larsen & toubro outthink - 2016, iim rohtak (campus winner)

PLEASE USE SLIDE SHOW MODE

1

QU

ES

TIO

NSCHALLENGES

•Calculate project feasibility for L&T Realty based on different project scenarios (extremityperspective, which is general phenomenon in real life situation) likea. Most Adverse – cost (15% more), revenue (15% less), occupancy (70%)b. Adverse – cost (10% more), revenue (10% less), occupancy (75%)c. Moderate Adverse – cost (5% more), revenue (5% less), occupancy (80%)d. Minimum Favorable– cost (5% less), revenue (5% more), occupancy (100%)

• calculate and consider revenue mix from residential property sales and commercial space lease/rental income and allied sources

Calculate and consider the revenue mix from residential and commercial sales

Conduct financial feasibility analysis for different conditions and comparison

Identify and quantify the risks associated with the project and infer critical risks

Analyze and quantify the local competitors’ performance against the company

Analyze feasibility of project by site analysis, TELOS and SWOT Analysis

Analyze the threats and opportunities in real estate sector and how to leverage

Analyze the supply and demand drivers of the real estate industry

Analyze Indian real estate industry and how it affects the project decision

Analyze the effect of interest rates on prices of real estate

Analyze macroeconomic factors affecting real estate market

Action Plan

Executive Summary

Detailed analysis of present economic conditions of India coupled with the current scenario of Real Estate sector showcases that economic conditions are highly favorable for growth of the sector in coming years

Current state of real estate as well as real estate funding coupled with supply and demand drivers help predict the situation of the real estate sector in future and helps in deciding the execution of the project.

PESTLE Analysis, Porter Five Forces Analysis and Market Analysis give a detailed overview and the result is that the project is feasible for the prospective residents(senior citizens) and will have good occupancy

A thorough site selection analysis is undertaken to determine the locational feasibility of the project, taking into consideration factors like proximity to important utilities and the prices which are obtained by secondary survey.

TELOS and SWOT Analysis give a detailed overview of the project in all areas, helps in inferring the threats and opportunities that the project will face and this can be used to take appropriate measures for mitigation/leverage

A detailed and quantitative competition analysis is undertaken with respect to local competitors on various factors from price to product value and the analysis indicates that L&T Realty is doing fairly well in competition

A detailed risk analysis for the project is performed, entailing eight risks in total and it is found that the Occupancy or Rising Prices Risk is the most critical and measures are to be taken for mitigation

Detailed financial analysis for all the four scenarios is conducted and NPV of ten years and twenty years is calculated and it is found that the negative cash flows scenarios are less than 5%

2

Economic Analysis Industry Analysis Market Analysis Project AnalysisCompetitive market

analysisFinancial Feasibility Recommendations

MACROECONOMIC VARIABLES

The liberal economic policies, aimed at improving privateparticipation, adopted by Indian Government has helped incapitalizing the strong fundamentals of the Indian economy whichinclude young population, rising urbanization and a growing middleclass population. Since the year 2000, Indian GDP has quadrupled toreach USD 1.8 trillion in 2012 and is expected to become the thirdlargest economy worth USD 6.6 trillion by 2028.

India and developing Economies GDP Growth India’s infrastructure investment (USD billion)India and developing economies FDI inflows

India’s strong economic performance behind the success in real estate

The real estate and construction industry has significant

linkages (both direct and indirect) with nearly 300

sectors like cement, steel, paints, and building hardware

which not only contribute to capital formation and

generation of employment and income opportunities,

but also catalyze and stimulate economic growth.

Therefore, investment in housing and real estate

activities can be considered a barometer of growth of

the entire economy

India’s strong economic performance behind the success in real estate

With strong economic performance, strong government policies like “housing for all” and large shifts towardsmetro cities in search of employments has created a huge demand of real estate in urban tier 1 cities. Withyoung population moving towards the urban cities in search of employments, the real estate market has hugedemand to meet both in commercial and residential segment. The nominal per capita GDP has risen and thedisposable income of the house holds has also increased. Major part of this disposable income is invested in fixedinvestments like real estate.

GDP Deflator

Source: Reserve Bank of India



Source: World Bank

3



India's office space absorption stood at 35 million sqft during 2015, at which is the second highest figure in the India's history after 2011, and was driven by corporates implementing their growth plans.

The Indian real estate market is expected to touch US$ 180 billion by 2020. The housingsector alone contributes 5-6 per cent to the country's Gross Domestic Product (GDP).In the period FY08-20, the market size of this sector is expected to increase at a CompoundAnnual Growth Rate (CAGR) of 11.2 per cent. Retail, hospitality and commercial real estate

are also growing significantly, providing the much-needed infrastructure for India's needs.

Mumbai is the best city in India for commercial real estate investment, with returns of 12-19 per cent likely in the next five years

REAL ESTATE SCENARIO

Housing Index in India decreased to 238 Index Points in the first quarter of 2015from 240 Index Points in the fourth quarter of 2014. Housing Index in Indiaaveraged 214.69 Index Points from 2011 until 2015, reaching an all time highof 240 Index Points in the fourth quarter of 2014 and a record low of 181 IndexPoints in the second quarter of 2011. Housing Index in India is reported by theNational Housing Bank, India.

