Awfis Space Solutions Ltd (NSE: AWFIS) Q2 2025 Earnings Call dated Nov. 12, 2024
Corporate Participants:
Amit Ramani — Chairman and Managing Director
Sumit Lakhani — Deputy Chief Executive Officer
Ravi Dugar — Chief Financial Officer
Analysts:
Rishith Shah — Analyst
Mohit Agriwal — Analyst
Ashish Shah — Analyst
Adhidev Chattopadhyay — Analyst
Saatvik Shetty — Analyst
Pranav Shrimal — Analyst
Akshat — Analyst
Krishna Shah — Analyst
Simanto — Analyst
Presentation:
Operator
Ladies and gentlemen, good day and welcome to the Awfis Space Solutions Limited Q2 & H1 FY ’25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Rishith Shah from Nuvama Wealth PCG. Thank you and over to you, sir.
Rishith Shah — Analyst
Good morning. On behalf of Nuvama Wealth PCG, I would like to welcome you all to the second quarter earnings call with the management of Awfis Space Solutions represented by Mr. Amit Ramani, the Chairman and the Managing Director; Mr. Sumit Lakhani, the Deputy CEO; and Mr. Ravi Dugar, the CFO.
So, without further ado, I’ll now hand over the call to the management for their opening remarks followed by a Q&A Session. Thank you.
Amit Ramani — Chairman and Managing Director
Good morning and a very warm welcome to everyone present on the call. Along with me, I have Mr. Sumit Lakhani, our Deputy CEO; Mr. Ravi Dugar, our Chief Financial Officer; and SGA, our Investor Relations Advisors.
For Q2 and H1 results, we have uploaded our presentation on the exchanges, and I hope everybody had an opportunity to go through the same.
Let me start with a brief overview of the business for the quarter. We are pleased to announce a strong financial performance in Q2 FY ’25 with revenue growth of 40% year-on-year reaching INR292 crores. This growth was largely fueled by contributions from newly added seats as well as increased occupancy across our established centers. Our strategy to maximize utilization has proven effective with occupancy levels steadily rising in key locations.
Our Co-working and Allied Services segment grew by 43% reaching INR218 crores, driven by rising demand for flexible workplace solutions. Similarly, our construction and fit-out projects, which includes our Design & Build business, saw a strong growth of 36%, reaching INR68 crores. This is supported by solid order pipeline and a favorable market condition.
Our EBITDA saw strong growth, rising by 67% year-on-year to INR100 crores with an EBITDA margin of 34.3%. This reflects an improvement of 550 basis points compared to the same quarter last year. This margin expansion was primarily driven by strong revenue growth, occupancy improvement, increased contributions from enterprise clients, allied services, and operating efficiency.
As of September 2024, our overall exit monthly occupancy rate stood at 73% with centers having operational for more than 12 months reaching an impressive 84%. This solid performance underlines the ongoing demand for our flexible workspace solutions and reaffirms our position as a preferred provider in this sector.
I would like to share that we have exceeded 110,000 operational seats across 180 centers, pan India; a significant milestone in our growth journey. Including centers in fit-out stage and letter of intent stages, our total capacity now surpasses 1,50,000 seats across 224 centers, covering an extensive 7.6 million square feet. This expansion underscores our commitment to meeting the growing demand for flexible workspaces and puts us firmly on track to achieve our target of 1,35,000 operational seats by March of 2025.
In response to the rising demand for flexible spaces in Tier-2 cities, we have significantly expanded our footprint in these emerging markets. We are present currently in Ahmedabad, Bhubaneswar, Chandigarh, Indore, Jaipur, Kochi, Nagpur, and our latest addition is in Guwahati which further strengthens our presence in these regions. Since September 2023, we have increased our footprint in Tier-2 cities by 43%, growing from 14 centers to 20 centers, underscoring our ongoing commitment to these high-potential markets.
Now, let me highlight a few key developments for this quarter. I am excited to announce the launch of our first Elite center at Aurobindo Orbit in Hyderabad’s renowned HITEC City. Elite by Awfis redefines luxury in flexible workspace sector setting a new standard for premium work environments. This exceptional space blends elegance with functionality, creating a sophisticated and inspiring atmosphere. Built with a commitment to sustainability and well-being, Elite offers an environment that nurtures creativity and collaboration. Featuring carefully curated amenities, it is designed to be more than just a workspace, it is an environment where professionals can excel in both comfort and style.
