Fit-out specialists ride the gravy train

Rs 1,000 cr market growing at 15% a year.

When information technology major Tata Consultancy Services (TCS) wanted a new facility to house its growing business process outsourcing (BPO) venture in Mumbai, it leased 250,000 square feet of an unused shed in the suburbs, and hired construction major Shapoorji Pallonji group's Construction Materials Group (CMG) to do it up.

The result? A state-of-the-art office that can accommodate 2,300 people with separate modules for voice and data operations. The Rs 28 crore project was handed over to TCS early this month.

The Hiranandanis recently fitted out a 50,000 square feet facility for engineering giant Larsen & Toubro in Powai, Mumbai, while the Indian Navy has inked a deal with CMG to do up a section of its new base at Karvar in Karnataka.

A crop of similar deals driven by other BPOs and retail players have been at the forefront of driving the Rs 1,000 crore fit-outs industry in the country. Growing at an annual clip of 15 per cent, it is emerging as a new growth opportunity in real estate.

While the Rs 100 crore CMG dominates the industry, other real estate developers like Hiranandani, Raheja and RNA builders have diversified into this allied activity.

While fit-outs have been the norm in the IT/BPO segment, anchor stores in malls, too, are now going for warm shells. In nearly 25 per cent of malls, anchors like Big Bazaar are going in for warm shells where the builder provides the AC, concealed lighting and flooring, while the client brings in the furniture and computers.

So much so, that CMG which earlier had about three inquiries a month, now tackles as many as 30.

"Most clients setting up offices are going in for warm shells which comes at a marginally higher cost," said Anuj Puri, managing director, Chesterton Meghraj. He claims that while a cold shell carries a tag of Rs 50 a square foot, then a warm shell costs around Rs 55 per square foot.

"A warm shell works out better for both the builder and the leasee. The client sees no point spending on AC, lighting or flooring which he cannot later carry with him, while the developer can easily recover the cost of these facilities over time," he adds.

"One reason for the emergence of big players in the sector is that multinationals coming into India are unwilling to invest in real estate in the initial years and prefer to redo their rented office space, which helps them to amortise their costs," said Rajesh Pandit, head, asset services (western region) of real estate consultants CB Richard Ellis.

Added Puri, "It is the bigger more organised players who have the kind of capital to put up a full fledged facility and wait to recover their cost over a period of time."

That is why, even real estate developers like Niranajan Hiranandani, chief executive officer of Hiranandani Builders, have entered this business.

"This is a segment where customer requirement can change every two years, so for businesses like ours it is great news," he said.

In fact, if the market continues to boom as it is doing today, he doesn't rule out hiving off this affiliated business into a separate division in the next couple of years.

Clearly, the entry of big players has brought about a paradigm shift. Traditionally, this mom-and-pop industry thrived on profit margins of 40 per cent. But, in the last few years, with the increasing volume and size of projects, margins have shrunk to 10 per cent.

'The clients also realise that they get better quality at lower prices with the bigger operators,' said Rahul Jain, chief operating officer of CMG. He pointed out that his company had initially spent time researching the quality of various construction materials like plywood, tiles and door hinges and use only those products that meet international standards. 'Since we have several projects going on at the same time, we buy in bulk and pass on our margins to the customer,' added Jain.

With a number of corporates including multinationals, looking for office space with standardised international facilities, the demand has been rising for organised players who can deliver both on quality and time.

Fitting it out

BIG PLAYERS Shapoorji Pallonji and builders like Hiranandani, RNA and Rahejas

GETTING MORPHED From being a traditionally mom and pop industry, project sizes now run into crores

WHO'S BUYING BPO/IT and retail firms