Mumbai is the best city in India for commercial real estate investment, with returns of 12-19 per cent likely in the next five years

Demand of Mumbai City

Data compiled using secondary survey

India NHB ResidexNHB RESIDEX is an index for tracking prices of residential properties in India

Increasing trends indicates growth in real estate sectorIncreasing trends indicates growth in real estate sector

0

50000

100000

2011-12 2012-13 2013-14 2014-15 2015-16

NDP/Capita (Current Price) in Rs.

Source: RBI, data is for Maharashtra State

As we can see that per capita income of Maharashtra is rising. This will create spiral effect in the economy. More Jobs will be created and hence more real estate infrastructure is required. More and more people will move to metros like Mumbai, in search of jobs and investment

Source: National Housing Bank, India 4

Economic Analysis Industry Analysis Market Analysis Site SelectionCompetitive market


Due to misuse of BPLR, RBI introduced base rate forbanks in 2010.

× Home Finance Cos are exempted from mandatoryusage of base rates and continue to use BPLR, therebycharging higher interest rates to customers.

Efficacy of using MIBOR to calculate interest rates ishigher than using BPLR or base rate as interest rateare more sticky with respect to MIBOR

Looking at data, two things can happen; reducing thecorridor in rates and removing the push for a cut inbase rates or MIBOR rates would stay the same,forcing banks to slash base rates.

The RBI cut its policy interest rate by 25 basis points to 6.5% in

April 2016. Interest rates are now at the lowest level since 2011.

Recent changes in monetary policy and regulation for banks have

brought down interest rates of banks significantly and this

decreasing trend would continue in the coming period as the

effects of the changes in monetary policy have not been fully

realized yet.

The combined portfolios of banks and specialized housing finance

companies catering to the housing market have increased 20%

CAGR over the last decade. Banks’ have made USD 142 billion of

real estate loans and Housing Finance Companies have an

exposure of USD 68 billion to the real estate sector.

Interest rates affect the following drivers of real estate prices: Mortgage rates Availability of Capital Demand for Investment

Capitalization Rate = risk free rate + risk premium – Anticipated growth in income

If returns on competing/substitute investment due to in interest rates, real estate values fall.Conversely, when interest rates , real estate values increase.

INTEREST RATES AND TRENDS

Source: Bloomberg

5

Economic Analysis Industry Analysis Market Analysis Site SelectionCompetitive market


× Housing prices continue to decline ashouseholds are deferring purchases inanticipation of further price cuts.

× Many buyers do not take out mortgage loans(ratio of housing loans to GDP < 5%) and henceif a project is charging by means of lump sumpayment mode, people are more unwilling topurchase as he has to foot almost 95% of costof the unit.

× Previously, loan to value(LTV) of most homeloans is 85%, and LIC recently reduced LTV to75% and HDFC to 80%.

× In Mumbai, house price rises weakened to 10.8% (5.8% inflation-adjusted) from 11.0% in Q1 and 11.1% in Q2.

× Since January 2015, the central bank has reduced its policy rate by 125basis points. But while the cuts have helped improve sentiment, bankshave been very reluctant to lower rates for borrowers, complaining oftight cash conditions.

To make policy rate cuts more effective, the RBI has taken steps toincrease liquidity by reducing banks’ reserve requirements, raising thereverse repo rate – the rates lenders charge to the central bankpledging to inject more long-term liquidity over the next 12 months

× Despite the festive season, sales in Mumbai have fallen 6% y-o-y to34,135 units in the last six months of 2015

The RBI also eased liquidity through a reduction in the marginalstanding facility (MSF) rate, at which banks borrow from the centralbank, by 0.75% to 9.5% and reduced the minimum daily maintenanceof Cash Reserve Ratio (CRR) from 99% of the requirement to 95%, amove aimed at inducing liquidity into the system.

INTEREST RATES AND TRENDS

6



CURRENT SCENARIO OF INDIAN REAL ESTATE SECTOR CURRENT STATE OF REAL ESTATE FUNDNG

PPP framework has been modified for more robust infrastructure development. In recent union budget, the private sector contribution limit has been proposed to increase from 30% to 50%.

The housing loan rebate has been increased from Rs. 150,000 to Rs. 200,000 in an attempt to revive the housing and other related segments

Real Estate Sector is the second major contributor to the GDP. Segment is expected to generate 7.6 million jobs this year

In the commercial segment, NCR, Mumbai and Bengaluru continue to be the leading cities accounting for more than 75% of the entire space getting absorbed in the country in the last two to three years’ time frame

Estimates show that for every rupee that is invested in housing and construction, 0.78 gets added to GDP

Housing ranks fourth in terms of the multiplier effect on the economy and third amongst 14 major industries in terms of total linkage effect

With the introduction of Real Estate Investment trust (REITs) and Infrastructure Investment Trusts (InvITs), a huge capital inflow is expected in this sector

According to World Bank’s Doing Business 2012 report, India is one of the top countries in housing & workspace needs, but ranks 181 in terms of construction permission processes

