CRISIL Research Cust Bulletin Feb13

CRISIL CRBCustomised Research Bulletin

February 2013

Sector Focus: Real Estate

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Foreword

In this issue, we have looked at unfolding trends in the real estate sector, as well as some of the other related sectors such as hotels, retail and hospitals. The year 2012 was a relatively tough one for the real estate sector in India. The macro-economic environment of high interest rates and sluggish growth coupled with continued high prices across most cities led to slowing of demand for real estate. As potential buyers remained in wait-and-watch mode, developers reacted by going slow on new project launches across segments (residential, commercial office space, and retail). The residential real estate market saw a decline in transactions (new apartment sales) across most of the 10 major cities, with NCR and Kochi the worst hit; in terms of average capital values, these 10 cities only grew by a marginal 3-5 per cent y-o-y. The relatively better performers among them were Ahmedabad, Bengaluru, and Pune. Demand for commercial office space, which has remained subdued ever since the economic slowdown of 2009, continued to be muted with corporate houses going slow on expansions. Lease rentals in both commercial and retail real estate space remained flat in 2012 vis-à-vis 2011. The hotel sector too had a similarly subdued year. The prevailing macro-economic climate took a toll on room demand, as both domestic and foreign tourist arrivals declined across both business and leisure destinations. Average occupancy rates (ORs) of premium segment hotels fell by over 400 basis points as the impact of this demand slowdown coincided with huge supply additions. Due to this demand-supply mismatch, the industry’s revenue per available room (RevPAR) this year is estimated to be at an 8-year low. In retail, despite the central government’s decision to open up the multi-brand retail segment to foreign direct investment, there is unlikely to be an immediate flurry of activity from foreign players. CRISIL Research expects FDI flows of only US $ 2.5 billion - 3 billion over the next 5 years in the organised retail sector. Even when top foreign retailers eventually foray into India, they will find that retailing here comes with its own unique set of challenges. The food and grocery (F&G) vertical, for instance, accounts for nearly two thirds of all organised retail in the country, yet it

2

CRISIL CRB Customised Research Bulletin

Foreword

remains one of the most challenging due to low gross margins on products sold, and logistical challenges, particularly in the supply chain. It is, thus, an opportune time to understand the challenges confronting the F&G retail segment, and the steps that players can take to improve both gross margins and IRRs. In this issue, we have done precisely that. This edition also throws light on the daunting challenges ahead of India’s hospital segment over the next few years. Although the healthcare delivery industry size is currently an estimated Rs 3 trillion, India is far short of several global benchmarks for healthcare delivery. Our estimates suggest that investments of nearly Rs 7 trillion will be needed over the next five years just to reach the global median of 24 beds per 10,000 persons. We are confident that you will find this edition informative and useful.

Prasad Koparkar Senior Director Industry & Customised Research

Opinion Segment-wise review of the Indian real estate market 01 Interview Binaifer Jehani, Director – CRISIL Research 04 Economic Overview – February 2013 06

Industry Overview Hospitals 07 Hotels 09 Organised Retail 11 Educational services 13 Independent Equity Research Report Ashiana Housing Ltd. 15 Customised Research Services Real Estate 16 Media Coverage 17

Contents


1

1. Residential Real Estate Macro-economic factors dampened transactions in 2012 The year 2012 saw macro-economic factors weighing down the growth of residential capital values across the 10 major cities in India (namely Mumbai, NCR, Bengaluru, Kolkata, Chennai, Hyderabad, Pune, Ahmedabad, Chandigarh and Kochi). High interest rates coupled with sticky inflation continued to exert pressure on demand as potential buyers chose to remain in a wait-and-watch mode. As a result, the number of transactions across these cities either remained stable or declined from the 2011 levels. Average capital values in the 10 cities grew at a marginal rate of 3-5 per cent in 2012 on a y-o-y basis. The growth, however, was seen primarily in the latter half of the year.

Capital value index (for 10 major cities)

Note: Indexed to 2005 Source: CRISIL Research

Mumbai and NCR to account for over half of the total estimated supply during 2013-2015 As far as residential supply in the 10 major cities is concerned, nearly 2.1 billion sq ft is planned of which CRISIL Research expects nearly 67 per cent or around

1.4 billion sq ft. to come up by 2015. Mumbai and NCR alone are expected to account for nearly 55 per cent of the estimated supply.

