and work done in 2011-12: Work done at a record high Despite market uncertainties, Sobha successfully completed 9 Real Estate projects measuring 3.14 million square feet of developable area and 2.06 million square feet of Super Built Area. The Company also completed 18 contractual projects aggregating to 2.08 million square feet. A total of 27 Real Estate and contractual projects measuring 5.22 million square feet of developable area and 4.14 million square feet of Super Built-up Area were completed during the financial year 2011-12. With this, Sobha completed over 50 million square feet of developable area comprising 288 projects in both Real Estate and contracts, since inception. Some of the key projects completed during the fiscal are: Phase 1 of Sobha Lifestyle Sobha Lifestyle at Devanahalli, Bangalore, which is set in the scenic backdrop of Nandi Hills, with its select presidential villas, gives living a new, elevated definition. The total area of the site is 55 acres and approximately 33 acres were developed in Phase 1. 165 independent plots with villas have been proposed for the development of the entire site of which 89 have been completed in phase 1. Sobha Lifestyle has 51% of the 55 acres (approximately 25 acres) earmarked for open spaces. There are 18 parks in the project with dedicated pedestrian walkways and ramps. The Super Built-up Area of Sobha Lifestyle (phase 1) is 526,953 Square Feet. The project also has a luxurious common clubhouse with a Super Built-up Area of approximately 23,100 Square Feet. The facilities include a large swimming pool, badminton, squash and table tennis courts - all of which conform to international standards. Sobha Corporate Office: Sobha Corporate Office (SCO) located at Sarjapur-Marathahalli Outer Ring Road, Bangalore, is the Companys registered and Corporate Office. It comprises a total of 10 floors (2B+G+6+T) with a Super Built-up Area of 2,10,433.71 Square Feet. The building has two wings - North Wing and the South Wing, with a total seating capacity of 701. Replete with 31 discussion rooms, the office also has world-class facilities with a rooftop cafeteria. Various materials which include stainless steel, timber, and concrete have been used in this project. New launches and ongoing projects During the financial year 2011-12, the Company has launched over 10 million square feet of new projects. As on March 31, 2012, Sobha is executing 23.04 million square feet of developable area and 16.28 million square feet of Super Built-up Area in seven cities. In addition to the above ongoing contractual projects, the Company is currently executing 10.05 million square feet of contractual orders for various clients like ITC, Biocon, Trident Hotels, GMR, Wipro, IPE (Institute of Public Enterprises), Robert Bosch, Blue Horizon Hotel, Chaithanya Projects and many more including Infosys Technologies. The contractual orders are primarily in civil, finishes, MEP works, interiors, furnishing, metal & glazing works. Strategy At Sobha, we are guided by our vision to transform the way people perceive quality. And to ensure that the vision becomes a reality across all our verticals, it is essential that we come up with the right plans and goals. Our journey so far has been successful, mainly because of our strategies that have borne fruit over time. With an eye to the future, the Companys business plans encompass not only growth but also training, innovation and sustainability. Sobhas strategic initiatives are long-term and are directed towards the all-round development of the Company. Following are four key strategies which are practised at Sobha: Revenue Growth Capitalising on demand The Real Estate vertical of the Company helps in establishing its brand. Sobha plans to continue to secure its position of being a preferred provider of quality urban housing in India. In terms of locations, the strategy of the Company has been to establish its presence in emerging cities. For instance, Sobha consciously decided to make a foray into fast-growing geographies like Gurgaon and Chennai to capitalise on their high growth potential. The key focus of the Company is to mature in the existing markets by improving the revenues and sticking to the planning schedules, looking at fresh land parcels and catering to the evolving needs of the customers. The Company is a market leader in 3BHK housing in its area of operations as it provides premium products which have an aspirational value. Sobhas strategy of launching products in a phased manner and maintaining a healthy volume-profitability balance has helped it meet its realisation and targeted EBITDA (Earning Before Interest Taxes and Amortization) margins, while building the growth momentum. Excellence in delivery is a hallmark of Sobha, which it will continue to live up to. The Companys delivery momentum has shifted to a higher trajectory with deliveries scaling up to an annual sustainable rate of 6 million square feet per annum. Of value-oriented operations and deals On the contractual side, the Company provides effective value proposition - which targets at providing high quality, well-designed products at competitive prices. The contractual orders, although niche, help boost our scalability. They validate our core mantras of Quality, Cost, Time, and Safety. Higher capacity utilisation in factories is something that Sobha has always channelised its efforts into and will continue to do. Banking on lands The business also expects to benefit largely from the low-cost land parcels as these help generate better margins. The Company adopts selective land monetisation policies in its debt reduction programme. Financial Stability The strategy of the Company is to maintain a balanced debt-equity ratio to raise more funds to expand its land bank and fuel the slew of new launches on the anvil. The debt-equity ratio has improved from 0.64 in FY 2010-11 to a modest 0.53 in FY 2011-12. The Company will be maintaining its debt-equity ratio in the range of 0.50 to 0.55 in the coming years to augment its growth and sustain a healthy balance sheet. Sobha continues to maintain strong operating margins for its Real Estate and contractual verticals. In spite of cost pressures due to the increase in the prices of input materials, Sobha has continued to maintain an operating margin of above 35% for Real Estate and above 15% for contracts. The Company plans to abide by its laid down margins so that it can effectively factor in changes in the macroeconomic environment and expand its footprint. Recruitment and Training Sobha has a structured recruitment process so that genuine talent is identified and nurtured. The Company continues to nurture its talent pool with a myriad of skills and capabilities. The Sobha Academy is a strong pillar of support for the execution team as it imparts well-focused training to in-house technicians and tradesmen. All engineers and supervisors of Civil, Plant and Machinery, Planning, Quality and Safety departments are put through in-depth training modules. The Technician Supervisor Model adopted by the Academy for on-the-job training stresses on the importance of hands-on-experience so that excellence in delivery is achieved within the set timelines. When it comes to its employees, Sobha stands for something beyond simply increasing profits. The Company makes every effort to provide an inclusive workplace to its employees by