Banks’ credit exposure to the real estate and housing sector declined from 10% (as a percentage of Gross Bank Credit) in FY10 to 7.9% in FY13

Mezzanine and structured equity instruments have become the instrument of choice for foreign investors

There has been an increasing dependence on non-banking finance companies (NBFCs) for funding in the real estate sector

Divestment of non-core assets and leased assets is another very strong theme that has been visible

Raising funds from the capital markets continues to remain an unviable option for the sector

Recent changes to the SEZ policy, in terms of reduced area requirements, easing of external commercial borrowing (ECB) norms for affordable housing and enhancement of limits for listed NCDs for all are positive steps for the sector

REITs are expected to have a positive impact on the real estate industry and open another avenue for investment in the real estate sector

Growth in the Reserve Bank of India’s nationwide housing price index slowed to 13.7% (8.7% inflation-adjusted) during the quarter ended September 2015 compared to the same period in 2014 – down from a 17.5% rise in Q1 2015 and 14.5% in Q2 2015.

7



DEMAND DRIVERS SUPPLY DRIVERS

Foreign Direct Investment 3

Lending patterns of banks/NBFCs 3

Plan Outlay & Gross Domestic Capital Formation 2

Govt. Schemes like PMGSY and IAY 2

Overall supply drivers

Urbanization 3

Demographic Dividend 1

Middle Income Group 3

Growth of services sector 1

Growth of retail and SEZs 2

Foreign Direct Investment

Lending Patterns ofBanks/NBFCs

Gross Domestic Capital Formation

Government SchemesGrowth of Retail

SectorGrowth of Services

Sector

Middle Income Group

Urbanization DemographicDividend

Overall demand drivers

• The number of Indians living in urban areas will increase from the 434 million in 2015 to about 600million by 2031 About 10 million people migrate to cities every year

• Increase in exemption limit from USD3317 to USD4147 will help in household savings• For FY15, estimated housing shortage for urban area was 18.78 million houses• Of a total supply of 445 million sq ft of office space planned in 10 major cities, around 167 million

sq ft would come up during 2013 - 15 with the demand being 66 million sq ft during the sameperiod. The government has formally approved 416 SEZs, of which 199 are in operation.

• Of a total planned supply of retail space of 67 million sq ft across major cities, around 38 million sqft would come up during 2013 -15

• The urban housing shortage is estimated at 18.78 million in FY ‘15.• Organised retail sector growing 25-30 per cent annually

• The government has allowed FDI of up to 100 per cent for real estate. FDI in constructiondevelopment of USD24.156 billion between April 2000 and September 2015. In 2000–2015, thereal estate sector accounted for 9 per cent of total FDI inflows into India

• Govt’s plan to build 100 smart cities would reduce the migration of people to metro and otherdeveloped cities. Lending of Banks have significantly reduced due to high NPAs and low capitalformation in the system.

• Govt initiatives to promote tourism in Tier 2 and Tier 3 cities is generating significant demand forhotels in such cities, especially for budget hotels

• Govt initiatives such as various urban development policies and programs (e.g., JNNURM) areexpected to contribute to enhanced urbanization.

• Boosting up of National Investment and Infrastructure Fund(NIIF) by providing a fund of USD3.31billion GFCF reached its peak of 9091.17 INR billion in Jul ‘15 but has been on a decline since thenreaching a low of 8639.56 in Jul ’16.

8



PORTER FIVE FORCES ANALYSIS

Government policy

Absolute cost

Capital…

Economies of scale

Switching costs

Product…

Threats of new entrantsBuyer pricesensitivity

Force down prices

Bargaining leverageDifferentialadvantage

Buyer switchingcosts

Buyer's Power

3

2

33

30

2

4

Threats of newentrants

Buyer's Power

Supplier'sPower

CompetitionRivalry

Threats ofsubstitute

Porter 5 forcesDifferentiation of

Inputs

Presence ofsubstitute inputs

Supplier switchingcosts relative

Employee solidarity

Supplier competition

Supplier's Power

Buyer switchingcosts

Availability of closesubstitute

Substandardproduct

Ease ofsubstitution

Buyer propensityto substitute

Threats of substitute

Sustainablecompetitive…

Firm concentrationratio

Level of advertisingexpense

Degree oftransparency

Powerfulcompetitive…

Competition Rivalry

Threats of substitutes Buyer's PowerThreats of new entrants Competition Rivalry Supplier's Power

• No specific substitutes available• Substitutes are mainly government-provided housing, mostly limited tothe economically backward class

• Large real estate firms have good bargaining power against customers • Unregulated and badly managed land banks make land acquisition difficult for realty companies

• An absence of competitiveneutrality due to unequalprovisioning of policy concessions

• Strong rivalry due to large numberof players operating in India

• Limits a seller’s ability to set theprices for goods and services

• Due to a large variety of quality players, the customers have many options to choose from • They are also becoming more discerning and demanding better quality

• Uncertain investment timelinedue to long gestation period• High cost of land and land userestrictions act as a natural barrier• Brand value of the incumbent

player for the consumers9



PESTLE ANALYSIS

PoliticalMr. Narendra Modi led party is

considered to be the most stable government in Indian recent history.