Planned v/s CRISIL Research's estimated supply

(2013-15)

Source: CRISIL Research

2. Commercial Office Space Rentals in 90 per cent of the micro-markets across 10 major cities remain lower than their 2008 peaks During the economic slowdown of 2008-09, demand for commercial office space especially from the IT/ITeS and BFSI sectors plummeted leading to a sharp correction in lease rentals. Between the first half of 2008 and the second half of 2009, average lease rentals corrected by almost 25-30 per cent. The subsequent period has seen a rather sideward movement in average lease rentals in the 10 major cities barring a few micro-markets which have witnessed either an uptrend or a downtrend. During this period, demand gained momentum briefly in the first half of 2011, but the existing vacancy levels prevented any major appreciation in lease rentals. A lean demand scenario has also adversely impacted the execution of many projects. Currently, lease rentals in almost 90 per

100

120

140

160

180

200

2005

2006

2007

H1

2008

H2

2008

H1

2009

H2

2009

H1

2010

H2

2010

H1

2011

H2

2011

H1

2012

H2

2012

Capital Value Index

20

40

62

73

91

104

91

132

167

605

27

69

99

101

133

152

155

179

269

877

Kochi

Chandigarh Tricity

Kolkata

Ahmedabad

Chennai

Hyderabad

Bengaluru

Pune

Mumbai - MMR

NCR

Planned Supply (mn sq ft.)

CRISIL Research's Estimated Supply (2013-15) (mn sq ft.)

Opinion Segment-wise review of the Indian real estate market

2


cent of the micromarkets in the 10 major cities are nearly 25-30 per cent below their peak levels seen in the first half of 2008.

Lease rental index (for commercial office spaces in

10 major cities)

*Excludes Ahmedabad since transactions happen on outright basis Note: Indexed to 2005 Source: CRISIL Research

Only 37 per cent of the total planned supply to materialise by 2015; oversupply to persist Of the total supply of 445 million sq ft planned across 10 major cities (Mumbai, NCR, Bengaluru, Kolkata, Chennai, Hyderabad, Pune, Ahmedabad, Chandigarh and Kochi), CRISIL Research expects around 167 million sq ft of office space to come up during 2013-2015. Of the likely supply additions, NCR, Bengaluru and Pune will together account for nearly 53 per cent. In relation to supply, demand is expected to be at about 66 million sq ft during the 2013-2015 period.


(2013-15)


3. Organised Retail Vacancy levels continue to impact growth in rentals In the post 2008-09 era, the organised retail real estate segment has struggled to gain traction due to the prevailing oversupply. In the period since the first half of 2010, lease rentals have remained flat in most micro-markets across the 10 major cities in India due to high vacancy levels. Rentals have not breached the peak levels seen during the first half of 2008 in any of the micro-markets across the 10 major cities.

Lease rental index (for retail spaces in 10 major

cities)

Note: Indexed to 2005 Source: CRISIL Research

100110120130140150160170180190

2005

2006

2007

H1

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H2

2008

H1

2009

H2

2009

H1

2010

H2

2010

H1

2011

H2

2011

H1

2012

H2

2012

Lease Rental Index

2

2 8

12 12

20 24 23 26

38

7 15 16

28 29

55 61

67 75

93

Chandigarh TricityKochi

AhmedabadChennaiKolkata

Mumbai - MMRHyderabad

PuneBengaluru

NCR

Planned supply (mn sq ft.)CRISIL Research expected supply (2013-15) (mn sq ft.)

100

120

140

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220

2005

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2008

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2011

H1

2012

H2

2012

Lease Rental Index

3

NCR to see maximum additions in mall space during 2013 to 2015 The total planned supply of retail space across the 10 major cities is estimated at about 67 million sq ft, of which CRISIL Research expects abound 38 million sq ft to come up during the 2013-2015 period. In number terms, CRISIL Research expects about 80 malls out of the total planned 141 malls to come up by 2015, of which 15 malls are expected to come up in NCR.


(2013-15)


4

45

26

812

101415

56788

1515

1827

32

KolkataChennai

Mumbai - MMRKochi

Chandigarh Tri-cityPune

AhmedabadBengaluru

HyderabadNCR

Planned malls

CRISIL Research's estimated supply of malls (2013-2015)

(No. of units)

4


Binaifer Jehani, Director, CRISIL Research, leads the research function on the real estate sector at CRISIL Research. She is responsible for overseeing a large team of analysts, offering comprehensive research coverage on real estate, spanning residential, commercial and retail space. Her areas of expertise also comprise healthcare delivery, hospitality and housing finance. In addition, Binaifer manages customised assignments, which involve gauging the feasibility, underlying market potential, etc of prospective business models for developers, private equity firms, investment bankers and banks. Research findings of such bespoke assignments empower these players to make informed and effective investment decisions. Binaifer joined CRISIL in 2004. During the course of her eight-year stint, she has successfully handled several projects, involving estimation of market and financial feasibility. These projects have driven critical business activities in areas of expansion, capacity building, etc. She has been an active participant at real estate forums, where she proffered valuable insights and opinions on vital sectoral issues. In 2008, Binaifer pioneered the product called ‘City Reality’, which determined underlying potential in the top ten cities of India. Further, in 2011, she was instrumental in conceptualising the ‘Reality Next’ report, covering the newly emerging cities, by going beyond the conventional top ten Indian cities. Binaifer is a Qualified Chartered Accountant and holds a Post Graduate Diploma in Business Administration with specialisation in finance from Symbiosis Institute of Business Management in Pune.