investing more in them by addressing their needs so that they give their best to work every day. Be it designing a work environment that is safe, comfortable and appealing to work in or tapping their creativity through Company fests -Sobha does it all. Innovation and Value Engineering Sobha uses Value Engineering as an effective tool to improve the total value of key operations across all levels within the organisation. Sobha also has plans to press forward its sustainability initiatives so that it can be a harbinger of green developments. The Company aims to contribute considerably by planning, designing and executing environment-friendly development across the country. The Company wishes to maximise its efficiency with cutting edge approaches. Profitable innovation for Sobha is a dynamic process of continually creating effective business models, improving customer experience, and opening new markets. Sobha stimulates creativity through Genesis, an annual celebration of innovative ideas and its R&D initiatives, so that it can capitalise on the sweet spot between emerging trends, organisational capabilities, and unmet market needs. Sustainability Performance With a footprint in 22 cities and 13 states across India, Sobha prides itself in being one of the largest Real Estate developers in the country, which is committed to achieving sustainable growth. Leveraging on its unique backward integration model, Sobha has been able to integrate eco- friendly measures into every stage of development thus bringing about a balance between financial, environmental and social impacts of the project activity. The Companys commitment to sustainability comes to life through a well-structured management process that is pivoted around the PDCA principle Plan - Do - Check - Act. Sobha has already been awarded with the ISO 9001, ISO 14001 and OHSAS 18001 certifications for its quality, safety and environment management systems respectively, making it one of the few construction companies in India to achieve this feat. Some of the key areas where Sobha places strong emphasis are discussed at length below: 1. Environment a. Green homes: A green building can have tremendous benefits, both tangible and intangible. The most tangible benefits are reduction in water and energy consumption right from day one of occupancy. The energy savings could range from 20 to 30% and the water saving measures up to 30% to 50%. The intangible benefits of green homes include enhanced air quality, excellent day lighting resulting in health benefits of the occupants and conservation of scarce national resources. Some of the common sustainable practices are elaborated below: * Genius Loci * Natural ventilation and lighting * Insulation * Top soil conservation * Rain water harvesting * Sewage treatment plant * Organic Waste Converter (OWC) * Fly ash blended cementations materials Different levels of green building certification are awarded based on the total points earned. The various levels of rating, which are awarded include: * Certified - in recognition of best practices * Silver - in recognition of outstanding performance * Gold - in recognition of national excellence * Platinum - in recognition of global leadership One of the Companys projects, Sobha Turquoise, has been bestowed with a pre-certified Platinum rating. It is the highest level of certification issued by the Indian Green Building Council (IGBC) under the residential category. As a conscious effort, many of Sobhas future projects will be certified by the IGBC. b. Water management: Water is a precious resource and to ensure its judicious use the following practices are diligently implemented: * The Company installs, manages and maintains a Sewage Treatment Plant (STP) during the construction phase of all its projects. The STP is used to treat the domestic sewage generated from labour camps. The treated sewage is subsequently reused for curing and landscaping. * A Water Treatment Plant (WTP) is also installed at all project sites to treat the raw water to maintain the desired quality parameters for domestic consumption. * Though Rainwater Harvesting System (RHS) is mandated by law since 2012, RHS has been a common feature of all projects developed by Sobha for more than a decade. Run-off water from hard-paved areas of the property is channeled to rainwater percolation pits through the external drain to recharge the ground water table. c. Waste management: Waste is an unavoidable outcome of any activity, but effective management practices can significantly help in minimising waste generation and reducing the impact caused by its disposal. Waste management practices are typically based on the 3R principle - Reduce, Reuse and Recycle. Some of the waste management measures followed by Sobha are: * Segregation of waste at the point of generation * Useful packaging materials, recyclables and surplus building materials are recovered and given to authorised recyclers for reprocessing and reuse * Hazardous waste is sent to the State Pollution Control Board (SPCB) authorised agencies for recycling or disposal as applicable * Organic Waste Converters (OWC) are installed at project sites to convert organic waste into compost. This approach clearly has two realisable benefits. First, it is an environment-friendly alternative to chemical fertilisers. Second, it saves the cost of purchasing fresh chemical fertilisers * In addition to this, OWCs are also used to process sludge from STP mixed with garden waste to produce rich organic manure, which too is an effective replacement for chemical fertilisers d. Energy conservation: Some of the energy conservation measures adopted by Sobha for all its projects are: * Solar water heating and landscape lighting * Solar lighting for all common areas within the project site * Only energy efficient CFL lamps are used for lighting in landscape, terrace, corridor and lobby areas * VFDs are installed to reduce the plumbing load * Gearless lifts have been installed to reduce power consumption e. Monitoring: Monitoring is an integral part of any management process. For ensuring effective management, key environmental aspects like ambient air quality, DG stack emissions, soil contamination, noise levels and water quality are monitored and documented periodically during the construction phase and up to the warranty period in the operational phase. All samples are tested in the Companys very own fully equipped Environmental Laboratory at Sobha Academy, Bangalore. In addition to internal monitoring, quarterly monitoring is carried out by an independent KSPCB approved external agency. Appropriate mitigation or control measures are immediately adopted if any monitored parameter records an increase above the permissible limits prescribed by KSPCB. Apart from this, the Company closely reviews all its environment-friendly measures to ensure that these initiatives result in a positive impact on the environment. A stringent quarterly review is carried out at all sites during the pre-construction and construction phases. Every year, based on the results of the quarterly review, the Company rewards the personnel at respective project sites for following the Best Sustainable Practices. 