The Government has laid down the roadmap for India, signifying a major

support to manufacturing and real estate sector.

Socio-political unrest in Iraq and Syria has posed a threat of high oil prices

across the globe.

EconomicNew investments have been

proposed by the government such as Rs. 7,060 crore to build 100 smart

satellite cities in India.

FDI norms have been modified to attract foreign players in Real Estate sector:

Reduction in built-up area requirement from 50,000 sqm to 20,000 sqm, and min

capitalization from $ 10 mil to $ 5 mil. Expected to see more than 100% increase in foreign investment flow, both via FDIs

and FIIs,

Better infrastructure and a healthy growth rate in IIP (Index of Industrial

Production) could solve import-export problem and hence a strong home

currency would ensure acceptable level of CAD (Current Account Deficit).

SociologicalIndia has one of the biggest markets with more than 65% of population

below 35 years of age.

The number of HNWIs in India is expected to double over next 10 years, growing by

137% in Mumbai alone.

India has a considerably huge pool of educated and cheap labor.

Technological

New construction techniques like ‘slip form construction’, ‘pre-fabricated

construction’, Mivan technology’ and ‘dry-wall technique’ have been

introduced to India from Malaysia, Thailand and China.

MIVAN Technology reduces the TAT (Turn around Time) by almost half as compared to the conventional technique and help

achieve a slab to slab cycle of 7 to 10 days.

India has become the 2nd largest Internet base in the world after China. The house hunting business has turned

‘digital’ as developers are keen on adopting modern technologies.

LegalThe draft Real Estate Regulation and

Development Bill, 2013 has increased transparency and protect customer

interest.

Real Estate Investment Trusts (REITs) have been introduced as an eligible financial

instrument / structure under the Foreign Exchange Management Act (FEMA) 1999.

REITs while attracting long term finance from foreign and domestic sources including NRIs would make available fresh equity to the sector.

EnvironmentalBig buildings and real estate projects

exempted from environmental clearance since April 2016 by

Environmental Ministry

Area-specific EIA and environmental clearance carried out by SEIAA has been scrapped and now building bye laws of

states are in effect

Setting up of National Green Tribunal by the center in 2010 has led to stricter action for builders and court has heard

nearly 2000 cases

Political

Economic

Sociological

Technological

Legal

Environmental

Factor Score (out of 5)

Political 3.5

Economic 4

Sociological 4

Technological 3

Legal 3

Environmental 2.5

1 Very Bad

2 Bad

3 Neutral/No Effect

4 Good

5 Very Good

Even though the real estate industryhas been plagued with the problem ofunused inventory in the recent past,the PESTLE analysis gives us a positiveoverview about the conditionsfacilitating the industry and thus theproject must be undertaken.

10



MARTKET ANALYISIS

Objectives Key Considerations

Definition of the market

The market area for the project is estimated to be 17.2 Km^2 (5% of area of Navi Mumbai = 344 Km^2)

The size of the target market segment is found to be 600,000

The income of the potential residents is touted to be Rs. 800,000/ annum and their assets are estimated to be Rs.2,000,000

Marketability of the project

The location is highly appropriate for a seniors oriented development due to its proximity to hospitals and the airport.

The current and prospective competitors are those who have developed/are in the process of developing projects in the Navi Mumbai area. This project has nosignificant threat from local competition because of the strong backing of the parent company.

Navi mumbai is a relatively new area in Mumbai and has been the highlight of development over the past few years. Numerous shopping complexes, commercialtowers, residential projects and the new airport is also underway construction in close proximity to this area.

Yes, the neighbourhood possesses the amenities required by senior citizens who are our prospective residents.

Creation of the product

As our target is senior citizens, we must provide units which are 2BHKs and it is mandatory that these units be provided with a smaller unit of a room and a bathroomattached to it which would act as a servant quarters. Pricing should be done according to phasing as the lumpsum payment mode would not attract senior citizens. Interms of management, there must be an office in the area itself to address the problems of the residents.

The amenities the prospective citizens would need to be provided is a large lawn with walkways, required number of lifts for every building, 24x7 power supply andwheelchair access to every part of the project.

Identification and Assessment of the need for personal, health and medical services

The senior citizens, who are our prospective citizens, would require cab services to travel to dofferent parts of the city, a maintenance and cleaning staff, a bank/ATMin the premises, and a library.

The senior citizens would require a round-the-clock basic medical facility on the premises and an ambulance, a massage room, an acupuncture centre and a yoga andpranayam centre

The personal and health care/medical needs of the prospective residents is very high and critical and hence measures are to be taken to ensure the residents are welltaken care of.

The services can best be provided by handing out contracts to third party service providers which would ensure high quality of services rendered as well asminimization of cost.

