In the last quarter of FY 20, parts of the world starting with China began being affected by the COVID-19 pandemic. The contagion spread across the world rapidly since then, inflicting high and rising human costs worldwide. Protecting lives and allowing health care systems to cope required isolation, lockdowns, and widespread closures to slow the spread of the virus. The health crisis has therefore had a severe impact on economic activity.
As a result of the pandemic, the global economy is projected to contract sharply by 3 percent in FY 20, much worse than during the FY 09 global financial crisis. In a baseline scenario, which assumes that the pandemic fades in the second half of FY 20 and containment efforts can be gradually unwound, the global economy is projected to grow by 5.4 percent in FY 21 as economic activity normalises, helped by policy support.
Countries urgently need to work together to slow the spread of the virus and to develop a vaccine and therapies to counter the disease. Humanity has been struck by pandemics historically and every time, economies have recovered from it eventually.
In the first three quarters of FY 20, the Indian government took many important decisions for the development of the country such as reduction of physical interference and transparency in GST and IT laws, focussed steps to improve ease of doing business ranking, financial assistance to farmers, merger of public sector banks and actioning infrastructure projects worth over ₹100 lakh cr. towards realising the goal of a $ 5 trillion economy.
However, in the last fortnight of March 2020, the government imposed a series of nationwide lockdowns to prevent the spread of the COVID-19 bringing the whole economy to the standstill for over two months, one of the harshest lockdown in comparison to other nations globally.
RBI has estimated India’s GDP growth to be in negative territory in FY 21 as the outbreak of coronavirus has disrupted economic activities. As per RBI, inflation outlook remains uncertain due to the outbreak of the COVID-19 pandemic; headline inflation may remain firm in the first half of the year and may ease in the second half. Overall growth for the country may remain flat for the year, however, sectors like Telecom, OTT, FMCG, Healthcare and Digital technology, are expected to fare better.
To support the economy in the midst of distress, the Indian government has unveiled a stimulus package targeted at reviving the economy through a combination of fiscal support, monetary support, ease of doing business processes, as well as some fundamental reforms including accelerated privatisation and corporatisation of several sectors. Necessary measures to reduce contagion and to protect lives will take a toll on economic activity, however, businesses with financial flexibility, agile organisation structure and strong underlying fundamentals armed with the vision to strengthen their business model are expected to fare better.
In addition, using the current crisis as an opportunity, the government has undertaken unprecedented structural reforms. Several industries have been de-regulated; labour reforms have been introduced, many state-owned enterprises privatised and government has opened its doors wider for Foreign Direct Investment. Even before the current crisis, India made the fastest progress in improving the ease of doing business improving from 142 in FY 14 to 63 in FY 19, a jump of 79 places in a span of five years. Thus, we believe that India is well placed to grow in the long term as its growth story is strongly dependent on its own fundamentals.
FY 20 was an important year for Max Ventures & Industries, in which we cemented our position in both our core verticals of Real Estate & Packaging Films.
FY 20 was an important year for Max Ventures & Industries, in which we cemented our position in both our core verticals of Real Estate & Packaging Films.
A biophilic flexible workspace at Max Towers, a premier office building by Max Estates, which also houses the MaxVIL corporate office
Max Estates Limited (MEL) is our primary subsidiary focussing on development of commercial real estate in NCR. Max Estates is complemented by Max Asset Services Limited (MAS) and Max I. Limited (Max I). Our legacy business of packaging films is operated through Max Speciality Films Limited (MSFL).
We ventured in the Real Estate business as we believe there is a demand–supply mismatch in the commercial real estate market in many pockets in the NCR especially in Grade A+ Commercial office space. With the strong brand equity built by Max Group through its various businesses in the last two decades, we believe we have put in place a sustainable strategy to bring a differentiated approach to real estate just the way we did in the past with Healthcare and Insurance. The Max brand has been created over the years on back of its philosophy of service, innovation and excellence in what we do and Max Estates intends to replicate the same in the Real Estate sector.
Max Estates Limited designs and delivers Grade A+ specifications for its projects inspired by its WorkWell philosophy that provides its occupants an energy-efficient and green work environment, a technology-enabled smart workspace designed to boost productivity while they are working, a comprehensive community building program for all workplace occupants, world-class measures and protocols to ensure health, safety and security of occupiers and a vibrant food and recreation hub when they want to socialise or take a break. This enables the company to be a preferred choice for tenants looking to occupy Grade A+ commercial office space in Delhi NCR.
