MANAGEMENT DISCUSSION AND ANALYSIS

Economy Outlook

The global economy grew at a moderate pace to 2.6% in 20I4. While the growth rate improved from 20I3, the major economies underwent a couple of challenges pertaining to structural imbalance, increased financial risks as well as geopolitical tensions. Moving to the future, the IMF projects the global economy to grow over 3% levels in the next couple of years. The outlook on economy remains cautious on account of market sentiment and volatility in the global financial markets, however the economic growth will likely be driven by the soft commodity prices and improving market demand.

From the Indian perspective, much of the exuberance that is being witnessed in India stems from the Parliament election of 20I4. The landslide victory of Prime Minister Narendra Modi led National Democratic Alliance (NDA) has not just brought about a stable political centre but also cleared the policy paralysis that India suffered from in the past couple of years. Moreover, the government is now taking steps to ensure that its development agenda can be implemented. Coupled with positivity, the economic fundamentals of the nation have also improved in recent months, with a moderation in inflation, commencement of the rate easing cycle, improving outlook for current account deficit, commitment to fiscal prudence by Centre & revival of brviously stalled projects. During the FYI5, the Indian economy grew at 7.3% (as per new calculations) in 20I4-I5 due to improvement in the performance of both services as well as manufacturing sectors. While the first half of the financial year was volatile, the latter half saw economy growth over 7%. The manufacturing sector recorded a growth rate of 8.4% during the last quarter of fiscal, up from 4.4% a year ago. As per the Organization for Economic Cooperation and Development (OECD), the Indian Economy's growth will remain strong and stable. The economy could even grow over 8 per cent if ambitious structural reforms such as goods and services tax, land and labour laws are affected. The FYI5-I6 fiscal consolidation target has been relaxed to allow for increased infrastructure investment while structural reforms to improve the ease of doing business and the Make in India initiative should boost corporate investments.

The Indian Real Estate Scenario

Given the backdrop of rapid urbanization, positive demographics and improving income levels, the Indian real estate sector has a strong global recognition. It is also the country's second largest employer after agriculture. Slated to grow at 30% over the next few years, the Indian real estate market size is expected to touch US$ I80 billion by 2020. The housing sector alone contributes 5-6% to the country's gross domestic product (GDP). Also, in the period FY08-20, the market size of this sector is expected to increase at a compound annual growth rate (CAGR) of II.2%.

During the brvious year, the residential real estate sector in India reflected a sluggish demand owing to volatile market scenario and subdued economic conditions confronting the sector for past few years. Bengaluru, Mumbai and Delhi-NCR remain the hotspots and accounted for around 60% of unit launches during the year. As of October 20I4, the capital values apbrciated 5-I3% in Bengaluru and 3-8% in Mumbai compared to the same period last year. As Bengaluru is largely end-user driven and Mumbai has a fair mix of end-users and investors, capital values have improved from the last year. However, capital values in Delhi-NCR declined 2-II%, primarily due to significant unsold inventory.

A notable trend in 20I4 was that the developers focussed primarily on mid segment offerings considering that this category has been largely underserved since the past few years. Around 68% units launched in nine months of 20I4 were in the mid segment, registering a significant increase from 56% during the same period of 20I3. The residential sector has been largely subdued across cities as high levels of unsold inventory exist, launches of new projects have been postponed amidst sluggish demand and capital values have largely been stable.

In India improved economic conditions and government measures to provide better infrastructure and housing are expected to have a positive effect. According to Economic survey - Government proposals to relax guidelines for foreign investment, implementation of REITs and increased funding for affordable housing and infrastructure projects, these are all expected to offer the much needed impetus.

The future outlook remains positive. Cushman & Wakefield Research estimates that overall urban housing demand in India is expected to be nearly I3 mn units by the end of 20I8. Besides the natural growth in population and declining household sizes leading to an increase in the demand for housing, increasing urbanization catalysed by migration of rural population to cities, development of industrial clusters and the proposed development of smart cities are likely to play a pivotal role in generating this additional demand. The growth of India's middle class population along with an increase in income, improvement in access to mortgage funding, attractive payment schemes offered by a few developers and good returns from the asset class have led to an increase in the growth of investments from this group. The Middle Income Group (MIG) is expected to generate the highest demand of I.08 mn units across the top eight cities till 20I8, followed by Lower Income Group (LIG) which is expected to generate demand of nearly I.05 mn units, and the Higher Income Group (HIG) will generate a demand for 0.52 mn units. Thus, both LIG and MIG will account for nearly four-fifths of the total demand.

Besides this, the Government of India have taken several initiatives to encourage the development in the sector. Some of them are as follows:

• The Government of Maharashtra has announced a series of measures to bring transparency and increase the ease of doing business in the real estate sector.