Substantiation of the projectPartners, investors, lenders and regulatory authorities need to be shown projected cash flows for the project, a risk analysis and mitigation report, sources of funding,maximum occupancy rates and plans and scheduling of the project

11



SITE SELECTION AND ANALYSIS

Navi Mumbai (Source: Google Maps)

Site selection process is a very complex in itself. It consists of various considerations like Access, size and shape topography. We haveconsidered some of the factors for Navi Mumbai site selection. We have quantified the parameters and have used secondary research data toanalyze factors like child friendliness, prices etc. Because our target customers consists of varied ages and professions hence all the weightsare given accordingly

Satellite image of Navi Mumbaishows the amount of land that isavailable for construction whichcan be used for the sitedepending on other parameters.

Prices level of Navi Mumbai Region (Source: Secondary Research) Senior citizen friendliness of Navi Mumbai (Source: Secondary Research)

Navi Mumbai

Sports Education

Factors Score Key Description

Sports 83 DY Patil Stadium

Education 75 DPS, NIFT

Railway 83 4 Stations

Metro 42 New Metro Coming

Airport 56 New Airport Coming

Administration 78 Good Administration

Railway AdministrationAirportMetro

Low Prices, high senior citizen friendliness, goodgeographic conditions and factors like sports, education,metro, airport, railway and administration suggests thatNavi Mumbai is a good investment destination for realestate

Go for near beach area

Low Prices, high senior citizen friendliness, goodgeographic conditions and factors like sports, education,metro, airport, railway and administration suggests thatNavi Mumbai is a good investment destination for realestate Go for near beach area

More Senior citizen friendly

Less Senior citizen friendly

12



TechnicalLargest fleet of highly specialized

and sophisticated equipment available at their disposal

24 heavy lift cranes with capacity ranging from 150 tons to 750 tons

Super heavy elements (up to 3000 t) are lifted through

specially built towers and strand jack systems together with heavy

skidding facility.

Economic

Interest rates are now at the lowest level since 2011 due to

cuts in the repo rate by RBI, making lending cheaper.

In case of unexpected, additional need of funds overshooting the debt

and equity funding availed, then excess funds would be supplied by

the parent company with ease.

78% increase of FDI inflows from June 2015 to June 2016 and

100% FDI in real estate indicate funding can be availed from NBFCs at cheaper rates with

minimal risk

Legal Documentation as per Section

373 of BMC Act

Verification from Survey Office and site inspection from the Building

Proposal Office

Mandated approvals from the required infrastructure

departments

OperationalAvailing of FMSPs to minimize

operational time and risk

Resources arrangement and construction execution as per

agreed parameters of time, cost and quality

Service level agreements based contracts for improved vendor

performance

SchedulingUse of MIS to ensure

connectivity among all verticals involved in the project

Provide inputs to PMCs for preparation of construction

schedule

Usage of new technologies such as BIM which result in improving coordination and design accuracy 0

5000

10000

15000

20000

25000

30000

35000

40000

45000

Floor13-14

Floor15-16

Floor17-18

Floor19-20

Floor21-22

Floor23-24

Floor25-26

Floor27-28

Floor29-30

Floor31-32

Floor33

Year 1 & 2

Year 3 & 4

Year 5 & 6

0

100

200

1 2 3 4 5 6 7 8 9 10 11 12

In R

s. c

rore

Construction Costs(Comm Only) over the years

0

500

1 3 5 7 9 11In R

s. c

rore

Construction Costs(Res Only) over the years

0

100

200

300

1 4 7 10 13 16 19 22 25 28 31 34 37

In R

s. c

rore

Average Lease Rent Rs/sqft/month over the years

0

20000

40000

1 3 5 7 9 11 13

In R

s. c

rore

Average Apartment price over the years

TELOS ANALYSIS

13



SWOT ANALYSIS FOR PROJECT

Weights Ratings Score Weights Ratings Score

STRENGTH OPPORTUNITY

Skillful Workforce 10% 4 0.4 Government’s investment initiative 15% 4 0.6

Disruptive growth in construction equipment 10% 3 0.3 Stable Government 15% 4 0.6

Market leadership 20% 5 1 real estate sentiments index showcase high demand 5% 2 0.1

Diversified revenues providing resilience 10% 3 0.3 Exemption limit on account of interest raised 5% 3 0.15

WEAKNESS THREATS

Increasing debt impacting financial flexibility 15% 2 0.3 Rising material cost 20% 4 0.8

rising manpower and material costs 10% 2 0.2 High inventory levels 10% 4 0.4

lack of adequate sources of finance 10% 3 0.3 Low R&D activities 10% 3 0.3

Insurance for project 15% 2 0.3 Approvals and procedural difficulties 20% 5 1

Total 100% 3.1 Total 100% 3.95

Range

3-4 2-3 1-2

High Medium Low

3-4 High 1 2 3

2-3 Medium 4 5 6

1-2 Low 7 8 9

Execute Hold Cancel

Recommendation: EXECUTE

The favorability of a project can best be decided by SWOT Analysis. The core strength of the project is thecompetence the company brings in real estate projects by being the market leader due to its excellence andsophistication in construction and over seven decades of expertise.

The weakness of this project can be mainly attributed to the lending patterns of banks and NBFCs, which inturn is dependent on the economic state of the country. In 2015, due to regulation of monetary policy by theRBI, interest rates have dropped down significantly. Indian Banks also have the added burden of clearing NPAs,and thus are more reluctant to issue loans for big projects.