I am happy to announce that Awfis has signed a mandate to design, build and manage over 1.65 lakh square feet new space for NSE, National Stock Exchange at Adani Inspire in BKC, Mumbai. Awfis already operates a co-working center in this building, and with this new deal, it expands its footprint with two additional centers in the same building. This partnership demonstrates Awfis capability to deliver high-quality workspace solutions tailored to clients’ business needs and employee well-being.
We are pleased to have built a strong partnership with Prestige, having collaborated with them on 16 centers that span 6,08,000 square feet of chargeable area. Building on this foundation, we are excited to announce opening of three new Elite centers in Mumbai, Delhi, and Bangalore, expanding our total footprint to 8,13,000 square feet of chargeable area in total of these centers. Each of these centers is designed to be high-end workspace, offering the very best in terms of location, design, and functionality. This expansion reflects our shared commitment to delivering exceptional workspaces and further strengthens our collaboration with Prestige.
In September 2024, we successfully divested Awfis Care, our facility management business, to SMS Integrated Facility Services, a company known for its technology-driven capability. The divestiture will enhance operational efficiency by reducing administrative and compliance tasks, allowing us to focus more on our core flexible workspace business. It also strengthens our financial position by improving cash flow and liquidity, enabling strategic reinvestment in growth and technology. The streamlined cost structure will enhance the ROCE, optimize capital usage and deliver stronger returns. Furthermore, this move allows us to sharpen our focus on leadership and flexible workspace market, emphasizing innovation, customer experience and service excellence.
To conclude, I would like to highlight that the flexible workspace market in India is on strong growth trajectory, driven by changing workspace preferences, technological advances, and economic factors. With current valuation at approximately INR108 billion, the market is projected to reach INR380 billion by 2028, reflecting a CAGR of round roughly 35% over the next four to five years. Awfis is well positioned to capture this demand with Grade-A workspace solutions in prime locations, offering premium design and project management.
Our Design and Build model delivers innovative workspaces, focuses on speed, quality, and flexibility, backed by advanced digital technology. With our expertise, operational efficiencies, and commitment to innovation, Awfis creates environments that meets high standards in design, functionality, and safety, ensuring success in evolving commercial real estate market.
Let me hand over the call to Mr. Sumit Lakhani, our Deputy CEO, to share Q2 FY ’25 operational highlights.
Sumit Lakhani — Deputy Chief Executive Officer
Thank you, Amit. Good morning, everyone. I would like to share with you the operational highlights for Q2 FY 2025.
On the supply side, as of September 2024, we have successfully crossed 110,000 operational seats, marking a significant achievement in our growth trajectory. Since September 2023, we have launched 52 new centers, adding 35,651 new seats to our portfolio. This expansion has allowed us to broaden our presence into nine Tier-2 cities and seven new micro markets, further strengthening our footprint across key emerging regions. Including centers under fit-outs, we have now reached a total supply of 205 centers with over 130,000 of seats and 6.6 million square feet of chargeable area. Our presence in Tier-2 cities have increased by approximately 43%, growing from 14 centers to 20 centers since September 2023, demonstrating our continued commitment to expanding in high-potential markets.
We continue to expand our managed aggregation share with 76% of seats, including additions and those under fit-out signed under this model. This approach aligns with our focus on an asset-light, risk-averse supply strategy and aimed at maximizing return on investment. We have a strong pipeline with signed letter of intents for 19 centers, adding almost 20,000 seats and 1 million square feet of chargeable area. This progress gives us confidence in achieving our target of 135,000 operational seats by March 2025.
On the demand side, we have signed demand contracts for 14,000 new seats in Q2 FY ’25 and 25,000 new seats in H1 of FY ’25. To give you a perspective, we sold a total of 37,000 seats in the whole of financial year 2024. Our revenue base continues to be highly diversified. We have signed service agreement for two floors spanning approximately 1.65 lakh square feet with National Stock Exchange at Adani Inspire in Bandra Kurla Complex, Mumbai. Partial revenue for this transaction is expected to flow in Q4 of FY ’25 and full revenue will start from Q1 of FY ’26.