We have seen success in this strategy especially with Max Towers, where we have achieved signify traction in leasing. Its leasing rates are at a premium to the prevailing rates in the immediate micro-market. Premium rentals at Max Towers signify the quality of our developments, innovation in products and differentiated solutions and customer-centricity offered by us. Further, it is important to mention here that Max Towers has attracted an enviable tenant profile primarily from central business districts of New Delhi and in turn has re-defined the commercial Real Estate landscape of Noida in terms of product quality, tenant profile and rental realisation.
Our second Grade A+ commercial offering is Max House project in Okhla. Phase 1 of this project is almost complete. It was planned to be launched in April 2020, however, the lockdown in Delhi-NCR delayed the last-mile completion resulting in a delay by a quarter. We expect to launch the project in Q2FY21 and are confident to achieve a similar reputed tenant profile as Max Towers for Max House. Once completed, Max House will be the only Grade A+ built to lease office in Okhla. With a strategic location combined with excellent accessibility and connectivity to the entire NCR, and the continuation of WorkWell design and practices, we are confident of achieving high occupancy levels in FY 21. Once launched, we expect to commence work on phase 2 of this project measuring ~2 Lakh sq. ft. which is expected to be ready for launch towards the end of FY 22.
Having demonstrated the ability to complete real estate projects, achieve premium rental rates and attract global capital, Max Estates feels confident to achieve significant market share in the commercial office space in Delhi NCR.
In FY 20, we started work on our third project. In November 2019, we announced acquisition of a prime land parcel in Sector 129 just off the Noida Expressway. This Grade A+ commercial project is named ‘Max Square’ and is being designed to house commercial office space as well as F&B and entertainment areas. For Max Square – we have onboarded our long-term trusted partner New York Life Insurance Company (NYL), one of the largest insurance companies in the world as co-investors. The project is housed in an SPV named Northern Propmart Solutions Limited. MEL holds 51% economic interest and NYL holds 49%. MEL is responsible for leasing and the final delivery of the project and will be entitled to a development management fee. NYL has shown a strong inclination to co-invest in the future developments with MEL.
Max has a rich and successful history of partnerships with reputed global and domestic investors. MEL intends to capitalise on these partnerships and actively look for opportunities with them on joint development basis. This allows us to be capital light and at the same time expand our portfolio of offerings. This also opens up an additional revenue stream from development & management fee. Access to capital will be the most important factor for Real Estate going forward as limited liquidity has been and will continue to be the major concern for the industry in near term.
Demand for Grade A office space in Delhi NCR is expected to be least impacted post COVID-19 as compared to other major cities in India as supply was already constrained in the region and would be further curtailed due to overstretched balance sheets of the developers. In Delhi NCR, our projects are located in and around Noida which is transforming to become the next commercial hub in NCR. Noida as a location is now the preferred choice for many companies as it offers high quality commercial office space experience, minutes away from Delhi and at relatively competitive and attractive rentals. Hence, there is a strong business case for companies to re-locate to Noida from Delhi and Gurugram especially post COVID-19 to save costs and diversify within a city with hub and spoke model to reduce time to travel between home and office. Our success with Max Towers is a leading example of this.
There is likely to be a demand revival for office space which undertakes proper measures to contain the virus spread like screening, sanitation, air filtration and social distancing which will be essential for a safe working environment. MEL’s experienced asset management team has implemented these best workplace measures to ensure a healthy work environment. Moreover, developer-managed offices will continue to gain advantage versus strata sold offices, which will find it extremely difficult to implement the best practices required to ensure a safe and healthy working environment. This revival is expected to gain momentum from Q4 onwards, as companies would assess the impact on the business and accordingly strategise their requirement for new office spaces.
We expect the supply of office space to drop as due to the pandemic-induced economic disruption, developers may not be in a position to complete developments owing to capital constraints and unavailability of labour. Max, being a credible brand with focus on Grade A+ commercial office segment and a strong balance sheet with access to capital, is well placed to benefit from the opportunity available.
The ongoing pandemic will bring many distressed opportunities in the market as developers would not be able to deliver on their commitment due to their stretched balance sheets and liquidity constraints. Having demonstrated our ability to complete real estate projects, achieve premium rental rates and attract global capital for our projects, we believe we are poised to achieve significant market share in the commercial office space in Delhi NCR.
