Suratwwala Business Group Ltd Management Discussions

The financial year 2023 saw impact of the Covid especially in countries like China, heightened geopolitical tensions led by Russia-Ukraine war, the resultant high inflation and the global fight on inflation spearheaded by all Central Banks. However, in the new financial year, while we have come out of the Covid challenge, most of the other issues continue to linger on, albeit with lower intensity.

Despite the challenges faced by the global economies, Global GDP growth thus far has surprisingly remained in the positive territory though slowing down considerably as compared to the previous year. Unprecedented monetary tightening done by the central banks has had somewhat less than expected impact on the overall economic activity. This has strengthened the view that the developed economies led by US are likely to have a soft landing or a no landing rather than a recession or hard landing. IMFs latest forecast: Growth will slow from 3.4 in CY22 to 2.8 percent in 2023 before accelerating to 3.0 per cent in 2024.

In line with earlier commodity cycles, most commodity prices which had shot up in the early part of the previous financial year have eased off noticeably. Prices for most of the commodities such as metals etc. are expected to be below the average levels seen in 2022.

After rising sharply over 2021 and much of 2022, inflation in most of the world has started slowing down, mostly driven by falling energy and food prices and fading supply chain pressures. This is paving the way for a reduction in the pace and intensity of interest rate hikes by the worlds major central banks, suggested at their recent meetings. However, while the inflation has been moderating in the face of steep policy rate hikes initiated by the Central Banks, the pace of moderation remains unsatisfactory for policy makers and it remains above the comfort level of most inflation targeting economies. This has made policy makers fear that inflation is becoming sticky prompting them to keep the interest rates higher for longer resulting in a downward bias to global growth forecasts. Also, with no end in sight for the Russia Ukraine war, any further worsening in the geopolitical tensions could once again disrupt global trade and supply chain leading to another round of high inflation especially in the energy prices.

As per IMF estimates, annual average inflation for various economies is expected to decline in 2023 vs. 2022. However, it is expected to remain above the pre-pandemic levels as well as the targets of the central banks. For advanced economies, it is projected to decline from 7.3% in 2022 to 4.7% in 2023. In emerging market and developing economies, projected annual inflation declines from 9.8% in 2022 to 8.6% in 2023 and 6.5% in 2024. With softening of inflation, it is expected that the monetary tightening initiated by the Central Banks will at the very least hit a pause during the year.

Review of Indian Economy

The financial year 2023 started on a rather gloomy note with the Russia-Ukraine conflict and the resultant energy price inflation - often Indias Achilles heel. India has weathered the storms of the previous year remarkably well and remained an oasis of calm in troubled global macro conditions. Led by efficient vaccination roll out, India emerged stronger than some of the other larger economies. To fight the inflationary pressures, global central banks led by the US Fed have raised benchmark policy rates substantially. This also forced RBI to raise policy rates by an unprecedented 250 bps in the financial year 2023 - fastest increase in policy rates in last two decades. However, given the fiscal prudence adopted by the Indian Government during the early part of the pandemic period, Indian macro conditions remain conducive of robust growth despite the above normal inflation seen recently which remain manageable to a large degree. Despite the challenges, Indian economy managed to grow by 7.2% in FY23 (Source: NSO), showcasing the structural nature of growth.

The Indian economy appears to have moved on after its encounter with the pandemic, staging a full recovery in FY22 ahead of many nations and largely ascending to the pre- pandemic growth path in FY23 and beyond. At the same time three key challenges remain entrenched largely from global macro side which will pose hindrance to Indias growth potential. First, inflation is likely to remain at an elevated level even though it may have already peaked. Secondly, aggressive tightening of monetary policies across the central banks of advanced economies is likely to cause a global slowdown this year, impacting trade and may also result in capital outflows and a rising imbalance in the balance of payment account. Third, higher energy prices is likely to keep the current account deficit at a higher level thus pressuring the currency. Additionally, on the domestic front - uneven spread of the recovery has meant that parts of the economy have still not reached their pre-pandemic levels leading to slower rural recovery.

