SRS Real Infrastructure Ltd Management Discussions.

Introduction

The real estate sector is one of the most universally renowned sectors, with being second largest employer after agriculture, in India and is slated to grow at 30 per cent over the next decade. The real estate sector consists of four sub sectors - housing, retail, hospitality, and commercial. Currently, growth of this sector is well supplemented by the growth of the corporate environment, rising with the demand for office space as well as urban and semi-urban accommodations. In fact, the construction industry ranks third among the 14 major sectors in terms of direct, indirect and induced effects from all sectors of the economy.

Market Size

The Indian real estate market is expected to touch US$ 180 billion by 2020,with housing sector alone contributes 5-6 per cent to the countrys Gross Domestic Product (GDP).In the period FY2008-2020, the market size of this sector is predicted to increase at a Compound Annual Growth Rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate are also on the rise, providing the much-needed infrastructural boost for Indias emerging requirements.

It is expected that this sector will invite further non-resident Indian (NRI) investments in both short term and long term goals. Bengaluru is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun

Sectors such as IT and ITeS, retail, consulting and e-commerce have noted higher demand for office space in recent times- growth of market can be contributed, here. The office space absorption in 2016 amongst the top eight cities amounted to 34 million square feet (msf) with Bengaluru recording the highest net absorption during the year. Information Technology and Business Process Management sector had a uncontested lead in the total leasing table with 52 per cent of total space uptake in 2016. Stats state that Mumbai is the best city in India for commercial real estate investment, with returns of 12-19 per cent likely in the coming five years, followed by Bengaluru and Delhi-National Capital Region (NCR).

Investments

The Indian real estate sector has observed a high growth in current times, with the rise in demand for office as well as residential spaces. According to data released by Department of Industrial Policy and Promotion (DIPP), the construction development sector in India has received Foreign Direct Investment (FDI) equity inflows to the sum of US$ 24.28 billion in the period April 2000-December 2016.Some of the major investments in this sector are as follows:

Altico Capital, a non-banking finance company (NBFC), has co-partnered with American private equity firm KKR & Co LP to invest a meaty sum of 435 crore (US$ 65.25 million) in a 66-acre residential township, being developed by SARE Homes in Gurgaon. They have also invested 200 crore (US$ 30 million) in Bengaluru-based real estate developer Legacy Group, to fund the ongoing construction while refinancing the developers existing loans.

Gurgaon-based property search aggregator Square Yards Consulting Pvt. Ltd. has successfully raised US$ 12 million from the private equity arm of Reliance Group for strengthening its team, while expanding its presence to more than 25 countries.

A combined venture between Dutch asset manager APG Asset Management and real estate asset platform Virtuous Retail, has obtained a portfolio of three shopping malls for US$ 300 million, and has further dedicated an additional US$ 150 million as equity capital to expand the portfolio.

Macquarie Infrastructure and Real Assets (MIRA) and Tata Housing Development Co. Ltd have ventured into a 70:30 partnership to invest 1,400 crore (US$ 210 million) and Rs.600 crore (US$ 90 million) respectively in premium high-end residential property projects, starting with four major cities of Mumbai, NCR, Bengaluru and Pune.

Mr.NandanNilekani, co-founder of Infosys Limited, has invested around US$ 25 million in a real estate NBFC unit of KKR India, one of the local arms of the US-based private equity firm KKR & Co LP.

Indiabulls Housing Finance has effectively raised over Rs.1,300crore (US$ 195 million) by selling masala bonds to foreign investors, set to be utilized for its affordable housing segment.

Ivanhoe Cambridge, the real estate faction of Canadas second largest pension fund manager Caisse de depot et placement du Quebec (CDPQ), sets to enter into a Joint Venture (JV) agreement with Piramal Fund Management to set up a US$ 250 million venture, providing equity capital to developers of residential projects in the country.

Apollo Asia RE Singapore Private Limited and realty firm SalarpuriaSattva Group have entered into a JV to acquire 100 per cent stake in two real estate projects at Bangalore and Vadodara from a consortium of offshore investors in a deal worth 275 crores (US$ 41.25 million).

NestAway Technologies Pvt Ltd, a home rental company, has progressively raised US$ 30 million in Series C round of funding from US-based Tiger Global, Russian billionaire Yuri Milner, and IDG Ventures India, allotted to scale up operations and build technology.

Real estate private equity fund of the Kotak group, Kotak Realty Fund, has significantly raised US$ 250 million from institutional investors for equity investments in realty projects across Indias top six property markets including Mumbai, Delhi, Pune, Bengaluru, Hyderabad and Chennai over the next 24 to 36 months.

Quikr, an online classifieds platform, has obtained real estate portal Commonfloor.com for US$ 200 million in a stock- cum-cash deal.

Goldman Sachs purchased shares worth 255 crore (US$ 38.25 million) in Vatika Hotels Private Limited, a company owned by real estate and hospitality firm Vatika Group.