The biggest opportunity that this project can avail is the inflow of foreign investment due to easing ofgovernment regulations and also missions like Housing 2020 which aims to close the gap of housing needs ofpeople.

The threat this project can face is not of approvals or inspections, but instead is the high amount of unusedinventory once the project is completed.

14



Site Phase Demonstration, (Courtesy: Autodesk)

Year

1PROJECT PHASING OF COST

Costs in Year 1 Total Capitalized Cost of Project

Approval and Sanctioning fees

Architectural Consultants Fees

Structural Consultants Fees

TIA and EIA

Administration, Supervision and PM Cost

Contingencies on other costs

Total Costs in Year 1 = Rs. 24 crores

12. 50%

6. 25%

2. 9%

1. 4%

2. 8%1. 4%

15




Year


18%

45%

32%

1%1% 2% 2.1 %


Commercial Part

Residential Part

Parking levels/Basement

Approvals and Sanctioning Fees (MCGM)

Architectural Consultant Fees


Business Development Expenses


16




Year



Commercial Part

Residential Part

Parking levels/Basement

Approvals and Sanctioning Fees (MCGM)



Marketing Cost

Bank Guarantee Fees

27.83%

55.66%

9.43%

0.94%

0.47%

2.83% 2.36%0.47%


17




Year



Commercial Part

Residential Part



Marketing Costs

Bank Guarantee Fees

30%

65%

1%

2%

2% 0%


18




Year



Commercial Part

Residential Part

Infrastructure Development

Architectural Consultants fees


Marketing Cost

Bank Guarantee Fees

Landscaping Consultant fees

19%

69%

5%

0%

2%3%1%

1%


19



Site Landscaping, (Courtesy: Google)

Year



Landscaping of the Recreational Garden

Approvals and Sanctioning Fees


Marketing Costs

Bank Guarantee Fees

83%

3%3%

5%6%


20



LOCAL COMPETITION

Company Name L&T Realty

Competitor Factors Weighting

Price 25%

Quality 20%

Customer Service 20%

Locality 15%

Amenities 10%

Possession 5%

Product Range 5%

Total 100%

Competitors Price Quality

Customer

Service Locality Amenities Possession

Product

Range

Total

Score

L&T Realty 3 7 8 7 6 8 6 L&T Realty 45

Ruparel Realty 4 7 6 7 4 5 3 Ruparel Realty 36

Khalsa Builders 7 7 5 6 7 6 2 Khalsa Builders 40

Shah Group 7 5 4 4 3 5 3 Shah Group 31

Vishrut Construction 5 4 4 4 3 7 3

Vishrut Construction 30

Patil Developers 3 6 7 7 5 7 5 Patil Developers 40

Weighted Rating

Competitors Price Quality

Customer

Service Locality Amenities Possession

Product

Range

Total

Score

L&T Realty 0.75 1.4 1.6 1.05 0.6 0.4 0.3 L&T Realty 6.1

Ruparel Realty 1 1.4 1.2 1.05 0.4 0.25 0.15 Ruparel Realty 5.45

Khalsa Builders 1.75 1.4 1 0.9 0.7 0.3 0.1 Khalsa Builders 6.15

Shah Group 1.75 1 0.8 0.6 0.3 0.25 0.15 Shah Group 4.85

Vishrut Construction 1.25 0.8 0.8 0.6 0.3 0.35 0.15Vishrut

Construction 4.25

Patil Developers 0.75 1.2 1.4 1.05 0.5 0.35 0.25 Patil Developers 5.5

Competitor Rating Ruparel Realty is a relatively new company and

has launched only nine projects since its inception

L&T Realty has the entire gamut of technology, engineering, construction, manufacturing and financial services of the parent company at its disposal.

× Shah Group Builders Ltd. Illegally raised funds from funds and is now directed to pay a compensation of over Rs. 6 crores to the investors over one year.

Patil Developers is the largest real estate developer of Pune and has completed 1.3 crore sq. ft. of landmark developments.

21



LOCAL COMPETITION

0

1

2

3

4

5

6

7

8

9

Price Quality CustomerService

Locality Amenities Possession ProductRange

Competitor Rating

L&T Realty Ruparel Realty Khalsa Builders

Shah Group Vishrut Construction Patil Developers

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Price Quality CustomerService

Locality Amenities Possession ProductRange

Weighted Rating

L&T Realty Ruparel Realty Khalsa Builders

Shah Group Vishrut Construction Patil Developers

45

36

40

31

30

40

L&T Realty

Ruparel Realty

Khalsa Builders

Shah Group

Vishrut Construction

Patil Developers

Total Score

6.1

5.45

6.154.85

4.25

5.5

L&T Realty

Ruparel Realty

Khalsa Builders

Shah Group

Vishrut Construction

Patil Developers

Weighted Rating

Price

Product Range

Possession

Amenities

Locality

Customer Service

Quality

In terms of prices, L&T Realty and Patil Developers are in close competition as they provide affordable housing

In today’s times, customer service has become an even more important offering than the product itself. L&T Realty ranks high in this regard.

