Henry Schein 8 x 11.ppt

Strategic Advisory Study, Bopal, Ahmedabad

Presented to:Inductotherm (India) Pvt. Ltd.

September 2013#Contents Jampel-yang (contracted toJamyang)

#Introduction

#3introductionInductotherm the Client owns and operates an industry on a land parcel measuring about 17.79 acres, located in Bopal, Ahmedabad, Gujarat.The client wants to ascertain the value of the asset and arrive at a suitable strategy to unlock the value of the asset, in the backdrop of the organizational needs and constraints.Objective of the StudyScope of WorkKey questions to be addressed in the studyWhat is the as-is where-is value of the land?What are the factors which influence the value of this land?What is the future outlook on land values in the area?What are the available options for unlocking the value?Should Inductotherm hold, sell or develop the asset?If hold, then for how long?If sell, then who are the potential buyers for the property?Is it a right time to approach these buyers?What is the least tax liability transaction structure?What should be Inductotherms strategy?Understand the growth and economic profile of the regionAssess the regulatory and legal aspects with regards to land and real estate developmentConduct a study on existing demand supply scenario of real estate asset classes suitable to the subject locationDetermine the ideal development mix at the site and thus estimate the highest and best use property valueEvaluate suitable strategic options for unlocking the value of the asset#Regional Overview

#5Gujarat OverviewFact SheetArea (sq.km.)181,338Population60,383,600Urban Population25,675,700Total Urban Households5,411,700Per Capita Urban Income` 95,100Annual Population Growth Rate2%Indias economic growth story over the last 20 to 30 years has been pre-dominantly driven by the services sector, especially the IT / ITeS sector. The next leg of the India growth story is poised to be driven primarily by the manufacturing sector.Over the last two decades, Gujarat has been one of the fastest growing states of India, both in terms of economy and population demographics.#Infrastructure

Roads

Passengers handled by Gujarat Airports20102015Ahmedabad837,0001,018,400Vadodara451,200603,800Surat32,10044,200Bhavnagar66,40073,300Jamnagar65,60073,800Rajkot195,200273,800Porbandar19,50022,200Bhuj88,900101,100Total1,755,9002,210,600RailwaysPortsAirports#Industrial ScenarioIndustrial Performance

Industrial Promotion Bodies

Output SpecializationGrowth ForecastsGujarat has seen a strong industrial growth in the past in the Petroleum and Chemical sectors, with these sectors constituting over 45% in the states economic output.The state has witnessed a number of emerging sectors like Metal & Metal Fabrication, Food Processing and Engineering, which are forecasted to grow at CAGRs of 25%, 18% and 16% respectively.#Ahmedabad as a Center of Gravity

Ahmedabad is at the center of gravity for significant industrial developments taking place across various clusters and along the Dedicated Freight Corridor (DFC) alignment in GujaratSignificant upcoming industrial growth with Ahmedabad at its center of gravity shall result in a multiplier effect of capital deployed being fed in Ahmedabad city, particularly, on the Ahmedabad real estate prices.#Ahmedabad OverviewFact SheetArea (sq. km.)646Total Population Census5,570,585Population Density (persons per sq. km.)8623Population 0 to 6 years (%)10.57Sex Ratio (females per 1,000 males)897Child Sex Ratio 0 to 6 years853Literacy Rate - 7 years and above (%)89.625th largest city of the country and 7th largest urban agglomeration One of the fastest growing urban agglomeration with a decadal growth rate in population of 23%Its a mono-centric city with proportionate growth in all the directionsWestern part of the city has seen more organized developmentsOne third of the households have annual income levels greater than ` 500,000 per annumThe city is witnessing one of the fastest growths in income profileCity administration has responded favourably to the increasing urbanization pressures and is developing public transport in the form of BRTS and also high density corridors along it