What is your outlook on prices in the residential and commercial office space segments of the Indian real estate market over the next 2 years? With the macro-economic environment keeping potential buyers in a wait-and-watch mode, the year 2012 saw the residential real estate market in India struggle. Factors such as high interest rates and sticky inflation continued to impact buyer sentiments and led to a fall in transactions across the 10 major cities of India (Ahmedabad, Bengaluru, Chennai, Chandigarh, Hyderabad, Kochi, Kolkata, Mumbai, NCR and Pune). However, with a reduction in interest rates and an expected improvement in macro-economic conditions, CRISIL Research expects demand conditions to improve in 2013 and 2014, enabling a 5-7 per cent y-o-y growth in average capital values in 2013 and another 6-8 per cent in 2014. The economic uncertainty of 2012 also affected demand in the commercial office space segments in the 10 cities. However, with the overall economy expected to fare better in 2013 and with certain IT majors reviving hiring, CRISIL Research expects office space rentals to appreciate by 2-4 per cent in 2013 and by 3-5 per cent in 2014, after ending relatively flat in 2012. With a decline in the launch of commercial office space, vacancy levels are also expected to fall. A further

Interview Binaifer Jehani Director, CRISIL Research

5

decline in lease rentals from the current levels is unlikely as we believe that the lease rentals have already bottomed out. Taking off from the previous question, in the next couple of years which of the 10 major cities is expected to outperform others in the residential segment? As far as the residential segment is concerned, Pune, Hyderabad and NCR are expected to see the maximum growth in capital values in 2013 and 2014. Of these, Pune will be one city to watch out for over the next couple of years. CRISIL Research expects average residential capital values in Pune to grow at a CAGR of 10 per cent till 2014, vis-à-vis the 2012 levels. Growth will be driven by factors such as Pune’s proximity to Mumbai and the relatively affordable rates, upcoming infrastructure such as the metro rail and an international airport at Rajgurunagar. Another important aspect that is expected to work in Pune’s favour is its status as a preferred IT/ITeS hub. With the majors in this industry moving into a hiring mode, we expect demand for residential units to increase. These factors, therefore, will work in tandem to maintain a steady demand for houses over the next two years. What are your views on the retail industry in India and on the retail real estate space? The year 2011-12 was difficult for organised retailers. Revenue growth of most players dipped sharply on account of weak consumer sentiments. Apparel prices also rose sharply with the increase in cotton prices and the levy of excise duty on branded apparel led to flat-to-negative volume growth for apparels. This added to the woes of organised retailers (as apparel accounts for one-third of organised retail). Growth slowed down in same store sales. Overall, growth in organised retail was lower at 16 per cent in 2011-12 as compared with a strong 23 per cent growth in 2010-11. In 2012-13, we expect organised retail growth to remain subdued at 8-10 per cent. However, over the longer run, CRISIL

Research expects the organised retail growth to remain robust, growing at an annual average rate of 20 per cent to Rs 4.0 trillion in 2016-17 from Rs 1.6 trillion in 2011-12. The factors that will drive the growth of India’s organized retail industry are favorable demographic change, rising disposable incomes, urbanization, nuclearisation, etc. Lease rentals for retail real estate space, which remained flat in 2012, are expected to go up in 2013 and 2014. Limited supply additions (of malls) coupled with an improvement in demand will enable this increase. How is the Indian premium segment hospitality sector expected to perform over the next 2 years? Uncertainty in the macro-economic environment will continue to impact both business and leisure travel in the current year and the next (2012-13 and 2013-14). Slowdown in travel in turn would affect room demand growth for premium segment hotels. During 2012-13 and 2013-14, room supply is expected to grow at 12 per cent CAGR, while room demand is forecast to grow only at 6 per cent CAGR. This demand-supply imbalance will lead to a fall in both occupancy rates (ORs) and average room rates (ARRs). By 2013-14, the fall in aggregate ORs is expected to be the steepest in the decade at 58 per cent as 11,750 premium segment hotel rooms get added to the existing inventory of 46,200 rooms across 12 key destinations of India (Agra, Ahmedabad, Bengaluru, Chennai, Goa, Hyderabad, Jaipur, Kolkata, Kerala, Mumbai, NCR and Pune) These destinations together account for 80 per cent of the premium segment hotel revenues. Intense competition will cause ARRs to decline at 5 per cent CAGR to Rs 7,000 in 2013-14 from Rs 7,750 in 2011-12. Consequently, the revenues per available room (RevPAR) will decline by about 10 per cent CAGR to Rs 4,050 in 2013-14 over 2011-12.