On quality, three local players are offering the same valued housing. For quality conscious buyers, this would be an important point.

This is the most important component from the builder’s point of view as it would decide his profits over the entire project life.

The amenities not only include basic facilities, but also include added luxurious facilities like massage room, Jacuzzi and sauna baths.

As all players have projects in Navi Mumbai, this factor takes into account the proximity to various services like schools, hospitals and airports.

Product Range includes the features in the project apart from housing and its auxiliaries, like office spaces, malls and gaming zones.

22



RISK ANALYSIS AND MITIGATION

5

4

3 O1

2 M2 T1,D1

1 P1 M1,F1 S1

1 2 3 4 5

Probability Level

Very High > 70% 5

High 50-70% 4

Medium 30-50% 3

Low 10-30% 2

Very Low <10% 1

CONSEQUENCES

LEVEL 1 2 3 4 5

IMPACT Very Low Low Medium High Very High

Cost < Rs. 5 lacRs. 5 lac - Rs. 10

lac Rs. 10 lac - 50 lac Rs. 50 lac - 1 crore Rs. 1 crore - Rs. 10 crore

ScheduleUsage of < 5 days float of an activity Usage of > 15 days

float of an activity

< 1 day impact to critical path

1 day to 5 day impact to critical

path

> 5 day impact to critical path

Scope < 10 hrs 10 hrs to 100 hrs 100 hrs to 1000 hrs 1000 hrs to 5000 hrs > 5000 hrs

Health / Environment Negligible Impact

One minor injury or environment

impact remediated in

house

Multiple minor injuries or minor

remediation

Single major injury or major

environmental remediation

Single death or irreversible effect on

environment

Impact

Pro

bab

ility

Technical Risk

Disaster Risk

Rising Prices/Occupancy Risk

Fund Risk

Management Risk

Safety Risk

Material Risk

Personnel Risk

This risk includes inadequacy of design and existing errors aswell as unviability of the technical plan

Experts point out that floods, thunder and other natural disastercan severely affect the project and it is known that site of projectis very susceptible to floods.

This risk includes the change of key members of the verticals ofthe project and also lack of working ability of the personnel.

Prices and cost of capital may rise in the future, and due toinflation, costs of materials and labour would rise, leading toless cash flows.

Due to unforeseen circumstances, fund procured is insufficientto meet fund demand. Also, after procurement, funds might notbe available on time.

Inaccurate work decisions, inadequate contract items,unreasonable time schedule and supplier/subcontractor risk addup to this risk.

This risk includes industrial accidents, structure security risk andequipment safety risk

This risk includes the supply and quality problems of rawmaterials, finished products, semi finished materials and specialmaterials.

Occupancy risk is critical

23



VALUATION

Case Description Occupancy Cost factor Revenue factor NPV (20 years) WACC IRR

Given Given 85% 1 1 302 15% 19.40%

1a Most Adverse 70% 1.15 0.85 -350.4254639 15% 9%

1b Adverse 75% 1.1 0.9 -135.0146808 15% 13%

1c Moderate Adverse 80% 1.05 0.95 82.46047557 15% 17%

1d Minimum Favorable 100% 0.95 1.05 551.4021396 15% 24%

20 year AFFO Net present value for different scenarios

Case Description Occupancy Cost factor Revenue factor NPV (10 years) WACC IRR

1a Most Adverse 70% 1.15 0.85 -452 15% 5%

1b Adverse 75% 1.1 0.9 -250 15% 10%

1c Moderate Adverse 80% 1.05 0.95 -43 15% 14%

1d Minimum Favourable 100% 0.95 1.05 371 15% 23%

10 year AFFO Net present value for different scenarios-600

-400

-200

0

200

400

600

800

Most Adverse Adverse ModerateAdverse

MinimumFavourable

NP

V in

cro

res

Scenarios

NPV in crores

20 Years

10 years

Case Description Return on Equity Return on Investment Debt Service coverage Ratio

1a Most Adverse 5.84 0.87 7.3

1b Adverse 7.14 1.09 8.93

1c Moderate Adverse 8.47 1.32 10.59

1d Minimum Favourable 11.67 1.89 14.60

Financial Feasibility ratios

Comparison of cash flows

For most businesses, depreciation is an acceptable non-cash charge thatallocates the cost of an investment made in a prior period. But realestate is different than most fixed-plant or equipment investments:property rarely loses value and often appreciates. Net income, a measurereduced by depreciation, is therefore an inferior gauge of performance.Therefore, real estates are instead judged by funds from operation (FFO),which excludes depreciation and can be improved by using AFFO as itsincludes CAPEX in calculation.

10 year NPV Values for Most Adverse and Adverse cases are negative 20 year NPV Values for Most Adverse, Adverse and Moderate Adverse cases

are negative Financial ratios for Minimum favorable and Moderate favorable are above

accepted values

10 year NPV Values for Most Adverse and Adverse cases are negative 20 year NPV Values for Most Adverse, Adverse and Moderate Adverse cases

are negative Financial ratios for Minimum favorable and Moderate favorable are above

accepted values

24



REVENUE MIX FROM RESIDENTIAL PROPERTIES AND COMMERCIAL PROERTIES

• Revenue mix is a calculation that determines the proportion of eachproduct a business sells, it can be a service or a product, relative to totalsales.