The governments focus has rightly been on sectors such as infrastructure, construction, and manufacturing that create jobs for workers across all skills. Production-Linked Incentive (PLI) Schemes for various industries rolled out over the past few years have started to bear fruit. Though still in infancy, these sectors have huge potential to effectively kick-start the manufacturing engine for the country thus diversifying the growth drivers for the country. Growth is expected to be brisk in FY24 on the back of robust credit growth, positive capital investment cycle given the demand as well as the strengthening of the balance sheets of the corporate and banking sectors. Further support to economic growth will come from the expansion of public platforms and path- breaking measures such as PM Gati Shakti, the National Logistics Policy, increased spending on various transportation infrastructure and the PLI schemes to boost manufacturing output. RBI expects GDP growth for FY24 to be 6.5% which will translate into general optimism in the economy and job sentiments.

Indian Real Estate Industry Overview

Real estate sector in general and housing sector in particular has always played a critical role in shaping the global economies. The multiplier effect of housing sector through direct and indirect as well as through induced impact is significantly large on both the GDP as well as employment generation. There are several ancillary industries which support the growth of real estate construction sector, like cement, steel, other non- ferrous metals, tiles, glass, brick, and certain consumer durables etc. Further, the industries that provide the inputs to these ancillary industries also gain momentum. Hence, due to the inter-linkages among all the sectors of economy, the overall economic impact of a real estate far exceeds the direct impact especially in employment generation.

India by virtue of its demography and development cycle is at a place where demand for quality urban housing is immense. This is only going to strengthen with each passing year as India graduates from being a low-income economy to a middle-income economy. As per industry estimates, India would see creation of 100 million new households who will become home ownership capable by virtue of rise in income levels by the end of the decade. This creates a once in a lifetime opportunity for the Indian real estate industry.

Due to the structural nature of demand, Indian real estate industry has continued to gain momentum during FY23 despite the uncertainties posed by global economic slowdown as well as steep interest rate hikes. While the market for office spaces staged a comeback in the post-pandemic period with back to office normalization, the residential market further gained on the momentum seen in FY22. Despite the 250bps repo rate hike, the robust performance of the sector especially in the housing segment signifies the strength of the underlying demand for property.

Indian Housing Market overview

Indian housing market went from strength to strength surpassing previous peaks seen during the last year. As per property research firm, Anarock Research, housing sales in 2022 grew by more than 50% YoY to 3,65,000 units, surpassing the previous peak seen in 2014 at 3,40,000 units. What is heartening to note is that this happened in a year when there was still some residual impact of the pandemic in the beginning of the year and mortgage rates went up sharply by more than 200 bps. This reinforces the view that housing demand in India is structural in nature. Sales once again exceeded launches in the top 7 cities making the available inventory at the lowest level since 2014. Launches for the year in the top 7 cities stood at around 3,60,000 units.

Rising sales coupled with falling inventory has brought the inventory levels down to 21 months in Q42023 from 32 months in Q42014. The supply side consolidation in the industry continues to strengthen which augers well for all the participants - consumers, reputed developers as well as financial institutions. The disciplined supply has meant moderately rising capital values of homes. As per various industry reports, residential prices have increased by around 5-7% across various geographies. This positive nominal price growth has kick started the virtuous price demand cycle where, while the nominal increases have incentivized end user demand to go up but price growth being below the wage growth has continued to keep the affordability intact.

The importance of the brand in real estate has continued its upward journey. Housing is increasingly becoming a branded consumer product. A strong housing brand in consumers minds stands for superior product quality, avenue for life style upgrade, an aspirational address and above all certainty of timely delivery. The above can only be delivered by branded tier 1 developers, leading to the demand side consolidation. Branded tier-1 developers with strong execution capability are expected to leverage this opportunity to gain even more market share by bringing newer products suitable for the demand dynamics whilst offering quality, and a sustainable environment as well as social ecosystem.