6


Indian Economy Economic Overview – February 2013

Macroeconomic Indicators - Forecasts

Inflation Industrial production growth Currency

Sectoral inflation Trade Growth

Interest rates

Foreign inflow (US$ bn) Credit growth

High Threat Medium Threat

-8

-4

0

4

8

12

Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

Mfg

40

45

50

55

60

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13

Avg Rs per US$

-20-10

010203040


Exports Imports

7

8

9

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov

-12

Jan-

13

1 Yr 10 Yr

0

10

20

30


Non-food credit growth

0

10

20

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12

Apr-

12

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2

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-12

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PrimayFuelManufacturing

4

6

8

10

12


WPI CPI-IW

-2

2

6

10

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov

-12

Jan-

13

FDI+(ECBs/FCCBs)Net FII flows

2012-13 2013-14 Rationaley-o-y Grow th Agriculture 1.8* 3.5

(%) Industry 3.1* 5.1

Services 6.6* 7.7

Total 5.0* 6.4

Inflation (%) WPI - Average 7.4 6.5

Low er global crude oil prices, higher agricultural output, and a stronger rupee are expected to low er inflation. Forecast for 2013-14 has been revised dow nw ards as demand-side pressure on inflation w ill be w eaker-than-anticipated earlier due to the lagged impact of slow er GDP grow th in 2012-13.

Fiscal deficit as a % of GDP 5.4 5.0

Fiscal deficit has been revised dow nw ards as w e expect the government’s recent commitment tow ards f iscal consolidation to continue. Higher GDP grow th w ill lif t the government’s revenue grow th w hile low er crude oil prices and continued pass-through of these prices w ill keep the subsidy burden under 2.0 per cent of GDP.

Interest rate (%)

10- year G-Sec (year end)

8 7.7-7.8Expected 50-75 bps cut in repo rate until March-end 2014 to low er the f loor for 10-year G-sec yields. High government borrow ings and an expected pick-up in credit grow th w ill limit the dow nside to 10-year G-sec yields.

Exchange rate

Re/US $ (year end) 53 51-52

Robust capital inflow s driven by an improved global outlook and domestic policy reforms to cover high current account deficit and result in an appreciation of the rupee to 51-52 by March-end 2014.

Note *CSO Advance EstimatesSource: Central Statistical Organisation, CRISIL Research

A boost in agricultural output (premised on a normal monsoon) and low er interest rates w ill revive private consumption. Aided by higher consumption grow th and a mild recovery in exports, industrial and services grow th are projected to pick-up in 2013-14. Forecast has been revised dow n from 6.7 per cent earlier due to w eaker-than-anticipated momentum in industry and services. Fiscal push to grow th is also expected to be low er now due to the government’s commitment to f iscal consolidation.

7

Industry Overview

Hospitals

India lags global norms in terms of healthcare delivery services India lags several global benchmarks for healthcare delivery. In terms of both healthcare infrastructure and manpower, the country faces severe shortage, which is reflected in the fact that India ranks below several developing countries including China, Thailand, Sri Lanka and Vietnam in terms of both beds to population and physicians to population ratios. Physicians per 10,000 population

Note: The global median for physicians per 10,000 individuals is 12

Hospital beds per 10,000 population

Note: The global median for hospital beds per 10,000 individuals is 24 Source: WHO statistics, CRISIL Research

Healthcare delivery industry size estimated at Rs 3 trillion in 2012-13 Based on the health indicators for India released by the World Health Organisation's (WHO) World Health Statistics survey, CRISIL Research estimates the size of the Indian healthcare delivery industry at 4 billion treatments in 2012-13 in volume terms, and at Rs 3 trillion in value terms. While the in-patient department (IPD) accounted for 72 per cent of the healthcare delivery industry, the out-patient department (OPD) accounted for the balance. CRISIL Research defines outpatients as patients who are not required to stay at the hospital overnight. It includes consultancy, day surgeries and diagnostics and excludes pharmaceuticals purchased from standalone outlets. CRISIL Research believes that apart from a change in age demographics and rising incomes, improvement in health awareness, a change in the disease profile (towards lifestyle-related ailments), rising penetration of health insurance and increasing opportunities from medical tourism will propel the future demand for healthcare facilities in India. (This analysis confines itself to secondary care and tertiary care hospitals, and all references to the healthcare delivery industry refer to these segments. Primary care hospitals and nursing homes are out of the purview of this analysis.)

Thailand

India

Sri Lanka

Vietnam

Global …

China

UK

USA

Germany

3

66

6

12

14

21

27

35

Physicians per 10,000 population

India

Thailand

Global …

Vietnam

China

Sri Lanka

USA

UK

Germany

9

22

24

28

30

3131

39

83

Hospital Beds per 10,000 population

8


Overall healthcare delivery market: Rs 3,000 billion

(2012-13)


Investments of Rs 7 trillion required to reach the global median of 24 beds per 10,000 persons During the 2007-08 to 2012-13 period, the total number of beds increased at a CAGR of 2 per cent to reach 1.2 million. In order to meet the benchmark of 24 beds per 10,000 persons set by the World Health Organisation for healthcare infrastructure, India would require an investment of over Rs 7 trillion over the next 5 years.

