A number of people have asked me Why is the real estate sector's slowdown notvisible when one looks at your financials?' My answer has been the same for years: Becauseof our thinking and acting differently.
At Kolte-Patil we believe that some of the easiest decisions are often the mostpainful and usually the ones to be questioned and avoided.
There was a time when it was usual for much of India's real estate sector to useinformal and unorganized practices on the grounds of operational speed and convenience.
At Kolte-Patil we took a longer view of our presence in the business. One of the firstquestions we asked of ourselves was: Will these practices be relevant thirty yearsfrom now?' Generally the answer that we derived was a resounding no'. The nextresponse was logical: if new practices were likely to emerge then perhaps it was necessaryto invest proactively in formal and organized business practices ahead of the sectoralcurve.
I will not deny that there was a temporary price to be paid. A number of tradeassociates and customers found Kolte-Patil's business approach inflexible. However onceRERA was introduced and a number of real estate players found it difficult to adapt wefound the going relatively easier because we had always done our business this way.
The result is not difficult to find. Since we had been conducting our business aroundthe RERA-mandated discipline our biggest growth transpired in the years immediatelyfollowing RERA. During these years 2017-18 and 2018-19 we widened our sectoral lead andreported our highest ever pre-sales collections and profit numbers.
There was a time when it was usual for companies to acquire as much land as theypre-emptively could and build sizable inventories that would last them for years. Mostcompanies justified land warehousing (as the term was called) on the grounds that in anIndia where the price of real estate usually appreciated the ones with the largest landholdings would inevitably post the most impressive gains derived out of a simple arbitragewhere the holding became the bigger profit driver than actual construction.
At Kolte-Patil we consciously resisted the crowd. We never lost sight of the fact thatwe were not an aggregator but a specialized convertor resulting in a relatively lowinvestment in passive assets (land) and a larger investment in active assets (equipmentpeople and processes) instead.
Planning beyond the quarter
There was a time when it was tempting to accelerate project launches that promisedtimely liquidation.
At Kolte-Patil even as we focused on making such investments we also took a long-termview of how to strengthen our prospects. From 2005-06 to 2010-11 we made a Rs.340 croresinvestment in buying 400 acres to build Life Republic across more than a decade. Mostanalysts questioned the acquisition on the grounds that since we did not possess townshipexperience project implementation would be extended across the years monetization wouldbe relatively slow and the initial infrastructure investment would be sizable enough andrecoverable only across an extended period.
At Kolte-Patil we proceeded to invest regardless because the land had been acquiredat a low cost. Besides we inducted a large strategic partner to defray our overallacquisition cost retained an adequate cash buffer that would keep us liquid even in themost challenging markets and were confident that the initial pain of not being able tomonetize immediately would be more than made up in the later years when a combination oflarger volumes and price appreciation would repay us handsomely. Our decision has beenvalidated and Life Republic is turning out to be a remarkable multi-year success storydelivering an IRR considerably higher than the industry standard and earlier than what onewould have expected.
The power of market focus
There was a time when it was the flavour of the day to diversify across differentgeographies to tap into those markets.
At Kolte-Patil we always believed that the reverse sticking to one or fewmarkets was a superior alternative. We went against the conventional grain on account ofour conviction that when diversifying into different regions most companies factoredvisible costs while the hidden costs of building a business in a new location weregenerally overlooked (which inevitably made the viability difference).
The result is that we selected to grow our presence in one city (Pune) for the firstfive years of our existence. By narrowing our geographic focus we leveraged our fixedcosts better; we derived a superior leverage of our brand (generating a large portion ofour revenues from customer walk-ins); we enhanced people productivity; we countered theprevailing wisdom that one city would not be able to service our growing corporateappetite by seeding the city better for prospective locations and in so doing transformedthe value of residential properties within those pin codes; we strengthened the recallthat If you intend to buy a property you really don't need to think beyondKolte-Patil'.