2. Social a. Workers welfare The following workers welfare initiatives are undertaken by Sobha to help the workers lead a balanced, rewarding and productive life: * Medical Care Center (MCC) / first aid center / ambulance room and an emergency vehicle are made available at all sites. The Company ties-up with hospitals which are located near the sites to ensure that the best medical facilities along with a trained first aid person are available anytime to take care of the workers * A well-equipped clinic is mandatory on every Sobha site to treat cases of minor accidents and illness * Occupational health-related medical evaluation is undertaken at regular intervals through quarterly medical camps, which are organised for the benefit of all site workers and their families * Day-care centers are provided at labour camps to take care of the children of the labourers. Where along with elementary education, quality food is also provided to them * Superior sanitation practices are followed at all project sites. The workers are also educated to follow good personal hygiene practices * Regular pest-control activities are undertaken to prevent the outbreak of any vector borne diseases at labour camps * Separate water tanks are installed for bathing and drinking facilities for the workers in the labour camps b. Safety of workers At Sobha, safety is one of the highest priority. Some of the safety initiatives undertaken during FY 2011 -12 are discussed below: * Five times during the fiscal year, Sobhas in-house projects were recognised as zero accident sites, a record achievement for Sobha * Safety Day was celebrated at all the in-house projects of the Company this year. The winners and the runner-ups were awarded for following all the safety protocols and achieving zero accidents at their sites * Scaffold systems and signages were introduced. These are extremely effective in reducing accidents and increasing awareness among workers * After implementing safety penalty systems, the Company managed to control many unsafe practices and minimised accidents * The Company has banned the use of 4-inch wood cutting machines at the sites to prevent accidents * A separate power tool room and a carpentry yard were introduced. Only authorised operators with special identify cards have access to these areas * Exclusive P&M check lists have been introduced for each phase of the project activity * Fire fighting and first aid training are conducted periodically for contractors and various execution teams * Hygienic labour camps installed with CFL lights, sockets and switchboards, were introduced Sl. Year Total man-hours Accidents No. worked (Million) Minor Major Fatal Total 1. 2010-2011 28 9 17 3 29 2. 2011-2012 24 2 11 1 14 Corporate Social Responsibility At Sobha, we believe some of our finest achievements do not just refrain to our growth figures. They also extend to Vadakkenchery and Kizhakkenchery - two small panchayaths in Palakkad district of Kerala. To usher in holistic growth at the grass-root level, the Company, under the aegis of its CSR arm, Sri Kurumba Trust, initiated Graamasobha - a unique social development initiative for the two graama panchayaths in the year 2006. DEVOTION AT WORK GRAMA SOBHA: In order to make a difference, our Chairman, Mr. RN.C. Menon, wanted to reinvent the timeless Gandhian concept of Gram Swaraj by developing world-class infrastructure and effective strategies to improve the quality of life of the rural masses, thus making the villages self-reliant. For this, specific information on the socio-economic dynamics of the poor living in the two panchayaths was required. So, an in-depth Social Empowerment Mapping Exercise (SEME) was undertaken by the Social Empowerment Department (SED) of the Trust to fulfil the following objectives: 1. To identify and enlist genuine beneficiary families from the two panchayaths using clear-cut norms and terms. 2. To generate qualitative and multi-dimensional Baseline Reports on the target families, so that specific programmes and activities could be implemented for their benefit. 3. To devise target-based, area-specific empowerment programmes and activities for key human development verticals like education, health, employment, housing, and water. 4. To design an effective mechanism to measure and monitor processes and the pace of the empowerment programmes of the Trust. - In 2008, the Trust selected trained and deployed 20 people on a full-time basis to complete the exercise. For about a year, they studied the incidence, depth, and severity of poverty of the beneficiaries with the help of various ** mapping methods. The Trust covered more than 15,000 families and identified nearly 2,500 families (around 11,000 people) from the BPL bracket. Individual photo identity cards were issued to each member of the adopted families. Based on the data, the Graamasobha model was developed. The lives of thousands of underprivileged citizens are getting positively transformed through this growth model, which has a bottom-up approach towards poverty alleviation. The following key social development institutions were established for the development of the deprived; Management Report Sobha Academy The Sobha Academy was started to empower and enable the rural poor to break away from the vicious circle of poverty, ignorance, deprivation, and exclusion by providing their children with high-quality education. Selection to the Academy is done through an open draw from a list of eligible candidates short-listed after intense research. More than 650 children have access to free, quality education due to this initiative. Once admitted, all the requirements of the children, including food, transportation, uniforms, books, medical care, etc. are met at no cost. The school, whose first session commenced on June 1, 2007, follows the ICSE curriculum. Another educational initiative of the Trust is Sobha Icon, which aims at creating Icons for India by making high-quality learning opportunities available for meritorious students who have exceptional skills but not the opportunities to grow. Regular academic professionals have been engaged to enhance the performance of more than 100 students. The project is carried out with the help of various school authorities, teachers, parents and other stakeholders in the education sector. A new initiative, Sobha Medals for Academic Excellence, is being envisaged. It will reward all the toppers of SSLC examinations from the academic year 2012-13 onwards in the project area. Sobha Health Care The Sobha Health Care Centre has redefined the limits of primary healthcare institutions anywhere in the country. The target group comprises the 2,500 BPL families of the adopted panchayats, senior citizens of Sobha Hermitage, students of the Academy and their parents. The facilities include free consultation, diagnosis, tests, treatment, and medicines. The Centre has also set up outreach counters to reach out to the needy at their doorsteps. Gynaecology and paediatric wards are also going to be launched soon. Besides, a comprehensive medical insurance scheme covering every member of the BPL families is being envisaged. A School Health Programme (SHP) has been initiated through which comprehensive medical screening is carried out for the students, and preventive care is provided. The Graamasobha initiatives are also playing an instrumental role in raising awareness about personal hygiene practices, particularly among the children studying in the Sobha Academy and their families, thanks to the stringent cleanliness guidelines laid down by the Trust for its beneficiaries