OPD28%

IPD72%

9

Industry Overview

Hotels

The average occupancy rates (ORs) of hotels in the premium segment in India will dip to 61 per cent in 2012-13 from 64 per cent in 2011-12 -- the net impact of a demand slowdown coinciding with huge supply additions. While incremental supply in 2012-13 is expected to be around 4,750 rooms, incremental demand will be limited to 1,200 rooms. This mismatch will precipitate a fall in the industry’s revenue per available room (RevPAR). Both large and small business destinations including NCR, Bengaluru, Chennai, Kolkata and Ahmedabad will see a sharp dip in RevPARs. Among leisure destinations, Jaipur and Kerala will see the fall in RevPARs. Growth in room demand to be subdued at 4 per cent in 2012-13 … After a year of high growth (21 per cent) in 2010-11, hotel room demand growth slumped to 7 per cent in 2011-12. In 2012-13, growth in room demand is estimated to remain subdued at 4 per cent (CAGR) primarily due to the continuing global economic downturn, which will impact both business and leisure travel. Demand growth is expected to be subdued

E: Estimated; Source: CRISIL Research

….as domestic passenger traffic and FTAs are expected to weaken The shrinking corporate budget for travel expenses, affected by the sluggish macro-economic climate, and a drop in domestic leisure travel are expected to hurt domestic passenger traffic in 2012-13. Foreign tourist arrivals (FTAs) in India – nearly 50-60 per cent of which is from USA and Europe – is also expected to slow down in 2012-13 following deterioration in the global economic health. During January-December 2012, y-o-y growth in arrivals was lower at 6 per cent as compared to the 10 per cent growth seen in January-December 2011. Slowdown in demand growth will coincide with a 10 per cent annual increase in room inventories… Supply growth will outpace demand growth


On the other hand, supply will augment at 10 per cent in 2012-13. This will aggravate the prevailing demand-supply mis-match further. By 2012-13 end, CRISIL Research expects 4,750 new rooms to be added to the existing 46,200 rooms across 12 Indian destinations.

-5%

0%

5%

10%

15%

20%

25%

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13E

29,7

50

30,9

50

46,2

00

50,9

50

2011-12 2012-13E

Demand (nos.) Supply (nos.)

10


These destinations collectively account for 80 per cent of the country’s premium hotel rooms. …that will widen the demand-supply gap further, causing ORs to dip Pan-India: Supply will far exceed demand


Occupancy in both business and leisure

destinations will dip (%)

E: Estimated; Note: ORs are calculated on total demand and supplies Source: CRISIL Research

The incremental supply in 2012-13 will be around 4,750 rooms, whereas incremental demand is expected to be only for around 1,200 rooms. The skew in supplies will cause the occupancy rates to fall from 64 per cent in

2011-12 to 61 per cent in 2012-13 – the lowest since 2004-05. … and ARRs to slide, with RevPAR likely to hit an 8-year low As increased room inventory intensifies competition, average room rentals (ARRs) will dip by about 5 per cent in 2012-13. The revenue per available room (RevPAR), which takes into account both ARR and ORs, will dip by around 11 per cent. At Rs 4,450, RevPAR in 2012-13 will be the lowest since 2005-06. Pan India ARR and RevPAR (%)


74% 72% 75% 73%66% 63% 66% 65% 61%

0

20,000

40,000

60,000

80,000

2004

-05

2005

-06

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2007

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2008

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2012

-13E

Demand (nos.) Supply (nos.)Occupancy rate (OR)

(Nos.)

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55

60

65

70

75

80

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

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2011

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2012

-13E

Business destinations Leisure destinations

3000

6000

9000

12000

2004

-05

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2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

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Average room rate (ARR) (Rs per day)RevPAR (Rs per day)

11

Industry Overview

Organised Retail

While food and grocery (F&G) accounts for two-thirds of overall retail, the share of organised retail is the lowest among all retail verticals, signifying underlying opportunity. However, this vertical is also the most challenging of all retail sector verticals. And building efficiencies in back-end infrastructure can help retailers improve margins in this vertical. Considerable opportunity in domestic food and grocery retail The food and grocery (F&G) vertical, Rs 18 trillion industry in 2012-13, constitutes more than two-thirds of the overall Indian retail sector. However, the organised retail market in F&G is only Rs 450 billion, and the organised retail penetration (ORP) of this vertical is the lowest among all retail sector verticals at 2.4 per cent. Taking into account the market size and the ORP, CRISIL Research believes there is considerable opportunity for organised retail players in F&G to grow. In the unorganised space, kirana stores (mom and pop stores), cart vendors and wet markets dominate. Organised retailers are present in this vertical through supermarket and hypermarket formats.