• The Government of India has relaxed the norms to allow foreign direct investment (FDI) in the construction development sector. This move should boost affordable housing projects and smart cities across the country.

The Budget 20I5 has allocated Rs I40 bn to a scheme that aims at building 60 mn houses by 2022, 20 mn of which will be in urban India. The government is also working towards a national housing scheme to build about 6 mn houses annually over the next seven years in rural India. The proposed National Gramin Awas Mission (GRAM) of the rural development ministry, which is likely to replace the Indira Awas Yojana, could become the guiding scheme for constructing houses in rural areas where 70% of the population lives. The government is following a twin pronged strategy of boosting demand whilst also removing supply-side bottlenecks. An approach to boost urbanisation through smart cities and development of large industrial corridors will help to develop new residential locations and tackle some of the most important issues facing the existing cities in India.

The Mumbai MMR Region

Mumbai Metropolitan region (MMR) as a counter magnet to Mumbai was envisaged in first regional plan of I965. However, the space has been growing phenomenally since I97I when the CIDCO was established. The vision was to create a combination of I4 mini towns or nodes, each to be provided with connectivity through well-designed roads, and later on through railway networks. Recently, the metro system was added to the original master plan.

In a span of these decades, MMR has not only caught up with the existing settlements but has also become the second-largest settlement city in terms of population share. In the last decade, Navi Mumbai has grown at an incredible pace of 88%, which is the highest growth rate in the region.

Government initiatives for the region:

• NAINA region or Navi Mumbai Airport Influenced Notified Area which has its genesis in the New Largest airport in the country, would be the biggest catalyst that will spur infrastructure development in Navi Mumbai.

• Presence of JNPT port and Multimodal corridor

Upcoming Connectivity

• Proposed Mumbai Trans Harbor Link (MTHL)

• Nhava - Sewri Sea link MTHL connecting South Mumbai to Navi Mumbai

• I26 km long Virar-Alibaug Multi Modal Corridor to connect NH-8, Bhiwandi bypass, NH-3, NH-4 and NH-4B, Mumbai-  Pune and NH I7

• Metro Railway getting operational from end 20I6/ early 20I7 from CBD Belapur to Taloja (Pendhar)

Urban Infrastructure

• Reliance Knowledge City, Reliance Corporate Park, Accenture, Millennium Business Park, Kellogs India and Hindalcon Industries in the vicinity of the region

The Jodhpur Region

Jodhpur, the second biggest city in the state of Rajasthan, is among the famous tourist destinations in the state as well as India. The city is also known as "Sun City" and it encompasses an area of 22,850 sq.km with a population of 2.I mn. The city is well connected to the rest of Rajasthan by airways, road and rail links.

The city is witnessing a rising population with trends moving towards urban living with aspirational lifestyle and amenities. The changing demographics have brought respectable interest both from the property developers and local residents therefore paving way for a potential market.

Drivers for Growth in Future are:

• IT and ITeS companies looking at Tier II cities are making Jodhpur as a hub

• HPCL refinery near Jodhpur with investment of Rs 37,230 Crores will generate employment for over I lakh people

• Study conducted by NCAER, Barmer refinery will generate revenues of nearly Rs 4 lakh crore in I5 years

• On DMIC lines, development of New Civil Airport and Integrated Multi-Modal Logistics Hub in Jodhpur

• Mass Rapid Transit System (MRTS) in Jodhpur and Pali

• One of Mega Leather Cluster at an investment of Rs I25 cr will be in Jodhpur

Company Performance

Arihant Super Structures is one of the leading developers in the MMR and Jodhpur region. The Company over the last two decades has been executing world class quality construction at truly affordable prices with focus on quality, and time of delivery. The group has a history of having delivered more than 5000 homes with about 4 mn square feet of space constructed which came from roughly 40 projects. Currently we have about II,000 homes under construction with an area of II.4 mn square feet under development and there are I2 projects under construction. Today, Arihant stands tall with a strong client base, efficient delivery team and good stakeholder's relationships.

We have a dominant brsence in high growth regions like Mumbai MMR (Badlapur, Shil Road, Taloja - Navi Mumbai, Panvel, Karjat and Khopoli) and Jodhpur. We have fully paid up land bank for projects to be executed in the next seven years and the most important highlight of our business model is that the land cost as percentage to realization is less than I0% for most projects executed till date.

20I5, being a difficult year for industry, the company sold over 580 units in FY I5 as against 727 units that were sold during FY I4. However, the company improved its average realisations from INR 3845 per square feet to INR 4026 per square feet. The Company's revenue grew by about 8% to finish the year at Rs. I097.6 mn. The EBITDA came in at Rs. 265.7 mn which translates to a margin of 26% for FY I5. Net profits stood at Rs. I0I.32 mn as compared to Rs. I3.I mn in FY I4.