and staff members. The families now strive towards keeping themselves and their living and working conditions clean to prevent diseases and maintain good health. Sobha Hermitage Sobha Hermitage, located on 23 acres of verdant green estates, is the most benevolent home one can hope to find for the deprived. It is the epitome of humanity, offering love, care, and support to the neglected sections of the society - senior citizens as well as young widows, referred to as young mothers, and their children. The residents stay in a secular and secure environment where they are provided with food, clothing, shelter and premium resources and services along with the best facilities, all on the house. Other Initiatives Sobha Vocational Training Centre The Sobha Vocational Training Centre (SVTC) has advanced resources and facilities. It aims at providing functional vocational training, and paid apprenticeships in carpentry to youth from poor families. Plans are afoot to add more trades in the near future. Direct and indirect employment is provided to hundreds through SVTC. Besides this, various other centres have been established for imparting training in computers, music and tailoring. Sobha Community Centre The Sobha Community Centre is a beautiful and spacious edifice for the deprived. It comprises a dining hall that has a seating capacity of 300. While it is open for public use for a nominal fee, its core purpose lies in feeding the poor, several of whom are fed free of cost every day. Special community feeding of about 30 aged and destitute women is organised daily. The Centre also plays host to various community mobilisation programmes including medical camps, orientation and training classes, and social weddings. It will soon be expanded into a full-fledged social development centre at par with international standards. Rural Women Empowerment The Trust has also undertaken a series of Women Empowerment initiatives. It has already unveiled a programme for comprehensive rehabilitation of young mothers living at the Hermitage. While they are presently employed on a salary basis in the Academy, they all have to complete graduation, for which the Trust will offer the necessary support and resources. After graduation, they will be placed in suitable positions in the institutions of the Trust. Separate living apartments are being constructed for them which they can move into, as their children grow older. Support will also be provided if they want to get married. In yet another widow assistance programme, more than 48 widowed mothers and their 90 school-going children, selected from the designated project area, have been brought under the safety net since 2007. They are provided with resources and facilities, besides a monthly living allowance of Rs.1,000 per month. Special tuition classes are arranged for their children. The Trust also plans to provide them with a housing complex in the future through a social housing and employment initiative. The Trusts emphasis is on providing maximum employment opportunities for women. In fact, 90% of the staff comprises female members. All girl staffers, when they get married, are given a special marriage allowance of Rs.60,000 to meet their expenses in addition to the other entitlements. The Social Wedding Programme is a constructive response of the Trust to help extremely poor families to get their daughters married. The Trust has been conducting dowry-less mass social weddings for the past five years. Pre and post marriage counselling is carried out for all the couples. Forty girls from both the panchayats are selected every year for this bi- annual social initiative. The Trust sponsors the wedding attires for the couples, four and a half sovereign of gold for each girl and household utensils. In addition to this, each couple is entitled to invite 50 people to the wedding. The average wedding expense for each girl amounts to Rs.1,25,000. Sobha Group strongly believes that if an initiative like Graamasobha can be taken up by other organisations too, it could change Indias poverty equation forever and bring about a sea change in the social fabric of this country. Research and Development The demand for new housing and infrastructure in India is increasing rapidly. This growth must be constantly fuelled with innovative approaches and latest methods in construction, which take into account the social, economic and environmental imperatives. Sobha always strives for perfection and continual improvement. Most of the projects developed, designed and built by the Company incorporate R&D initiatives and newer processes thereby creating added value for clients. To Sobha, advancing construction activities with the help of R&D directly translates into improving productivity to save time and cost; enhancing quality, value engineering, exceeding customer expectations, delivering greater value and increasing the skill set of the workforce. Innovation management as key success factor The organisation uses innovation to spot and develop new growth segments. The Companys motto for innovation is Think, Act, Share, Celebrate, which translates to Think individually; Act team wise; Share with the employee fraternity; and Celebrate Sobhas success as a family. Sobha has a structured way of receiving ideas from its employees - through an in-house online application called IdeaSpace. This provides a platform for virtual discussion of the idea which ensures organisational participation in identifying the best practices. Ideas pertaining to different areas of operations are invited and judged on the following four parameters: quality, feasibility, safety and customer orientation. Models that can lead to improved business performance are implemented. They are also showcased in an exhibition, Genesis, which is organised by the Company every year to celebrate creativeness and innovation. Monthly Value Engineering workshops addressing concern areas are organised to help the participants analyse and suggest innovative and practical solutions. Sobha drives innovation at three levels: * Central Innovation * Division Innovation * Project-specific Innovation 1. Central Innovation Process and IT: On the process front, the Process and Information Technology department of Sobha develops processes as Standard Work Process Procedures (SWPPs), wherein each activity, spanning every department of work, is extensively documented. The process development procedures have helped the Company in upgrading its Enterprise Resource Planning (ERP) system. ERP facilitates the flow of information across all functions within the Company and helps effectively manage external communication with the stakeholders. Our ERP system has helped improve efficiency, simplify work processes and improve customer experience. Some of the successes with our ERP and other Information Technology applications during the year have been: * Sales and construction agreements as well as the sale deed can be generated using the ERP system * Providing a customer portal to help customers login and view their accounts * Sending SMSs through ERP to customers for payment reminders and receipt * Sending SMSs through ERP to sales team members with details on prospective customer allocations * Constantly enhancing the Companys homegrown ERP to manage the budgeting and capital expenditure request process for the Plant and Machinery Department and managing