#Real Estate Analysis

#11Residential market overview

Central Zone 5West Zone 2North Zone 3East Zone 1South Zone 4Units Under DevelopmentUnsold Units#Supply AnalysisMarket SizeAhmedabad market has over 109,000 units in various stages of development. Of this about 8000 units are concentrated in Western AhmedabadPremium Projects Western Ahmedabad has the highest market share in premium units priced greater than ` 10 million, which is ~ 33% of the total premium apartments marketAbsorptionOut of the total 109,000 units in Ahmedabad that are under development, over 45,000 units off these are unsoldZone 4 has the maximum quantum of unsold inventoryUnits Under DevelopmentTicket Size (` lakh)0-2525 5050 100100 - 200200 and AboveTotal%Zone 14,2525,7912,6335845511,381113%Zone 21,8271,9982,5131,0583717,7677%Zone 35,88514,7991,6223167422,69621%Zone 442,8995,8391,1145064850,40646%Zone 51,0559,3873,12159420514,36213%Total55,91837,81411,0033,0581,249109,042%51%35%10%3%1%100%Unsold UnitsLocations0-2525 5050 100100 - 200200 and AboveTotal%Zone 11,4492,8141,1352272855,91013%Zone 21,1831,0499633432123,7508%Zone 33,1594,900608182238,87219%Zone 416,2962,594687256819,84143%Zone 54895,4671,105233997,39316%Total22,57616,8244,4981,24162745,766%49%37%10%3%1%100%#market AnalysisZone12 Qtrs20 Qtrs28 QtrsNorth16.28%20.93%29.01%South14.94%14.57%21.53%West 20.94%16.25%26.88%Central12.27%17.45%33.06%Overall there is a slow down in Ahmedabad market and developers are struggling to clear the inventory. Developers are facing a cash crunch situation and therefore investment into land is not an attractive option for them. Central zone has shown highest appreciation followed by the western zone. However, over the past 3 years period, the price appreciation in west zone has surpassed all the other zones.#Bopal MarketYearMarket AppreciationIncremental AppreciationTotal Appreciation201615.76%57.15%72.92%201827.63%79.17%106.80%202147.75%111.34%159.08%Bopal has almost 26% share of the Western Ahmedabad marketOver the past 10 years, the market has seen a significant developmentBopal market has seen a 5.5 fold increase in prices over the last 10 years#Growth of Bopal

#Site Analysis

#17Location

Sabarmati RiverSardar Patel Ring RoadSarkhej Gandhinagar HighwaySubject PropertyRailway RouteAmbli Road Railway StationAhmedabad Railway StationAmbli Bopal RoadNearest Highway (S. P. Ring Road)1 kmNearest Railway Station(Ambli Road)5 kmNearest Airport(Ahmedabad Airport)23 kmNearest Bus Depot(AMTS Depot)10 kmNearest Port(Khambhat)100 km

Subject PropertySouth Bopal RoadBopal RoadThe subject site is an industrial land parcel bearing plot nos. 58, 59 and 60/A, measuring approximately 17.79 acresThe site is located at Bopal, one of the upcoming and prime locations of AhmedabadThe site enjoys excellent connectivity#Regulatory AspectsReal estate development at the subject location is governed by the General Development Regulations (GDR) of the Ahmedabad Urban Development Authority (AUDA)Following are some key regulations that are applicable to the subject property:Zoning

FSI (Floor Space Index)The subject site falls under two zones:The base zone applicable is Residential Zone II (R-II)There is also an overlap of the Residential Affordable Housing Zone (R-AHZ)Major difference in the applicable norms under these two zones is in the permissible FSI* Additional chargeable FSI shall be permitted on payment of charges equal to 10% to 40% of the Government (Jantri) Rates.Permissible Development

R-II Zone

R-Affordable Housing Zone

Base FSIChargeable FSI *Total FSI1.21.52.71.20.61.8Residential 1 & 2; Educational 1 & 2; Institutional; Assembly 1, 2 & 3; Mercantile 1 & 2; Business; Religious; Sports & Leisure; Hospitality; Parks; Public UtilityResidential units with built-up area upto 50 sq.mt.more than 50 and upto 66 sq.mt.more than 66 and upto 80 sq.mt.#Valuation and Tax Implications