In terms of occupied seats, approximately 66% of our client base consists of large corporates or multinational companies, 20% are SMEs and mid-corporates and 13% are start-ups and the remainders are freelancers. In our portfolio, we have 39% multi-center clients. The contribution of 100-plus seat cohorts to our total cohort remains robust at 57%, reflecting the increasing confidence of clients in transitioning from traditional offices to flexible workspaces. Our blended exit month occupancy rate was 73%. Occupancy typically increases as new centers mature. For centers older than 12 months, the occupancy rate stands at 84%. The total average client tenure is 33 months with a lock-in period of 24 months, demonstrating strong long-term client commitment. Our client profile is well diversified with 2,877 active clients as on 30th September.
That concludes my update. I will now hand over to Mr. Ravi Dugar, our CFO, for the financial discussion.
Ravi Dugar — Chief Financial Officer
Thanks, Sumit. Good morning, everyone, and a very warm welcome to everyone. Let me give you a quick overview on our financial performance.
For Q2 of ’25, our consolidated operating revenue stood at INR292 crores, which is a growth of 40% on a year-on-year basis. The operating EBITDA stood at INR100 crores, which is a growth of 67% on a Y-o-Y basis. The margins stood at 34.3% as against 28.8% in Q2 of last year, which is a growth of 550 bps.
For H1 FY ’25, our operating revenue stood at INR550 crores, which is a growth of 39% on a Y-o-Y basis. The operating EBITDA stood at INR179 crores, a growth of 62% on year-on-year basis. The margins stood at 32.6% as against 28% in H1 of last year, a growth of 455 bps.
On the IGAAP equivalent basis, which is adjusted for Ind AS 116 lease rentals and other Ind AS which is 109 and Ind AS 102, for Q2 ’25, our consolidated operating revenue stood at INR292 crores, a growth of 41% on a year-on-year basis. The operating EBITDA stood at INR44 crores, which is a growth of 160% on a year-on-year basis. The margins stood at 14.9% as against 8.1% in Q2 of FY ’24, which is a growth of 690 bps.
For H1 ’25, our operating revenue stood at INR549 crores, a growth of 40% on Y-o-Y basis. The operating EBITDA stood at INR73 crores, a growth of 199% [Phonetic] on Y-o-Y basis. The margins were at 13.3% as against 6.4% in H1 of last year, a growth of 690 bps.
For Q2 of FY ’25, IGAAP equivalent depreciation was at INR19 crores and finance cost was at INR1 crore. For H1 of ’25, IGAAP equivalent depreciation stood at INR35 crores and finance cost at INR2 crores.
On Ind AS basis for Q2 FY ’25, our cash EBIT, which is operating EBITDA plus other income less the actual lease payments, stood at INR52 crores, which is the growth of 115%, and this number for H1 FY ’25 is at INR90 crores, which is a growth of 131% on Y-o-Y basis.
On PAT, in Q2 of FY ’25, PAT, excluding exceptional items, is INR15 crores versus a loss of INR4 crores in Q2 of last year. In H1, PAT, excluding exceptional items is INR17 crores versus a loss of INR13 crores in H1 of last year.
As of September 30th, our liquidity position is at a comfortable INR205 crores. The gross debt stood at INR28 crores. As a result, our debt-to-equity is 0.07, which was 0.14 in Q2 of last year. Our net debt-to-equity stood at negative 0.42, which was negative 0.17 in Q2 of last year. We see a further decline in our debt-to-equity ratio as our profitability and liquidity situation continues to improve. Our ROCE on an annualized basis has improved from 68% in Q1 of FY ’25 to 73% in Q2 of the current financial year.
This is all from our end. We now open the floor for Q&A.
Questions and Answers:
Operator
Thank you very much. [Operator Instructions] The first question is from the line of Rishith Shah from Nuvama Wealth PCG. Please go ahead.