Government Initiatives

The Government of India, along with the governments of the respective states, has undertaken numerous initiatives to promote the development in the sector. The Smart City Project, where there is a plan to build 100 smart cities, is a prime opportunity for the real estate companies. Below are some of the other major Government Initiatives:

The Ministry of Housing and Urban Poverty Alleviation has approved the construction of 84,460 more affordable houses for urban poor in five states, namely West Bengal, Jharkhand, Punjab, Kerala and Manipur under the Pradhan Mantri Awas Yojana (Urban) scheme with an average investment of 3,073 crore (US$ 460 million).

The Securities and Exchange Board of India (Sebi) has planned easier regulations for real estate investment trusts (REITs), such as elevating the cap of investment of REITs assets in under-construction projects from 10 per cent to 20 per cent, to attract the interest of developers, and also plans to relax the rules, to aid foreign fund managers relocation to India. SEBI has allowed Foreign Portfolio Investors (FPI) to invest in units of Real Estate Investment Trusts (REITs), infrastructure investment trusts (InvITs), and category III alternative investment funds (AIFs), permitting them to acquire corporate bonds under default. The Securities and Exchange Board of India (SEBI) has also issued the consultation paper for public issue of Real Estate Investment T rusts (REITs), which include provisions such as capping of allocation to qualified institutional buyers (QIBs) at 75 per cent, among other topics. They have also notified final rules that will govern real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). This move will supplement easier access to funds for cash-strapped developers; while creating a new investment avenue for institutions and high net worth individuals, and eventually ordinary investors.

The RajyaSabha or the upper house of the Parliament has conceded the Real Estate (Regulation and Development) Bill, 2013, which sets to protect consumer interest, certify competence in all property related transactions, while improve responsibility of real estate developers, increase transparency and attract more investments into the realty sector in India.

Indias Prime Minister MrNarendraModi permitted the launch of Housing for All by 2022, under the Sardar Patel Urban Housing Mission. Close to 30 million houses will be built in India by 2022, mostly for the economically weaker sections and low-income groups, through public-private-partnership (PPP) and interest subsidy.

Way forward

Replying to a progressively well-informed consumer base and, keeping in context the aspect of globalisation, Indian real estate developers have shifted gears, successfully accepting fresh challenges. Real estate developers, to meet the growing need for managing multiple projects across cities, are further investing in centralised processes to source material and organise manpower and. The sector is also hiring qualified professionals in areas like project management, architecture and engineering. The mounting flow of FDI into Indian real estate has encouraged transparency to an increased level. Developers, in order to attract funding, have revamped their accounting and management systems to meet due diligence standards. These are sure-shot signs of better time to come to the sector.

Company Overview

The land operations of the SRS Group are completed by SRS Real Infrastructure Limited, a Bombay Stock Exchange recorded organization, and its 100% auxiliary SRS Real Estate Limited. The organization is, as of now, affianced in the improvement and development of over twelve undertakings in the private and business classes. With a land bank of roughly 500 sections of land, the land operations are spread crosswise over Faridabad, Greater Faridabad, Palwal, Rewari, Rohtak Panchkula in Haryana and Karjat (Mumbai).

We have immediately earned a name for ourselves in the land business, because of our scale, straightforward operations, convenient conveyances and a solid comprehension of the necessities of the purchasers. What sets our organization in good stride is its wide span of operations which incorporate Group Housing, Independent Floors, Residencies, Farmhouses, Townships, Corporate Tower, IT Parks and Hotels. These numerous tasks have fundamentally added to the companys quality and abilities, enabling it to leverage new opportunities.

2016-17 has been an eventful year for us. We initiated the second phase possession of approximately 100 flats and offered possession of 375 flats at our Palwal, Sector- 5 project, ensuring a rush of customers to own a piece of our premium housing. Out of 109 Villas, the company has offered 74 Villas for possession at the SRS Farm House in Manjhawali, Ballabgarh. We have got 35 new bookings for plots at our Panchkula Golf Hill Project. Our overseas project of construction, development and maintenance of the bus depot at The Republic of Congo is in full swing.

The real estate market has been among the sectors worst hit by the economic downturn which, coupled with high interest rates in the face of persistent inflation and delays in securing mandatory government approvals, has kept wary homebuyers away for the last couple of years. The sector witnessed substantial slowdown and part recovery in demand because of the global economic downturn and various government regulations such as demonetization, which led to a decline in affordability and tight liquidity. The retreat of various real estate investors, accompanied by slowdown in the capital markets, has resulted in oversupply and falling prices. Also, the advent of demonetization has brought in a sobering effect to the market as well as SRS, with the organizations bank account becoming NPA.