the sales invoicing process for the mattress division * Working with the design team to adopt Revit as an architectural design software * Implementing an office automation and surveillance system at Sobhas new Corporate office Green initiatives Designing projects as per the LEED and IGBC guidelines result in better lighting and ventilation. Creating in-house expertise Network rendering technology and render farms have been implemented to create in-house walk-throughs for projects. Bar bending schedule Bar Bending Schedule (BBS) can be produced accurately from the structural drawings using the newly implemented Rebar CAD software. Using the software, the reinforcement wastage of the project can be brought down from 3% to 1%. Introduction of LED light fixtures The Company has introduced LED light fixtures in place of normal Metal Halide (MH) & CFL light fixtures. LED light fixtures consume very less power and save up to 60% of electricity. They also last ten times longer when compared to other fixtures. Lighting management system Introduction of Lighting Management System (LMS) with the following features for energy conservation: Daylight harvesting Daylight sensors help in actively managing the amount of artificial light in a room when natural sunlight is available. They can substantially decrease lighting power consumption depending on the amount of natural light available and the accuracy of the daylight harvesting device. Occupancy sensors The occupancy and movement sensors are introduced in meeting rooms, cabins and toilets of various contractual projects as they help conserve energy. They also cut down on the use of light fixtures during non-working and unoccupied hours at the workspace. Introduction of heat pump for hot water An air-sourced heat pump works by absorbing heat from the outside air and transferring it to water in a tank. The heat pump is an all-in-one device that discharges hot water according to the desired requirement up to a water temperature of 600 celsius. It is one of the most economical systems to heat water for domestic use. This highly efficient unit uses free renewable energy from the air and is three to four times more convenient than a conventional electric heater. The heat pump is a safe and eco-friendly device, which can be installed outside a house or on the terrace. It is best suited for row houses and villas. Construction technology New formwork system proposed using H-Beams and brackets The new formwork system proposed using H-Beams and brackets will help remove the usage of silver oak (a type of timber) for primary and secondary runners. The lack of availability, increasing costs and quality issues of the silver oak wood were the main concerns, which necessitated the use of factory made H-Beams. The use of this system can qualitatively improve the column beam framework and subsequently reduce the thickness of external rendering. Introduction and implementation of Debris Crusher The Debris Crusher is a machine that works with the jack load method and a 10 bhp motor. It is a compressor used to compress blocks, rocks, concrete moulds and debris. It crushes up to 25 mm. These compressed materials are later used for screed concrete and backfilling. The output capacity of the machine is 8 tonnes/ hour. About 3% of the debris generated is recycled and used for backfilling. Hence the cost of carting the debris outside the site premises is considerably saved. Implementation of the thin bed mortar system A thin bed mortar system has been implemented to reduce the environmental impact, save water, improve energy efficiency, reduce maintenance and maximise a buildings life. This methodology helps save labour, time, water and energy. One unique and distinct advantage is that it is free from curing post application. 2. Divisional Innovation Introduction of automatic spraying machine The automatic spraying machine helps in reducing the limitations of the traditional way of spraying like high lacquer consumption, low coverage area, large drying time and high material wastage. As the amount of lacquer being used in the work piece is less, it reduces the material consumption by 10 to 20% and increases the coverage area by 20 to 40%. Boltable spring corner cleat for window and ventilators The innovative idea of Window Cleat allows one to make a perfect corner connection, which is controlled by an in-built key and pins. This is implemented in the toilet ventilators of our residential units. Polyester fibres into concrete Adding polyester fibres to concrete during the production of kerb stones and paving slabs (of less than 100 mm thickness) acts as a secondary reinforcement measure. It also helps in the reduction of cement content and reduces the amount of CO2 released into the atmosphere. Thermal insulating blocks EPS (Expanded Polystyrene Foam) has lower thermal conductivity and a high ability to resist heat transfer, and hence, making it a good insulating material. It is also lightweight and environmentally-friendly due to its minimal processing energy. 3. Project-specific Innovation Secant pile wall system Secant pile walls are constructed by drilling overlapping vertical shafts and backfilling them with lean concrete. In alternate shafts, a steel pile section is installed, and the lean concrete provides soil retention between piles. This system provides water cutoff and even helps in earth retention. Lateral bracing is often required as this system is generally used for deeper excavations and in cases of high water table conditions. The secant pile wall system is ideal for sites, which are nearer to residential complexes as it helps cut down on noise pollution. A more accurate concrete finishing methodology A high-quality, dual operation screed vibrator accompanied with a rotating laser instrument allows a 100 mm thick layer of freshly poured concrete to be compacted, levelled and smoothened in one operation. The laser is used for transferring and checking reference levels to a 1 mm accuracy thereby delivering a perfectly levelled floor, on which tiling can be directly laid upon. Employees Excellent image as an employer One of the key reasons for Sobhas sustained growth is its employees. The Companys focus on establishing and maintaining a good workplace environment, introducing training programs to equip the workforce to handle their on-the-job challenges and taking steps to inspire leadership have gone a long way in making it an attractive employer. Sobha has been able to garner top slots for campus recruitment at some of the leading engineering colleges and management institutes across South India. Sobha recruits candidates based on their technical, functional and behavioural competencies. Beginning with a comprehensive induction programme, right from the time of entry of a new recruit, the Company provides the right inputs to ensure seamless integration of young minds and expertise in the organisation - a workplace where talent can blossom and realise its full potential. Sobha believes in nurturing its employees, without any discrimination. As a responsible corporate citizen, the Company encourages persons with disabilities in its candidate pool. As of March 31, 2012, Sobha has employed a workforce of 2,502, up 12.5% (278 in absolute number) from 2,224 in March 31, 2011. Recognised as a top employer Sobha Developers Ltd. has been honoured with the Employer of the year in