#20Valuation

Subject PropertyComparable 1Comparable 2Comparable 3Comparable InstancesSr. No.LocationPropertyArea (acres)TypeRate (` per sq.yd.)1Opposite Applewoods TownshipSurvey Number: 501, 502~ 20 Quote30,000 2Sahara City Township Road (left side)Survey Number 485....~ 20Quote25,000 3Sahara City Township Road (right side)Survey Number 645....~ 30Quote25,000 Value Conclusion Comparison MethodAverage Land Rate: ` 20,453 per sq.yd.Land Area: 86,106 sq.yd.Market Value: ` 1,761 millionTotal Land Area Final Plot59,339 sq.mt.Total Saleable AreaResidential ~ 2.54 millionEssential Retail ~ 0.12 millionCapital Value` 3,200 per sq.ft.Total Revenue` 12,857 mnTotal Cost` 6,316 mnAbsolute Profit` 6,541 mnNet Present Value` 2,183 mnEffective Land Rate` 30,761 per sq.yd. Discounted Cash Flow Method: Project Financials#Tax implicationsThe provisions of Income Tax Act, 1961, as amended by Finance Act 2013, with reference to the following need to be given special consideration Capital Gains Tax: LTCG 20% Dividend Distribution Tax (DDT): 15%, with limitations on repatriationSpecial ProvisionsSection 54G : Exemption of capital gains on transfer of asset in case of shifting of industrial undertaking from the urban areaWhere the capital gain arises from transfer of capital asset situated in an urban area, in consequence of shifting of such industrial undertaking to any area other than urban area, and the assessee has within a period of one year before and three years after the date on which the transfer took place: purchased a new machinery or plantAcquired building or land or constructed building for the purpose of his business in the new areaShifted the original asset and transferred the establishment of such undertaking to such areaSection 112 : Tax on long term capital gains, Where the total income of the assessee includes any income arising from the transfer of long term capital asset, which is chargeable under the head capital gains the tax payable by the assesse on the total income shall be the aggregate of .Sub section (c ) in case of a foreign companyThe amount of income tax payable on the total income as reduced by the amount of such long term capital gains, had the total income as so reduced been its total income; and(w.e.f. 1-4-2013) the amount of income tax on long term capital gains arising from the transfer of a capital asset, being unlisted securities, calculated at the rate of ten percent on the capital gains in respect of such asset as computed without giving effect to the first and second provisions of section 48 ( expenditures, indexed cost of acquisition, indexed cost of improvement)#Tax implications Possible StructuresOption ATo create a new company either by demerger (more preferable but will take 3-4 months) or by way of Slump Sale (Sec 50B of Income Tax Act) of all assets and liabilities except land in Bopal.In case of demerger there will may not be any income tax implications.In case of Slump Sale the company may be transferred without land at a nominal profit of 10%.Investments for the purchase of assets by new company from old company can be done by creating a new Indian entity. Investment may be made by parent company as 100% FDI in manufacturing sector is allowed.After the new company takes over, the old company shall be left with only land in its book.Instead of selling the land, the entire company may be sold. This would lead to savings in stamp duty for the buyer.Also the Capital gains arising due to the sale of company and thereby transfer of land, shall ,as per Sec 112, be subject to a 10% of income tax, however, the benefit of indexation will not be available in this case.The proceeds so received can then be repatriated to the parent company basis a CA certificate and documentation as required by RBI.

Option BTo sell the land from the existing company.Since the transaction shall be that of land, there shall be no savings in stamp duty for the buyer.Avail the benefits of section 48 (expenditures, indexed cost of acquisition, indexed cost of improvement).Avail benefits of section 54G.MAT may still be applicable depending upon the tax structure of the parent company.Capital gains arising due to the sale of property shall be subject to a 20% of income tax, however, the benefit of indexation and set off of new land and building (if one year prior or three years later) shall be available.Dividend distribution tax shall be applicable, and there shall be restrictions on repatriation.

Note: The above structuring needs to be confirmed by a Tax Consultant.#Decision Analysis

#24Decision Tree#Option EvaluationOptionSell Now and Lease Back for 3 YearsSell After 3 YearsSelf DevelopmentManagement / Marketing ContractJoint DevelopmentAbsolute Profit (` mn)1,1203,7559,4389,1368,471Net Present Value (` mn)1,0132,3441,6521,5371,852Regulatory RiskNilNilMediumMediumMediumMarket RiskNilLowHighMediumHighDownside Risk / Upside PotentialNilLimited downside; high upsideHighHighHighCapital Gains Tax54G: Set-off available; Demerger: Reduced rateReduced rateApplicable: 20%Applicable: 20%Applicable: 20%Dividend Distribution Tax54G: Applicable; Demerger: NilNilApplicableApplicableApplicableStamp Duty54G: Applicable; Demerger: NilNilNot ApplicableNot ApplicableNot ApplicableTransfer PricingNot ApplicableNot ApplicableNot ApplicableNot ApplicableNot ApplicableLiquidityHigh; upfront cash generationLowLow; longer gestation periodLow; longer gestation periodLow; longer gestation periodCapability RequirementNilNilHighMediumLowOperational FlexibilityHigh; continuation of existing operationsHigh; continuation of existing operationsHigh; continuation of existing operationsHigh; continuation of existing operationsHigh; continuation of existing operationsFinancial AssessmentRisk AssessmentTaxationAspectsOtherAspects#SummaryOption Evaluation Net Present ValueRecommended OptionNPV: ` 1,013 mnNPV: ` 1,537 mnNPV: ` 1,652 mnNPV: ` 1,852 mnNPV: ` 2,344 mn#Conclusion