MMR housing market overview

Mumbai Metropolitan Region (MMR) is the largest residential market in India with over 30% contribution to absorption volume and around 45% by value. Given the higher capital values and profit margins, MMR is also the most profitable market with likely accounting for over 50% of the profit pool of the residential market in Indian top-7 cities. As per Anarock Research, MMR reported an absorption of more than 1,10,000 units, showing a growth of 44% compared to the previous year. In value terms, MMR recorded absorption of H 1,570.0 bn showing a growth of 60% on a YoY basis. Similarly, it recorded a launch of more than 1.25 lakh units in 2022 showing a growth of 119% compared to previous year. The strong pace of absorption has meant that the overall available inventory in the MMR is now just above 20 months of sales. Pricing growth has remained stable in the MMR market witnessing around 7% YoY growth which has kept the affordability intact given salary growth seen across most industry has been in the range of 8% to 10%.

Pune housing market overview

Pune is a hub for manufacturing activities across various industries such as automobiles, defence, engineering goods etc. It also has a presence of a large number of IT Services companies. The diversified nature of job providers has made Pune an attractive and steadily growing residential market. Pune market stood third in terms of both new launches and home sales across the top 7 cities - comprising total share of 18% and 16% respectively of overall top -7 cities. As per Anarock Research, Pune reported a 59% YoY growth in unit absorption and achieved sales of over 57,000 units. Similar to MMR, available inventory in Pune is now around 20 months of sales. Home prices in the Pune market have witnessed a growth of 5% YoY in 2022

Indian logistics and warehousing overview

Indias logistics and warehousing industry is undergoing a dramatic transformation from a small unorganized godown led industry, into a prominent asset class. Strong growth in organised retail and e-commerce, rising consumption, change in consumer buying patterns as well as China + 1 strategy adopted by various global MNCs have all led to a need to create an efficient supply chain infrastructure. Rollout of GST has further accelerated the formalization of the sector. Companies have started the move to be present near consumption centres rather than production centres as was the case historically. With impetus provided to manufacturing industry through various PLI schemes and diversification by global manufacturers through China + 1 strategy means that demand for industrial and light manufacturing is also on the rise.

There is currently a scramble to reduce delivery timelines by all e-commerce as well as organized retail players, substantially boosting demand for the in-city fulfilment centres. With the pandemic vaulting the e-commerce sector on a high growth trajectory and the entry of players such as the Tata Group and the Reliance Group in this highly competitive space, in-city warehouses have started becoming mainstream phenomena much earlier than anticipated.

As per Anarock Research, Grade-A warehousing space absorption is expected to grow by 15% CAGR over 2021-25 in volume terms to 85 mn sqft. On the back of strong demand, rentals are also rising by an estimated 4%-8% per annum across various top cities.

Driving factors

The driving factors for the construction and building material sector in India are:

1. Aspiring millennials:

Millennial in India are a crucial market segment with easy access to home loans and are currently in their prime purchasing years. In 2020, they contributed to over 50% of home sales and their influence helped the Indian real estate market exceed 54% in 2022.

2. Urbanization and population growth:

India is the most populous country with around 1.42 Bn citizens. Indias population growth and rapid urbanization have led to an increased demand for real estate. From 17% in 1951, the urban population had risen to 35% in 2022 and is projected at 38% by 2025, widening the real estate market.

3. Rising disposable incomes:

The soaring demand for quality housing, fuelled by an expanding middle class and increasing disposable incomes, led to a substantial surge in real estate demand. The number of affluent Indian families doubled, with the percentage rising from 14% in 2005 to 31% in 2021. Projections anticipate a further rise to 63% by 2047.

4. Appreciating asset class:

Property prices in India have been on the rise since 2020. A 6% annual appreciation in property prices is predicted in FY 2023-24, making it attractive to own a home in India.

5. Growing foreign investments:

With 100% FDI approval under the automatic route in completed projects, foreign capital inflows into the Indian real estate market surged three-fold to USD 26.6 Bn during 2017- 2022, compared to the previous five years. For the same period, foreign investments accounted for 81% of the total investments in this sector.

6. Preference for green buildings:

Green buildings are gaining popularity among the wealthy segment of the Indian population because of the countrys growing per capita income and are seen as a potential solution to Indias rising pollution levels and poor air quality index. Although exorbitant cost appears to be a barrier, the longterm advantages of reduced energy expenditure, improved life quality and government incentives could strengthen demand.