Real Estate award at the Realty Plus Excellence Awards 2012. Empowering young minds Around 80% of Sobhas workforce comprises young people, who are under 35 years of age. They bring about a fresh perspective to the Companys work environment and foster the innovation culture of Sobha. Young employees also seek out creative challenges and view their seniors as vast resources from whom they can gain knowledge. The professional development of employees is fuelled through various training and development modules. High performers with a potential to grow in the organisation are provided with challenging opportunities for taking up higher responsibilities in line with their career aspirations. The Company has a Management Trainee Scheme, through which it hires bright civil engineers from leading institutes and grooms them to become future leaders. They are equipped to deal with the most critical project management and delivery functions. The Company also provides a first taste of job experience to several interns who are given hands-on training. The integrated work processes at Sobha give them a wide exposure to world-class construction practices. Growth-oriented work environment In addition to offering attractive career and development opportunities for employees, Sobha also believes in compensating them based upon their performance, merit and competitively in relation with the market. The Human Resource Department of the Company conducts a compensation survey periodically to benchmark Sobhas remuneration against the market. Key metrics such as cost and revenue per employee are tracked closely to measure the efficiency of the employees and attractive performance linked incentives are given if the desired targets are achieved. Employee retention Working on the holistic development of employees through initiatives like providing honest feedback for improvement or appreciating them for their achievements help in employee retention. The transparent Company culture, which is built on values, such as respect, support, and recognition of achievements has always been a source of motivation for our talent pool. The staff-centric policies are the key differentiators, which give Sobha a competitive advantage over the others. Employee-friendly initiatives Creative Club Sobha has a Creative Club, which adds value to every Sobhaites life. The Club actively celebrates important occasions like Earth Day, World Plumbing Day, Earth Hour and Environment Day besides days of national significance like Independence Day and New Years Day and all festivals. It also plays an active role in fostering creativity among all employees. Employee Welfare Fund The Creative Club has also set up a Sobha Employee Welfare Fund. Sobhaites across various divisions can voluntarily contribute to this fund. The funds raised are used to help a Sobhaite in his or her medical emergencies. Innerve The Company publishes its in-house magazine, Innerve, every quarter. It updates employees on the latest Company information and all people-related activities. Following are the key objectives of the magazine: 1. To be the most effective means of internal communication 2. To enhance employee belongingness and engagement 3. To create a sense of pride and association among employees Thanks to employees The good reputation of our high-quality products is due to our employees commitment, performance and loyalty. Sobhas workforce was instrumental in helping the Company achieve another excellent result in FY 2011-12. We express our sincere thanks to all our staff members who have contributed to our success. Training Staff development at the forefront People are our strength, so employee training programmes and initiatives are an integral part of Sobhas growth vision. The training modules are driven by technology and enhanced by innovation. They have been a major driving force of our success. The challenging business scenario necessitates continuous development of employees in terms of skills and competencies in line with the work requirements. Sobha has a technologically well-equipped Academy where both technical and behavioural training is provided. The trainings are structured in the following way: 1. At the time of joining, an induction program is conducted to familiarise the employees with various business units, departments and work processes. 2. After joining, all employees have to undergo annually three days of behavioural training besides three days of technical or work-related training. 3. Reverse trainings are conducted at the project sites. Its a platform for the Companys employees to unleash their hidden potential as a trainer and share their knowledge with others within the Sobha family. Through this, the staff gets an opportunity to learn more about their lines of work as they teach their peers about their technical know-how and share their experiences. 4. Workers development training programs are conducted to address the needs and concerns of the construction workers with the aim to improve their well-being. Sobha Academy - where knowledge meets know-how Sobha Academy is an inter-company training centre that offers world-class training in construction with state-of-the-art facilities. Artisans like Mason, bricklayer, tile-layer and carpenter are trained in batches of 25- 30 at the Academy. Quality, safety and cleanliness are the three words the Academy promises to add to the trainees vocabulary and make sure they learn to practice it. The technical training structure at Sobha is divided into two parts - supervision and inspection. The Company has identified 28 activities, which go into the execution of a project. To execute each activity there is a laid down sequence and procedure using the right tools and methodology. These kinds of activity-specific trainings help in delivering high-quality products. Similarly, each of the technicians is trained to carry out all the activities related to his trade in a sequential manner. For instance, a worker who is recruited from a village is extensively trained to acquire the skills required to execute the simplest task related to his trade. He is given minimum theoretical and maximum practical training for a period of over four weeks. This is followed by another eight weeks of on-the-job training under senior and experienced technicians at the project sites. His skills are then put to test based on the proficiency achieved in executing the laid down activities. Next, he is provided execution training rigorously for nine months. Following which he is trained on higher skill sets; thereby the training process becomes an ongoing one. The Sobha Academy has conducted a total of 55,816 hours of structured training for 4,364 employees and technicians during this fiscal year. The Academy plays a large role in ensuring that the artisans and employees are rightly skilled and well-oriented. Sobhas employees are encouraged to attend outstation as well as external trainings to keep themselves up-to-date with the latest skills and knowledge pertaining to their area of work. Every year several new training modules are introduced to cater to all sorts of delivery and execution functions. Some of the new technical training programmes introduced in FY 2011-12 include concreting, scaffolding, masonry, plastering, water-proofing, painting, tiling, marble & granite work, metal work, aluminum fixtures & glazing works, project