The result of this contrarian approach is that we now account for nearly 11% of thePune market undisputed market leadership and our sizable accruals from thisgeography have in the last few years been invested in the completion of two projects inMumbai signing of ten more projects with a number of them at different approval stagescreating a strong Mumbai pipeline. Besides the Company is building a presence in thefast-growing market of Bengaluru.
There was a time when it was easy for real estate players to mobilize debt and acquireland parcels with the objective to enhance equity value.
At Kolte-Patil we believed that this strategy would work well during buoyant marketsbut proved to be a millstone during an economic slowdown. In a world where it is virtuallyimpossible to predict the timing of the next slowdown we believed it would work well forus if we minimized the variables affecting our business. By a process of elimination thedecision to reduce the quantum of debt on our books was perhaps the most logical. While onthe one hand this implied that we would probably grow slower than some of the fastestgrowing real estate companies in the country it also implied that we would possiblyremain liquid through all market cycles and that we would grow sustainably - in good yearsand bad.
The result of a debt-averse approach is that we had a gearing of only 0.47 at the closeof 2018-19 and our interest cover was an attractive 3.2 possibly among the highest inIndia's competitive real estate sector.
There was a time when it was fashionable to pass on cost increases to the consumer.
At Kolte-Patil we believed that the more sustainable strategy lay in reducing coststhrough the elimination of systemic inefficiencies and using a sizable part of that savingto reinvest in our business. In the five years ending 31 March 2019 which also coincidedwith the most challenging for our sector Kolte-Patil invested Rs.68 crores in MivanShuttering technology which was used in our Life Republic and Tuscan projects with theobjective to accelerate construction and build right the first time.
The result is that not only did we report a larger quantum of business but alsoreported higher margins (arising out of a lower cost structure).
The big question today: Where is India's real estate sector headed and what isKolte-Patil's place in it?
The slowdown of the last few years and the increased demands that the new businessenvironment has placed on real estate builders is indicating that nearly 60-70% of theplayers are likely to exit the business. The new players likely to enter and these couldbe private equity players are expected to be more corporate in their approach driven byprocesses systems and technologies. When you combine this with a deepening RERA relevanceand the government facilitating the regulatory environment the writing on the wall isclear: the future belongs only to those real estate players who are driven by anall-encompassing approach to discipline.
Now come to the way the sector is panning out. At Kolte-Patil we believe that theemerging environment is one of the most attractive for the long-term success of our sectorfor a number of reasons.
What used to be a housing finance loan of around 11% has declined to around 8.5% evenas incomes have grown.
There has been no price increase in the real estate sector in the last five yearsenhancing product affordability.
The transparency and compliances related to product sale have increased strengtheningthe positioning of real estate as a credible investable asset class.
As an industrial discipline kicks in deeper volumes and affordability could increasewidening the market and making it imperative to participate in the sector with adequateresources.
As promoters own sizable equity stakes in their real estate projects more skinin the game more projects are likely to get completed strengthening buyerconfidence.
That brings us to the outlook at Kolte-Patil.
We are optimistic of our prospects because we believe we have matured as a company.
We are strengthening our business across a 360-degree perspective: we are constructingfaster we are selling faster we are collecting faster and we are reinvesting in landparcels in a bigger way even as we remain largely under-borrowed and hencede-risked.
More specifically we have 1.4 million sq ft across 14 asset-light societyredevelopment projects under implementation in Mumbai. We will continue to evaluatestrategic and financial partnerships that enable us to scale operations while limiting ourcapital commitment. We have ~3 million sq ft in subsequent implementation phases ofexisting projects like Life Republic and Ivy Estate likely to get classified under Section80 IB Affordable Housing Scheme with a corresponding zero tax outgo.
We intend to acquire 10-12 million sq ft of additional land bank through outrightpurchases/joint development agreements with land owners across luxury affordable housingand MIG housing projects.
In view of these realities we believe we are attractively placed to make the big leapfollowing which we could grow even faster than we have done in the last few yearsenhancing value in the hands of all those who are associated with our Company.
Rajesh Patil Chairman