Organised F&G retailing formats

Huge challenges in F&G retailing in India Although F&G offers considerable opportunities to organised retailers on account of low ORP, it is also one of the most challenging verticals due to the low gross margins earned on products sold. Indicative gross margins across categories in India

Perishable nature of products – A big concern Fresh products (fruits and vegetables) drive footfalls for supermarkets and hypermarkets, and hence are an essential part of the product mix despite the lower gross margins earned. On account of their perishable nature, fruits and vegetables require proper handling and storage. Further certain FMCG products such as ice cream, butter, etc also require refrigeration facilities. Supply chain challenges Challenges in FMCG supply chain

For FMCGs, the supply chain consists of manufacturers/suppliers either delivering products to the store or to the regional distribution centre of the retailer. A supermarket has 3,000-4,000 stock-keeping units (SKUs) while hypermarkets have 20,000-25,000 vis-a-vis 700-800 SKUs in the case of kiranas; SKU is each unique product available for sale at the store. Also, in India, as tastes and preferences differ between regions; 15-20 per cent of the products stocked are

Category Gross margin* Category Gross margin* Fresh 8-10% Apparel 30-35% Staples 10-12% Footw ear 30-35% FMCG-Food 10-12% Electronics 12-14% FMCG-Others 10-12% General

merchandise 12-14%

Furnishings 35-40% * Indicative gross margins of branded productsNote: Gross margins can improve w ith increasing share ofprivate labels. Gross margins for fresh categories andstaples are net of w astages.Source: CRISIL Research

Food & grocery Other categories

FormatStore area( sq ft)

Fresh 5-10% Fresh 3-5% FMCG- food 20-30% FMCG-food 15-20% FMCG-others 20-30% FMCG-others 15-20% Staples 20-30% Staples 10-15% General merchandise

5-10% Apparel 10-15%

Others 20-40%

Note: Fresh - Perishables like fruits, vegetables, etc; FMCG food- Processed food like w afers, juices, etc; FMCG staples - Grainslike rice, pulses, etc; FMCG others - Home and personal careproducts like soaps, detergents, etc; General merchandise -Plastic items, etc.Source: CRISIL Research

HypermarketSupermarket

2,000-10,000 50,000-150,000

Typical product mix

12


local in nature. As a result, F&G retailers have to deal with a large number of FMCG product suppliers. This makes managing inventory and supply chain more difficult than other verticals. As most retailers in India do not have a fully integrated back-end infrastructure, receiving goods is also a challenge with retailers having to manage multiple deliveries at the store from both large and small suppliers. Indian retailers also have lower fill rates of 60-67 per cent for FMCG products as compared to 90-95 per cent in the US and Europe on account of delays in shipments; fill rate is the availability of inventory at the store to meet customer demand. While small local suppliers are essential for adding local products, dealing with them is challenging as they may not have IT systems integrated with the retailer.

Challenges in fruits and vegetables supply chain

Managing the fruits and vegetables (F&V) supply chain is demanding on account of inadequate storage and transportation facilities in India. Direct sourcing from farms is done only by a few large retailers, and even they source only 30-40 per cent of their F&V requirements directly. The rest is procured from wholesale APMC (Agricultural Produce Marketing Committee) markets. Further, retailers are required to route the sourced F&V through APMC yards and pay all taxes and commissions, thereby increasing the time taken for transportation. Poor road conditions in India result in increased transportation time, which leads to higher wastage for perishables Lack of cold chains (cold storages and refrigerated transportation) is another problem plaguing the Indian market. While 180 million metric tonnes of F&V (excluding potato) was produced in India in 2011-12, cold storage facility was available for less than 3 per cent of this production. Back-end efficiencies can improve gross margins As compared to other verticals, the back-end infrastructure for F&G retail in India is relatively

underdeveloped. For F&G, the back-end constitutes logistics (transportation), handling, cold-chain for storage, contract farming, and F&V sorting, grading and collection centres, as well as processing and packaging centres. Investments in back-end infrastructure can bring about efficiencies that can help reduce wastage and improve gross margins. Investments in back-end infrastructure to result in better gross margins According to CRISIL Research, a retailer can improve the overall gross margins for the F&G category by around 300 bps by making additional investments in back-end infrastructure. These investments would have to be made in cold chains, automation of warehouses and other technologies. The average gross margins of Indian F&G supermarkets (at the store level) are around 13 per cent. The fresh category can benefit the most with a superior supply chain. In this category, CRISIL Research expects gross margin improvements of 600 bps from lower wastage and better quality of products. Also, a superior supply chain will help retailers offer a wider range of F&V, including exotic varieties, which will command higher gross margins. Similarly, gross margin improvements in other categories like staples and FMCG can be achieved by premiumisation of the product mix, introducing private labels and value-added products. Some of these product improvements are already being explored by Indian retailers. Back-end infrastructure investments can improve IRRs by 250-300 bps The typical internal rate of return (IRR) earned by an F&G retailer in India at the company level is 10-11 per cent currently. CRISIL Research believes that IRRs for an F&G retailer can improve by 250-300 bps to 14-15 per cent with higher investments in backend infrastructure. Also, investing in back-end infrastructure will enable retailers to expand faster in the front-end and thereby further improve IRRs.