Industry SWOT analysis:

Strengths	Weaknesses	Opportunities	Threats
• High Demand • Economic Growth • Foreign Investment • Favourable government policies • Skilled workforce	• High Cost of Capital • Lack of Transparency • High Land acquisition costs • Challenging regulatory framework • Limited financing options	• Growing urbanisation • Affordable Housing • Infrastructure Development • Technology adoption • Green Buildings	• Economic slowdown • Policy changes • Fluctuating Interest rates • Stiff Competition • Regulatory Risks

Segment-Wise or Product Wise Performance:

During the year the revenue from real estate segment stood at ? 6227.90 Lakhs as compared to revenue of ? 79.36 Lakhs of FY 2021-22

During the year, the company was involved in single segment of business.

Key Financial Ratios

Financial Ratios
Ratios	2023	2022	% Change	Remarks
Trade Receivables Turnover Ratio	83.91	1.98	NA	The Company migrated from BSE SME Platform to Main Board of BSE Limited and National Stock Exchange of India Limited on the February 10, 2023. Pursuant to the same the Company has adopted the first time adoption of IND-AS (Indian Accounting Standard) format for its financials applicable from February 10, 2023, as per applicable IND-AS requirement. Due to which, the ratio, are not comparable.
Current Ratio	1.04	0.69
Inventory Turnover Ratio	0.28	-
Debt Service Coverage Ratio	3.07	-0.74
Debt Equity Ratio	0.41	-1.26
Operating Profit Margin	0.48	-3.50
Net Profit Margin	0.34	-13.55
Return On Net worth	0.49	-0.06

Risk Management • Interest rate risk

Risk: Interest rate risk refers to the risk of change in interest rates that can impact the cost of borrowing and the value of real estate investments. Higher interest rates can increase borrowing costs and reduce demand for real estate.

Mitigation: SURATWWALA manages liquidity risk by keeping enough cash reserves, diversifying its funding sources, and periodically analysing its cash flow and liquidity status. During a high-rate cycle, buyers were offered attractive discounts to increase demand. A low net-debt-to-equity ratio further insulates from this risk.

• Raw material risk

Risk: Substantial fluctuations in raw material pricing may impact the cost of construction. Increasing prices can be partially absorbed through higher realizations. There could also be an impact on profitability in the event the price hike is not fully absorbed by the market through higher realizations.

Mitigation: The Companys supply chain is established. With suppliers, the business established standard pricing for the supply of essential raw materials over a predetermined time

• Political and regulatory risk

Risk: Real Estate is also subjected to political and regulatory risk, which can arise from changes in government policies, zoning laws and environmental regulations. These risks can impact real estate values and development opportunities

Mitigation: SURATWWALA manages political and regulatory risk by staying informed about the changes in laws and regulations, maintaining relationships with local authorities and conducting a thorough due diligence on properties before acquisition.

• Competition risk

Risk: The Company is subject to potential threats posed by other businesses operating in the same market, offering similar products or services.

Mitigation: SURATWWALA conducts thorough market research to differentiate its offerings effectively. Prioritizing customer satisfaction and embracing innovation to enhance the overall experience and build customer loyalty. Additionally, forging strategic partnerships and maintaining financial prudence provide stability and support sustainable growth to the Company.

Internal control systems and adequacy

The Companys internal control and risk management system aligns with the principles and criteria specified in the corporate governance code. It is an integral part of the overall organizational structure involving coordination among different individuals to fulfil their responsibilities. The Board of Directors provides guidance, supervises strategy to the executive directors and management, and oversees monitoring and support committees. S. M. Suratwala & Co. serves as the Internal Auditor for the Company.

Human Resources

At SURATWWALA, we believe that our people and our "We Care" culture strengthen our processes and operations and are central to our continued success. We are committed to build and further enhance skills of our people and provide them with a safe, inclusive, caring and an unbiased environment. Our workplace culture fosters creativity, agility, innovation, and meritocracy. We respect and are committed to uphold human rights of all our stakeholders - employees, subsidiaries, suppliers, and other partners. We had 34 permanent employees as on March 31, 2023.