management, reinforcement, construction safety, pre-cast buildings and green building orientation. While the behavioural ones comprise communication skills, etiquette and mannerism, man- management, leadership skills, administration at sites, stress management, industrial relations and interviewing skills. Risk Management Report Risk Management is a continuous and dynamic process that involves identification, assessment, analysis, and measurement of all potential threats, events, and associated risks which may have a bearing on the achievement of stated objectives or on the operations of the Company. The Board of Directors and Audit Committee of the Company have been entrusted with the responsibility of establishing and implementing an effective risk management system. The following are the key risks faced by the Company: Strategic and Market Related Risks Industry Specific Risk The Real Estate market is affected significantly by changes in economic conditions, demographic trends, employment, and income levels, among other factors. The Companys business is dependent on the availability of Real Estate financing in India. Recession in the economy may cause the Company to experience limited availability of funds in the future. Sales Market Risk A decline in the Real Estate market may cause the property buyers to remain risk averse and the market spending may turn more cautious because of it. These factors could have adverse effects on the Companys business and future growth, or could otherwise decrease the revenue generated from some or all of the Companys residential, commercial, and contractual businesses. Customer Relation Risk A substantial portion of revenues from contractual projects is generated from one major client operating in the Information Technology sector. If the said client either reduces or stops providing the Company with contractual projects or if there is a slowdown in the IT sector, it could have a material adverse effect on the Companys business and its results of operations. Competition Risk The Company may face significant competition from other Real Estate developers which undertake similar projects within the same regional markets as the Company. Due to the fragmented nature of the Real Estate business, adequate information about the competitors projects may not be available and accordingly the Company runs the risk of underestimating the supply in the market. Diversification and Investment Risk Expansion into new geographies exposes the Company to risks such as low level of familiarity with the development of properties in the new geographies, attracting potential customers in the new markets, etc. The impairment of intangible assets that may arise out of acquisition, such as goodwill, can also cause additional financial burden to the Company. Investments usually have a gestation period spanning several years. The associated risks include those related to obtaining requisite regulatory approvals for the projects. Changing government policies may also impose restrictions or prohibitions on investments. The strategic risks described above are inherent to the sector in which the Company operates. The demand for housing in India is huge and the potential for growth in cities due to migration will definitely present more opportunities to the sector in the years to come. The Company believes that quality is the key differentiator wherein the customers get complete value for the investments made. As per the internal estimates of the Company, majority of the homebuyers are less dependent on debt finance. The Company has also been adding new customers in the area of contractual projects, so that the dependency on one major client is reduced. Operational Risks Project Implementation Risk One of the primary inputs for a construction company is the availability of land. The uncertainty of underlying title of the land in India is a major factor and involves the risk of legal disputes and related costs. The other inherent risks in the project implementation phase include delays in implementation, supply chain issues, migratory labour, accidents, cost and quality control. Availability and Volatility of Input Costs Risk Fluctuating input costs is a risk inherent to the Real Estate business. The Companys operations are subject to increase in expenses due to a number of factors such as increase in construction, repair and maintenance costs, sub-contracted service costs and labour costs. Personnel Risk The Companys performance depends to a significant extent on the abilities of its senior management personnel and loss of services of such personnel could have a material adverse impact on the Companys business. Also, if the Company is unable to identify, attract, and retain competent manpower such as engineers and architects, the business could be adversely affected. IT and System Risk The Company uses an Enterprise Resource Planning (ERP) system known as R Construct for integrating its core and back-end activities such as architecture, engineering, projects and costing. Any disruption of the existing IT systems or a delay in implementation could disrupt the Companys ability to track, record, and analyse the work in progress or cause loss of data. The Company employs well-governed processes to ensure that project-level implementation risks are minimised. The Company has an in-house Quality, Safety and Technology (QST) department to address quality issues of the end product. The Company has effective polices to retain and motivate key personnel to contain the risk of attrition. The Company owns the intellectual property associated with the ERP System and has an in-house IT Department which caters to the development and maintenance of the IT Systems, ERP framework and the associated IT related issues. The Company engages in negotiating long-term contracts for the purchase of key material, and it also follows a backward integration model wherein the key inputs for the final product are sourced in-house, thereby reducing the dependency on external suppliers. Financial Risks Interest Rate Risk The Company has incurred floating rate indebtedness for its projects to a certain extent. Changes in interest rates, which are highly sensitive to factors such as governmental, monetary and tax policies, may increase the Companys cost of borrowing and impact its profitability. Liquidity Risk Investments in the Real Estate sector are relatively illiquid. The Company may not be able to liquidate its assets promptly in response to economic conditions in the Real Estate market, or may be required to give a substantial reduction in the price to ensure a quick sale. Credit Risk The Company undertakes certain projects in cooperation with various other parties. Credit risk arises when they do not perform their obligations as in such circumstances, the Company may be required to make additional investments in the joint venture or become liable for its obligations. The Company has managed its gearing levels efficiently during the last three financial years. The gearing ratio has come down from 1.72 in 2008- 09 to 0.53 in 2011-12. The management is of the view that the present level of debt is optimum for the Company for ensuring sustained growth in the future. The Company has adopted an effective method for purchase of land, and due diligence of joint development partners is conducted before entering into any joint development