13

Industry Overview

Educational services

Structure of K-12 education in India The K-12 education structure in India can be classified both on the basis of management and by the various stages of education. On the basis of their management, institutes imparting K-12 education can be grouped into 3 categories: those that are managed either by the government, or the private sector with or without financial aid from the government. Based on the stage of education, the education structure is classified into Primary (class I-V), Upper primary (VI-VIII) and Secondary (IX-XII). K-12 education is imparted through institutions offering schooling from kindergarten to class XII. These schools form the largest chunk of the educational services industry in India. Schools in this sector can be categorised as follows: Classification of K-12 schools in India


In India, the education sector is included under the Concurrent List. Hence, legislative powers governing the sector are distributed between the centre and the state. Educational institutions in India have to be run as not-for-profit entities - they are run either as trusts, societies, or companies under Section 25 of the Indian Companies Act. As a result, the surplus funds generated by the educational institutions cannot be withdrawn; instead, they have to be utilised for the development of the institution(s). However, in recent years, such trusts have been permitted to transfer the surplus funds generated by one institution to a sister concern under the umbrella of the same trust. Overview of K-12 education in India While demographic data suggests that there should be 352 million children enrolled in schools, government data indicates enrollment of only 243 million children in 2009-10. Despite having the world's largest K-12 population, India has a low enrollment rate at the school level. At present there are only 1.45 million schools offering K-12 education in India, of which 1.27 million schools offer elementary education (up to standard VIII). Of the 1.27 million elementary schools, government schools account for nearly 82 per cent. Number and share of public institutions (2009-10)


Government

Private Aided (Government

funded but privately managed)

Private Unaided

K-12 Education

Primary(Class I-V)

Upper Primary (Class VI-VIII)

Secondary (Class IX-XII)

By Management

By Level of Education

0.07 million

1.05 million

Secondary and higher secondary

(37%)

(Elementary)(82%)

14


Rise in enrollment of K-12 students in private institutions The share of private K-12 institutions in total educational institutions has remained largely stable in 2011-12 over 2007-08. However, the share of private institutions in total enrollments has grown faster between 2007-08 and 2011-12. CRISIL Research expects that the importance of private sector in K-12 segment would increase with their share in total enrollments augmenting to 48 per cent in 2016-17 from 42 per cent in 2011-12. Importance of private sector in K-12 education on

the rise


Growing preference for private institutions Rising urbanisation, increasing ability and willingness to spend on quality education have resulted in a shift in preference from government schools to private ones. Also, slow-paced capacity creation in government schools has led to higher enrollments in private institutions. The charts below establish the trend in rising preference for private schools not only in urban areas but also rural pockets.

Rapid growth in private institutions (2008-09 –

2010- 11)

Source: DISE, CRISIL Research

School profitability could be impacted by RTE implementation The Right to Education (RTE) Act makes education a fundamental right of every child between the ages 6 and 14. It requires all private - aided and unaided - schools to reserve 25 per cent of the available seats for children from the 'Economically Weaker Sections' (EWS) of the society. The other key features of the act are listed below: � No capitation fees to be charged for admission � No denial of admission � The school would be entitled for reimbursement of

the expenditure it incurs to the extent of expenditure incurred per child in other government-run schools, or the actual amount charged from the child , whichever is lower.

The Right to Education Act would not apply to unaided minority schools.

75%

25%

63%

37%

75%

25%

58%

42%

0%10%20%30%40%50%60%70%80%

Public Private Public Private

Institutions Enrollment

2008 2012

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Rural government

Urban government

Rural private Urban private

Growth in enrolments per schoolGrowth in number of schoolsGrowth in enrolments

15

Ashiana Housing Ltd (Ashiana) continues to be a prominent real estate player. Focus on quality projects at a reasonable price and rack record of timely completion of projects have strengthened its brand equity. It has a strong pipeline of projects (9.6 mn sq ft) but most of these projects are awaiting land conversion approvals. As a result, bookings and construction are delayed. More-than-anticipated delay in approvals could affect Ashiana’s future prospects. However, with the new launches expected by FY13-end, we expect bookings to revive in FY14. We maintain our fundamental grade of 4/5.

Positive on long-term prospects Limited land bank, focus on residential projects and presence in tier II/III cities have resulted in efficient capital management and a strong balance sheet. We remain positive on Ashiana’s long-term prospects given its emphasis on quality offerings at a reasonable price and track record of timely completion of products. Owing to this, Ashiana enjoys strong brand equity, reflected in premium pricing of 5-10% compared to competition.

Strong pipeline but approvals are a hurdle; shift in capital allocation strategy a positive Ashiana has a pipeline of 9.6 mn sq ft of projects but most of them are awaiting land conversion approvals. Nearly 7.8 mn sq ft of projects are in Rajasthan, where the land conversion process has been at a standstill for the past one year. Due to approval hurdles, it has devised a new capital allocation strategy where payments for the land are subject to receipt of approvals. Hence, it will have limited liability in case of further delays in approvals.

Bookings and construction to remain under pressure in FY13, to pick up in FY14 Given the approval hurdles, there is limited visibility on new project launches in H2FY13. As a result, bookings and construction are likely to remain under pressure. We expect bookings of 0.8 mn sq ft in H2FY13, marginally above H1FY13 levels, and construction of 1.1 mn sq ft in FY13 compared to 1.5 mn sq ft in FY12. With the likely approval of building plans for 1.1 mn sq ft project in Jaipur (Gulmohar Gardens), 0.42 mn sq ft in Jamshedpur (Anantara) and 0.4 mn sq ft in Neemrana in H2FY13, we expect bookings to pick up in FY14.