Max Estates’ office buildings personify their differentiated philosophy of WorkWell which encompasses biophilic, environment friendly buildings suited for balancing productivity, recreation, and community building
It is important to note a new emerging trend of for work from home which if successful may reduce the new office space demand. There are some positives like saving on travel time due to work from home but at the same time due to unavailability of safe and secured digital infrastructure, this concept may take time to gain momentum especially when productivity assessment is taken under consideration. A positive trend coming out for commercial real estate is that demand for office space may increase due to the de-densification (higher space per employee) in an office.
Hence, there are two forces at play and we expect commercial real estate to show continued resilience in our core market of Delhi-NCR in times to come with new leaders and business models emerging.
Our other real estate subsidiary Max Asset Services Limited (MAS) focusses on providing services such as building operations management, as well as managed offices for enterprises. MAS leverages various technological tools such as mobile app, video analytics, visitor management etc. which help in managing costs while delivering superior customer experience. In addition, it plays a pivotal role in creating a vibrant well-kint working environment by creating interesting events, activities and employee engagement initiatives through its program called ‘Pulse’. MAS is currently playing a pivotal role in implementing the hygiene and health measures which are essential to contain the COVID-19 spread.
MaxVIL’s subsidiary Max I. Limited pivoted its investment philosophy in FY 20 to focus on synergistic investment and mentorship opportunities with real estate businesses through “Maxcelerate”, an ecosystem for real estate technology start-ups. For example, the ecosystem has helped us partner with a start-up, which is now developing a digital video tour of our office assets to engage clients via guided tour, critical in lieu of constrained inter-city travel. The key objective of Max I. is to find and nurture companies synergistic to the real estate business of the Max group through deeper engagement. Existing investments for Max I. pre-pivot include ‘FSN E-Commerce Ventures Pvt. Ltd’, an online multi-brand beauty retailer under the brand name ‘Nykaa’ & a creative food hospitality company – ‘Azure Hospitality Pvt. Ltd.’ We will look to monetise these investments at the opportune time and future investments will be focussed only towards Real Estate tech companies.
Max I. has already been working with many start-ups in the field of air quality management, visitor management, video analytics solution etc. which will play a crucial role in implementing new-age technologies to contain the spread of the virus.
Hence, we believe, MEL with support from MAS & Max I. will become the most preferred brand in providing ‘Real Estate solutions’ at scale.
Max Speciality Films Limited (MSFL) manufactures a vast range of BOPP films across a wide field of applications: graphic art, labelling, flexible packaging for processed foods, confectionery, non-food fast moving consumer goods (FMCG) and industrial goods. MaxVIL holds 51% while Toppan holds 49% in MSFL as a strategic partner. Toppan is a Japan-based global leader in printing.
A positive trend coming out for Commercial Real Estate is that demand for office spaces may increase due to the de-densification (higher space per employee) in an office.
FY 20 has been a rebound year for our packaging business. EBIT increased from 228mn in FY 19 to 753mn in FY 20 while EBIT margins increased from 2.6% to 8.5% in this period. The value-added specialty films contributed 42% to total volumes in FY 20 as compared to 34% in FY 19.
FY 20 has been a rebound year for our packaging business. EBIT has increased from 228mn in FY 19 to 826mn in FY 20 and EBIT margins increased from 2.6% in FY 19 to 8.5% in FY 20. The value-added speciality films contributed 42% to total volumes in FY 20 as compared to 34% in FY 19. It led to immense improvement in realisations and profitability for the business, supported by lower raw material cost due to fall in the crude oil prices. Our manufacturing facilities ran at optimum capacity utilisation throughout the year with higher contribution from more profitable value-added specialty films as against commodity films.
With the production of recyclable BOPP films, MSF supports the idea of recyclability and circularity. The Indian government’s focus to reduce usage of single use plastic will benefit MSF as BOPP Films is a multi-layered product which is easier to recycle.
During the nation wise lockdown due to COVID-19, MSF tried its best to serve the country as it comes under essential goods industry category. With consumer preference shifting from unpacked foods to packed, safe and hygienic foods, the demand for MSF was strong and it continued to operate during the lockdown after an initial shut down for 3 days.
This will improve the demand for packaging materials. MSF with a focus on research and innovation led speciality products is all set to benefit from the available opportunity. Demand from international markets will be uncertain due to the ongoing economic disruption but it will be compensated by healthy domestic demand.
Moreover, no major capacity addition is seen coming online for next year in the industry. Raw material prices which are crude oil linked are expected to remain soft for the next year. With increased realisation for our products, better demand-supply situation and soft raw material prices and our continued focus on innovation and increase in the specialty product mix, we expect the business to flourish in the coming fiscal year.