#28conclusionWhat is the as-is where-is value of the land?As-is where-is market value using Sales Comparison and DCF varies from ` 1,760 to 2,180 million.What are the factors which influence the value of this land?Gujarat is fast transforming into one of the most industrialized states of the country.The state economy is recording growth rates far in excess of the country average.Ahmedabad, on account of its location and proximity to state capital, is at the center of gravity of these developments.The city is fast transforming into a metropolitan.The boundaries of the cities are witnessing rapid expansion.The income profile of the residents is also witnessing rapid increase.The multiplier effect of significant development is being felt on Real estate market, resulting in a number of localities getting revaluedWhat is the future outlook on land values in the area?Price appreciations expected over the next 3 years: 57 to 73 %; 6 years: 79 to 107%; and 9 years: 111 to 159%What are the available options for unlocking the value?Hold for extended periodsSell now whole, strata saleSell after in a window of 3 years whole, strata saleSelf develop, Joint development, development with a management / marketing contract#conclusionShould Inductotherm hold, sell or develop the asset? Growth PerspectiveBopal is fast transforming into an upper middle class locality.Residential property prices in Bopal are expected to increase rapidly over the next 3-5 years.Market PerspectiveAhmedabad real estate market today is dominated by local developers.Currently the market is witnessing significant oversupply.The developers are in consolidation mode and are only looking at stressed acquisitions at a discount.Pan India / Corporate / Cash Rich developers are likely to invest in Ahmedabad over the next few years.Operations PerspectiveThe new facility at Sanand is being developed and is expected to be commissioned over the next 2-3 years time frame.Considering the above points, we recommend Inductotherm to Hold the asset, and look at sell as an option only in a window of next 2-3 years.Todays Ahmedabad real estate market is dominated by local players.National level players who had entered the market have either seen mediocre performance, or have not initiated their developments.Thus, the potential buyers for the asset are predominantly Ahmedabad based developers.If sell, then who are the potential buyers for the property?#conclusionIs it a right time to approach these buyers?NoToday, the Ahmedabad market is in an over supply situation.The developers are in a consolidation mode and are having limited focus on large project developments, and are themselves on the verge of selling their assets and land banks.The developers with liquidity are looking at stressed asset transactions at a significant discount. What is a tax efficient transaction structure?Sale of the asset is liable to attract capital gains tax, dividend distribution tax and stamp dutyInductotherm being a foreign company, other aspects like transfer pricing, DTAA (Double Taxation Avoidance Agreement), forex changes are also to be considered.There are some provisions under sections 50 B and 54 G of The Income Tax Act through which a tax efficient transaction structure can be worked out.What should be Inductotherms strategy?Hold the asset for a period of two to three years.Develop a shifting plan and initiate the process of conversion of land from industrial NA to residential or mixed-use NA.Keep a close eye on changes in the development control regulations and application of the high density zone to the property and its resultant impact on the valuation.Create an awareness of the asset in the market, without actually marketing it.Approach the market participants at the right time, i.e. with in the window of next three years.#DisclaimerThe statements, information and opinions expressed or provided in this publication are intended only as a guide to some of the important considerations that relate to property investment. Although we believe they are correct and not misleading, with every effort having been made to ensure that they are free from error, they should not be taken to represent, nor are they intended to represent, investment advice or specific proposals, which must always be reviewed in isolation due to the degree of uniqueness that will attach thereto.Neither Knight Frank nor any persons involved in the preparations of this publication give any warranties as to the contents nor accept any contractual, tortuous or other form of liability for any consequences, loss or damage which may arise as a result of any person acting upon or using the statements, information or opinions in the publication. This publication is confidential to the addressee and is not to be the subject of communication or reproduction wholly or in part.Knight Frank (India) Private LimitedPaville House, Near Twin TowersOff Veer SavarkarMarg, PrabhadeviMumbai - 400025Tel:6745 0101Fax: 6745 0202www.knightfrank.com#Thank You

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