Operational Highlights in FY 15

Operational Performance

Despite a tough business year, your company booked an area of 0.45 mn square feet during the year. This area booked is sbrad across our I2 projects that are under construction in different regions. This translates to 580 units that were sold during the year. The company's average realisation improved to INR 4026 per square feet.

From the location perspective, the majority of the bookings resulted from the MMR region which accounts for 50% of the total booking pie. We also booked 26% of our sales in Panvel, followed by Jodhpur, Thane and Navi Mumbai. The company also received occupancy certificate for its ambitious project "Arihant Amodini" at Taloja. The project comprises of I26 units and is a single tower structure.

New Launches

During the year we launched another project at Taloja - Arihant Anshula. The project was launched in October 20I4 and it is a complex comprising of 25 towers and 480 units. The structure of each tower would be S+4 stories. The saleable area in Square feet is 0.45 mn. Taloja is a CIDCO owned and a planned residential node right next to Kharghar. It is already a station on the Diva-Panvel Railway line and is enriched with basic infrastructure like Schools, Colleges, Playgrounds, Hospital and Local/ General Stores.

We also launched Arihant Aloki at Karjat. It is a proposed stilt +I0 storied complex with 408 units. The total saleable area would be 0.45 mn. Karjat produces a large geographical area and is going through a transition from an ideal weekend getaway destination to an urban conglomerate with business and job opportunities for residents.

There are few mega infrastructural developments taking place in this belt that makes Karjat a potential destination for investment:

•The Proposed Mumbai Trans Harbor Link (MTHL) Project, which is a proposed six-lane dual carriageway road bridge connecting Sewri on Mumbai side to Nhava on Navi Mumbai side.

• The Proposed Navi Mumbai International Airport (NMIA) which will support the rapidly growing air travel needs of Mumbai Metropolitan Region, with its increased economic activities such as Jawaharlal Nehru Port Trust expansion and other SEZs, which are being established in this region.

•The proposed Panvel-Neral-Bhima Shankar-Pune road- which will reduce the distance to Karjat from 89 kms to barely 65 kms within the next 2-3 years, thereby reducing travel time to a little above an hour.

Minority Interest

The minority interest reflects an increase of 84% on account of substantial increase in the profitability of the subsidiaries. Debt and Short Term borrowings

There is an increase in the long term borrowings of the company. This is largely on account of finances raised in the form of unsecured loans.

Current Liabilities

The total short term loans have reduced by 53% and there is also a slight reduction in the trade payables. The increase in the other current liabilities reflect the increase in amount received from sales to customers (Booking amount)

Fixed and Non-Current Assets

The Company's tangible assets after adjustment of debrciation are INR 52.6 mn against 52.9 mn in the brvious year. Inventories

The total inventory has increased from INR I,302.0 mn in FY I4 to INR I,842.6 in FYI5. The change is on account of additional land bank of 58.6mn and 42% increase in the projects under construction

Operating Revenue

The Company registered an 8% increase in the operating revenues. The Company made significant gains in Arihant Amodini and Arihant Arshiya projects.

Expenditure

The other expenditures of the company increased by 36%. An increase of I0I% in the debrciation expenses is largely on account of change in policy as per Companies Act, 20I3.

Employee Salary

With the increased remuneration and headcount, the annual employee benefit expenses increased by I2%

Outlook

We believe that the industry is going through a cycle which is typical of this sector. After a continuous boom of almost five to six years at a stretch, we have seen some softness in the last two years and we believe that this softness in the market will continue for another year or so. Despite this, we believe that there exists a market for a specific product at a specific price point and if we are able to cater to this demand, the pain and softness that is there in the segment can be alleviated to a great extent. This would ensure that the revenue run rate continues to show a decent trend with an upward bias while profitability margins might not follow the same trajectory.

As far as our projects are concerned, a number of projects have already been launched in the brvious two to three years and we would see traction from those launches contributing to the financials of the next two years. We do not see any decline in the units sold compared to last year while the Company is also focussing on innovation in product design so that the customer gets a product that he desires, his requirements are matched and at a budget that he can afford.

The Company going forward would also focus on city centric projects and would lay emphasis on redevelopment projects where the turnaround time as well as other administrative procedures are easier to handle with a quick turnaround time. This is in addition to our core focus on affordable housing. We believe that this strategy of ours would play out in the long run as we believe that the sector still has intrinsic strengths and as long as the developer is able to cater to the specific demand of the buyer, there is a market waiting to be tapped.