Gearing up for the next level of growth Construction picked up from 0.5 mn sq ft in FY07 to 1.5 mn sq ft in FY12. Bookings also jumped to 1.8 mn sq ft from 0.4 mn sq ft during the same period. We believe Ashiana’s business model is scalable and the management is taking the steps in the right direction. With a cash balance of ₹1,050 mn, it is comfortably placed to acquire another 50-60 acres of land; the company plans to expand in southern and western India. It is also ramping up the second line of management to prepare for the next level of growth.

Shift in accounting methodology to impact P&L; cash flows remain strong Due to a change in the accounting methodology to possession based from percentage completion, revenues and PAT are expected to decline over the next two years but will pickup in FY15. Operating cash flows are expected at ₹0.7 bn p.a. in the next three years.

Valuations – current market price has upside We continue to use the net asset value method to value Ashiana. We have rolled forward our projections to FY15. Factoring in cash flows from three new projects – Gulmohar Gardens (Jaipur), Anantara (Jamshedpur) and Neemrana - we raise our fair value to ₹256 per share from ₹205. At the current market price, the valuation grade is 4/5.

KEY FORECAST (CONSOLIDATED)(₹ mn) FY11 FY12 FY13 FY14E FY15EOperating income 1,396 2,417 1,399 1,478 3,153EBITDA 441 826 542 558 1,190Adj Net income 429 696 432 478 989Adj EPS-₹ 23.1 37.4 23.2 25.7 53.2EPS grow th (%) 15.0 62.0 (37.8) 10.6 106.8Dividend Yield (%) 0.8 1.1 1.1 1.2 2.5RoCE (%) 26.9 36.7 18.6 17.2 31.6RoE (%) 28.2 33.5 16.7 15.9 26.9PE (x) 9.3 5.7 9.2 8.3 4.0P/BV (x) 2.3 1.7 1.4 1.2 1.0EV/EBITDA (x) 8.0 4.1 5.0 3.6 1.1Source: Company, CRISIL Research estimates

CFV matrix

Shareholding pattern

Performance vis-à-vis market

1 2 3 4 5

1

2

3

4

5

Valuation Grade

Fund

amen

tal G

rade

Poor Fundamentals

ExcellentFundamentals

Stro

ngD

owns

ide

Str

ong

Ups

ide

KEY STOCK STATISTICSNIFTY/SENSEX 5880/19317NSE/BSE ticker ASHIANA/ASHIHOUace value (₹ per share) 10hares outstanding (mn) 18.6

Market cap (₹ mn)/(US$ mn) 3,987/73nterprise value (₹ mn) 2,972/572-w eek range (₹) (H/L) 3,107/128eta 1.4ree float (%) 33.10%

Avg daily volumes (30-days) 10,139Avg daily value (30-days) (₹ mn) 1.9

66.1% 66.1% 66.1% 66.9%

0.2% 0.4% 0.6% 0.6%33.7% 33.5% 33.3% 32.5%

0%

20%

40%

60%

80%

100%

Dec-11 Mar-12 Jun-12 Sep-12

Promoter FII Others

1-m 3-m 6-m 12-mAshiana 29% 30% 25% 53%NIFTY 4% 5% 16% 23%

Returns

Independent Equity Research Report Ashiana Housing Ltd December 17, 2012

16


Customised Research Services Real Estate

Coverage

Note: Real(i)Next was a one time report published in June 2011. Key Offerings Real estate: Residential, Commercial, Malls & Multiplexes, IT/SEZs etc � Feasibility study/ Land development mix � Market potential of a city and Area-wise analysis � Valuation

Education: Play schools, K-12, Coaching Institutes, Engineering Institutes, Management Institutes, etc � Market analysis, Industry sizing and Feasibility Study � Competitive analysis � Franchisee evaluation � Valuation

Healthcare: Speciality, Super-speciality, Multi-speciality, and allied segments like diagnostic centres, standalone clinics, etc. � Market analysis, Industry sizing and Feasibility Study � Competitor analysis/Benchmarking � Valuation � Studies on allied services like health insurance, medical colleges, pharmacies and diagnostic centres

Hospitality: Premium, budget hotels, Service apartments, Quick-service restaurants, coffee shops, etc. � Market analysis and Feasibility study � Valuations � Management company/Franchisee evaluation

Ahmedabad Bhopal

Bengaluru Bhubanesw ar

Chandigarh Coimbatore

Chennai Indore

Hyderabad Jaipur

Kochi Lucknow

Kolkata Nagpur

Mumbai Surat

NCR Vadodara

Pune Visakhapatnam

Organised retail

Educational Services

Hospitals

Hotels

City Real(i)ty Real(i)ty Next

Cities covered: Cities covered:

17

Media Coverage

18


NOTES

19

NOTES

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