agreements. Other Risks Legal Risk The Company is involved in certain legal proceedings in relation to the lands owned by it and claims in relation to taxation matters. Any adverse decision may have a significant effect on the Companys business, prospects, financial condition, and results of operations. Regulatory Risk The Company is subject to extensive local, state, and central laws and regulations that govern the acquisition, construction, and development of land, including those related to zoning, permitted land uses, fire safety standards, height of the buildings, access to water and other utilities. Political Risk The Companys business may be affected by changes in Government policy, social and civil unrest and political or other developments in or affecting India. Specific laws and policies affecting Real Estate, foreign investment, and other matters affecting investment in the Companys securities could change. Such changes could adversely affect the Companys business. Disaster Risk The occurrence of natural disasters, including earthquakes, fires, pandemic diseases and man-made disasters, including acts of terrorism and military actions, could adversely affect the Companys results of operations or financial condition. The Company has a strong in-house legal department and engages outside experts to mitigate legal and regulatory risks. It is an active member of trade associations like CREDAI and FICCI and makes joint representations to the Government and Regulators on common issues being faced by the sector. The Company takes adequate insurance coverage for managing disaster related risks and adopts sufficient measures to reduce the incidence of man-made disasters. Overall Risk Mitigation Mechanism The Company has well-governed systems and processes in place to identify and take steps to mitigate or minimise the Company related risks. The Company has constituted a Risk Council comprising personnel from cross- departmental functions, which meets at regular intervals to address the risks faced by the Company, mapped in terms of probability along with the impact. The Risk Council advises the management on key mitigation related issues for better decision-making. The Audit Committee and Board of Directors of the Company are aware of the aforementioned risks faced by the Company and have adopted adequate and timely risk management measures to counteract the risks. Operational and Financial Analysis Execution and Delivery Sobha is one of the few Real Estate developers in India, which has executed 51.80 million square feet of developed area since inception. The Company has completed 79 Real Estate projects covering 25.45 million square feet and 209 contractual projects measuring 26.35 million square feet. Sobha has a strong community of over 10,000 customers. In the financial year 2011-12, the Company has completed and handed over 5.22 million square feet of developed area comprising 9 Real Estate projects covering 3.14 million square feet and 18 contractual projects covering 2.08 million square feet of developed area. Sobha is currently executing 38 Real Estate projects covering 23.04 million square feet and 47 contractual projects comprising 10.05 million square feet of developable area. During the past five years, Sobha has executed an average of 6.62 million square feet of developed area and 5.80 million square feet of Super Built- up area annually, thus indicating a strong delivery capability. New Sales Despite a challenging macroeconomic environment, the Company, during the FY 2011-12, achieved Real Estate sales of 3.28 million square feet compared to 2.78 million square feet of saleable area in 2010-11. The summarised Real Estate sales performance of various cities where the Company has its operations in for the financial year 2011-12 is given as under: The value of the new sales achieved during the financial year is T17.01 billion. During the financial year 2011-12, the overall price realisation has improved from T4,082 per square feet to T5,181 per square feet, up by 27%. The sales value also increased from T11.33 billion to T17.01 billion, up by 50% and fresh sales volume increased from 2.78 million square feet to 3.28 million square feet, up by 18%. Operating Margins During FY 2011-12, the Company has earned an EBITDA margin of 31.38% compared to 25.74% in the previous financial year. The higher margins are mainly due to the increase in the Real Estate sales when compared to the contractual projects and higher price realisations. New Launches The Company had launched new projects in Bangalore, Chennai, Gurgaon, Pune, Coimbatore and Mysore aggregating to a total development of 10.45 million square feet, which will be completed in a phased manner. New Markets During the year, the Company has increased its footprint in three new cities namely Gurgaon, Chennai and Mysore. Despite a few challenges in new markets like variations in customer preferences and local laws, the Company was able to sell 0.50 million square feet of new sales indicating a great promise in the years to come. Future Launches Sobha, during the financial year 2012-13, is planning to launch residential projects with an eclectic product mix of multi-storied apartments, row houses, super luxury villas, commercial development and plotted development in Bangalore, Coimbatore, Thrissur and Mysore covering a total Super Built-up area of 5.86 million square feet wherein the Company has an economic interest of 4.30 million square feet. Cash Flows During the financial year 2011-12, the Company generated net positive cash flows of T5,302.44 million against T4,131.32 million during the previous year indicating an increase of 28.35% on a year over year basis. Cash Flows (Rs. in million) Profit before Tax 2,952.36 2,435.96 Depreciation 387.78 277.73 Changes in Working Capital 1,499.66 1,043.23 Net Interest 941.51 752.92 Others (478.87) (378.52) Operating Cash Flow 5,302.44 4,131.22 Land Monetisation The Company has divested some of its non-strategic land parcels for an amount of Rs.1,365.36 million during the financial year ended March 31, 2012 compared to Rs.1,539.62 million during the financial year ended March 31, 2011. Financial Indebtedness As on March 31, 2012, the Company has outstanding loans of Rs.11,257.70 million compared to Rs.12,109.65 million as on March 31, 2011. The net debt as on March 31, 2012 is Rs.10,645.90 million compared to 1,844.30 million as on March 31, 2011. The net debt has decreased by Rs.1,198.40 million during the financial year ended March 31, 2012. The reduction of debt is mainly on account of internal accruals and partly due to land monetisation. Consequently the Debt/ Equity ratio has reduced to 0.53. The graph depicts the financial indebtedness position of the Company for the last two financial years. Land Bank The Company has an economic interest in land parcels spread over nine cities having a developable area of 216.66 million square feet. The average cost of land is Rs.173 per square feet and Rs.86 per square feet when factored on a FSI basis. The graph shows the distribution of land bank across the various cities. Key Ratios 31.03.2012 31.03.2011 EBITDA Margin 31.38 25.74 Pre Tax Margin 21.05 17.62 Post Tax Margin 14.32 13.20 ROE 10.41 10.24 ROCE 9.91 8.57 Earnings per Share (Rs.) 20.48 18.61 Book Value (Rs.) 204 189.33 Debt/Equity Ratio 0.53 0.64 Price Equity 16.27 15.77 Price/Book Value 1.63 1.55