Debt-laden developers in the countrys key property markets—Mumbai, Bengaluru, Chennai and the National Capital Region (NCR centred on Delhi)—have been struggling with slow sales, high unsold inventory, delayed construction and stalled projects.

Opportunities for SRS have reflected this as we have witnessed failure in terms of rise of revenue. This requires consolidation of the inebriated situation, instead of any further expansion. We have therefore decided to indulge in market stabilizing practices, forgoing the onus to expand. SRS may discontinue its trading business completely and Future reorganization of business will consist of Real Estate segment (primarily affordable housing) and infrastructure segment (domestic and overseas projects). 2017-18 is looking up to be a stabilizing year ahead as we take proactive measures in building an empire from scratch. With the inclusion of developments such as RERA and affordable housing, SRS is set to power ahead in an era of profitable growth.

Real Estate (Regulation and Development) Act, RERA is a very significant and crucial law that will impact the entire Real Estate sector in the country. With RERA, transparency and accountability are being introduced in a sector that is widely perceived as big yet unorganized. here will be more accountability and compliance from the developers end as RERA renders brokers, agents and developers punishable if they do not comply and abide by the regulations. This will bring faith back as investors would promote the practice of transparency, calibrating the market.

The second reform to leave a lasting impact falls on the shoulders of Goods and Services tax (GST). It is the most revolutionary tax-related reform to be seen in India in several decades, having a reflective effect on Indias economic prospects and future scenario of the market. In spite of the tax structure has being announced, there is still a lot of speculation about which tax rate will be applicable to the real estate and construction industry. Yet, this is set to have a positive impact on SRSs endeavors as business will improve due to enhanced liquidity, leading to enriched profitability, collection will garner a timely facade, sales will increase and our NPA of banks will be standard.

As a move to revolutionize the real estate scenario, Prime Minister has announced that 2 Crore affordable houses will be completed upto 2022 to provide home for poor and middle class. The budget announcement on allowing 100 per cent deduction for profits to housing projects building homes up to 30 sq.metres in the four metro cities and 60 sq.metres in other cities is likely to spur supply of affordable homes, demand for which makes for almost 90 per cent of the demand for homes in India. Govt. classified the Affordable housing projects, which is certain to improve the profitability of the Company due to low income-tax on affordable projects, alongside being an easy way to get funds from financial institutions or banks. SRS allies to that through plans to build affordable housing for new owners to capitulate on.

SRS believes in progress, but not at the cost of Mother Nature. We have always vouched for sustainable development, fit for not only us but our future generations to thrive in. Hence, our construction procedures are environment friendly, following all applicable norms. Our pro-environment construction procedures are what have always set us apart and we intend to follow that path in the coming years ahead. Alongside that, all compliances such as NGT are adhered to as we stay true to our commitments and vouch for our integrity.

HUMAN RESOURCES

The Company considers its employees to be the most valuable asset and is committed to provide a conducive work environment to enable each individual employee to fully realize his or her potential. One of the cornerstones of the company culture is teamwork and continuous learning. To promote this, the company focused on supporting people to unlock their potentials and to enable them to work with a superior team spirit. The Companys HR measures revolve around this philosophy. As on 31st March, 2017, there were 44 employees on the payrolls of the Company.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has proper and adequate system of internal controls to ensure that all assets are safe guarded and protected against loss from unauthorized use or disposition, and that transactions are authorized, recorded and reported correctly and adequately.

The Internal control system provides for well documented policies, guidelines, authorizations and approval procedures. The internal control is designed to ensure that financial and other records are reliable for preparing financial information and for maintaining accountability of assets. All financial and audit control systems are also reviewed by the Audit Committee of the Board of Directors of the company.

Cautionary Statement

This Annual Report may contain forward looking statements, plans and strategy of SRS, its future financial condition and growth prospects, future developments in its industry and its competitive and regulatory environment, and statements which contain words or phrases such as "propose", "transform", "will", "expected to", "horizon of growth", "strong growth prospectus", etc. or similar expressions or variations of such expressions. These forward looking statements are based on expectations and projection, and may involve a number of risks, uncertainties and other factors that could cause actual results, opportunities and growth potential to differ materially from those suggested by such statements. These risks and uncertainties include, but are not limited to risks with respect to its real estate business, economic environment in India, changes in development regulations, changes in tax law, changes in other applicable laws, litigation and labour relations.

Some information in this report may contain forward-looking statements. We have based these forward looking statements on our current beliefs, expectations and intentions as to facts, actions and events that will or may occur in the future. Such statements generally are identified by forward-looking words such as "believe", "plan", "anticipate", "continue", "estimate", "expect", "may", "will" or other similar words.

On behalf of the Board
For SRS Real Infrastructure Ltd.

 

Place: Faridabad
Date: 12th July, 2017

 

(Dr. Anil Jindal) (Rajesh Singla)
Chairman Whole-Time Director
DIN: 00005585 DIN: 00009745