• Sales mix is important, because some products or services may be moreprofitable than others, and if a company's sales mix changes, its profitsalso change.

• Managing sales mix is a tool to maximize company profit.

Residential properties gives different cash flows over time. Following points are considered while deciding the optimum revenue mix of the project:

Step 1: Analyzed of the process and eliminated any activities that do notadd value to the project. We have eliminated those activities whoserevenue contribution was less than 2 crore

Step2: Calculated the cost associated with the remaining process anddivisions. In our case it was commercial and residential which includesvarious services like leasing and renting

Step 3: Analyzed all possible constraints faced by the division ingenerating profit using risk matrix analysis

Step 4: Calculated total revenue and profit margins generated from thecommercial and residential segment to calculate the optimum mix

26%

74%

Revenue Mix

Commercial Residential

-500

0

500

1000

H1

H3

H5

H7

H9

H1

1

H1

3

H1

5

H1

7

H1

9

H2

1

H2

3

H2

5

H2

7

H2

9

H3

1

H3

3

H3

5

H3

7

H3

9

reve

nu

e in

cro

res

Phases

Revenue of mix

Residential Commercial

0

500

1000

1500

2000

2500

H1

H3

H5

H7

H9

H1

1

H1

3

H1

5

H1

7

H1

9

H2

1

H2

3

H2

5

H2

7

H2

9

H3

1

H3

3

H3

5

H3

7

H3

9

Revenue Breakup

25



SENSITIVITY ANALYISIS

MONTE CARLO SIMULATION ON 20 YEAR-NPV OF CASH FLOWS WHEN REVENUE VARIES

MONTE CARLO SIMULATION ON 20 YEAR-NPV OF CASH FLOWS WHEN COST VARIES

26



SENSITIVITY ANALYISIS

Monte Carlo simulation has been done to simulate the sensitivity of the project. Occupancy of 85%, 95% and 100% has been considered Occupancy does not have incremental change hence specific values are considered Cost and Revenue are susceptible to change Values of Cost and Revenue are considered to be normally distributed Mean and maximum-minimum range is calculated using different feasibility

scenarios given in the question Standard deviation is calculated using 6-sigma variation over the normal curve Over 2000 odd simulations were run

MONTE CARLO SIMULATION ON 20 YEAR-NPV OF CASH FLOWS WHEN BOTH REVENUE AND COST VARIES

Results: Less than 5% of the simulation has shown negative cash flowsOccupancy is an important risk factor in deciding cash flows At 85% occupancy, NPV of ~500 crore is more likely to be

achieved At 95% occupancy NPV of ~700 crore is more likely to be achieved At 100% occupancy NPV of ~730 crore is more likely to be

achieved27



SENSE ANTICIPATE

Factors Scores Factors Scores

Supply-Demand 4 Cost of building materials 5

Site Conditions 4 Cost of financing/Financing solutions 2

Land Use / Approvals 5 Turnover Rates 4

Site Selection 5 Services and Amenities 5

Timing / Sales Pace (Absorption) 4 Quality of Asset Base 4

Financing / Financial Returns 3 Revenues from rents and service fees 3

PRIORITIZE

Occupancy based revenue system

Increased rate of completion

Reduce vacancy rates

Optimize unit mix and size

Mitigation of construction risk

Focus on site preparation

Occupancy based revenue

system

Increased rate of completion

Reduce vacancy rates

Optimize unit mix and size

Mitigation of construction

risk

Focus on site prepation

Supply-Demand

Site Conditions

Land Use /Approvals

Site Selection

Timing / Sales Pace(Absorption)

Financing /Financial Returns

Cost of buildingmaterials

Cost offinancing/Financing solutions

Turnover Rates

Services andAmenities

Quality of AssetBase

Revenues fromrents and

service fees

Project Life

Twenty Years

6 Years

• Completion of construction on time• Use contract laborers to minimize costs• Smooth completion of approvals and

inspections

• Charge maintenance feesfor upkeep

• Service level agreementsbased contracts in order toreduce costs

• Advertise efficiently to maximizeoccupancy rates

• Desired occupancy to be achieved• Cash flows to be maintained to pay off

debt

SAPE CYCLE

6 Years Recommendation• Completion of construction on time• Use contract laborers to minimize costs• Smooth completion of approvals and inspections20 Years Recommendation• Advertise efficiently to maximize occupancy rates• Desired occupancy to be achieved• Cash flows to be maintained to pay off debtProject Life Recommendation• Charge maintenance fees for upkeep• Service level agreements based contracts in order to

reduce costs

28

Thank You

Anupreet Choudhary

1st Year

Indian Institute of Management, Rohtak

B. Tech (Civil),

Indian Institute of Technology, Guwahati

Shubham Aggarwal

2nd Year


B.E. (Mech) PEC University of Technology

Swastika Singh

1st Year


B. Tech (Civil) National Institute of Technology Karnataka

TEAM: RadioActive

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