Rishith Shah
Hi, good morning, sir. And congrats on the great set of numbers. Thank you for the opportunity. So, I have actually three questions. So, the first question is regarding the Design & Build segment. So, we have highlighted that we have kind of received orders worth about INR175 crores in the first half. So, I just wanted to understand, of this INR175 crores, what part would be executable in the second half and what would spill over to FY ’26? Should I assume a part of this order book would also contain the NSE order? Should I ask all the questions right now?
Sumit Lakhani
Yeah. So, with respect to the Design & Build, the orders which we have booked, a portion of it will be booked around in H2. With respect to the overall guidance from D&B business, we have not specifically given any guidance with respect to the growth from FY ’24 to FY ’25, but it will — as our total guidance is about 30-odd-percent, so, you can expect the overall D&B business to also, on a whole year, grow at 30%-plus kind of a scenario.
Rishith Shah
Got it. That makes sense.
Sumit Lakhani
And with respect to — just a clarification, with respect to the NSE, that will not be part of the Design & Build. That will primarily go into the space revenues, it’s a managed office kind of a transaction.
Rishith Shah
Okay. Okay. Sure, thanks for the clarification. Sir, second question actually was on the Elite brand that we have kind of launched this quarter. So, I just wanted to understand the rationale behind creating this new luxury or higher — more than a premium brand when we already have Awfis Gold, it’s already a premium offering. And also as to how the unit economics will differ in case of Elite in terms of revenue per seat or the capex or the margins?
Sumit Lakhani
Sure. See, if you look at, we launched Awfis Gold during the pandemic to cater to demand of large corporates who were adding flex to their portfolio. So, it delivers very strong value for customers seeking a premium experience. But with Elite, what we are trying to do is, it is designed to offer an elevated workspace ecosystem for catering to larger demand in premium workspace segment with a focus on sustainable practices.
The thought primarily stem from two key factors. One, we see is that the market size of premium workspace segment is showing very strong growth over the past few years, and it is projecting to grow even further. Second is the sheer GCC demand in India, especially in the flex sector. So, with Elite, what we are trying to cater is the demand as a ready-to-move-in product for GCCs to experience and understand our capabilities before they take up a larger space with us.
So, that is the primary goal and GCCs are the primary target customers and as I mentioned that the market size of premium workspace is growing, so, we also see strong demand from consulting, BFSIs and larger start-ups.
In terms of the economics, primarily in a same micro market as compared to a flagship Awfis brand, Awfis Gold generally charges a premium of about 15% to 25%. From Elite, we are expecting the seat realization, which will be about 40% to 45% higher than the Awfis product. In terms of the overall capex, we are expecting the capex to be about 25% — 20%, 25% higher than what we do for our base Awfis product and our contribution margin profile because the Elite centers can come across both straight lease as well as managed aggregation remains the same on what we have for the Awfis base product.
Rishith Shah
Sure. That makes sense. And just to follow up on this, what kind of — I mean in terms of the centers, what is the future? So, we have already kind of started one center and planned another four.
Sumit Lakhani
Yes.
Rishith Shah
So how do we kind of plan on taking this brand going forward?
Sumit Lakhani
So, see, the current plan is, we will have these five centers, we will — selectively across key micro markets where we see a strong GCC interest, we will continue adding a few of these centers across. Just from a perspective, we generally as a company are not very aggressive with our expansion in terms of centers. So, we will see how the response is across these centers and then we will take a call.
Rishith Shah
Okay. And lastly, regarding our Tier-2 — strategy about targeting the Tier-2 space, so we — this quarter we entered Guwahati also. So, can you tell us more about the strategy and how do we see the centers growing in this area and also how the center occupancy is expected to ramp up in Tier-2?
Amit Ramani
So, the rationale for selecting the location, clearly Guwahati acts as a frontier to Northeast with huge opportunities. Guwahati also offers strategic location. It has an untapped market and obviously a market potential. It has lower operational costs and supportive government incentives, it makes it an attractive market for corporate offices. We feel that over the years we shall be able to get up multiple centers in the city and catering to diverse ecosystem of demand. This center, obviously, the first one that we are going in is about roughly 230 seats. We look to expand to another center shortly, making us almost 500 seats in this location. The first center is a managed office with a large IT, ITES client and hence obviously the occupancy in this specific center is fairly good, almost 100% day one.
In terms of your other question on Tier-2 markets, we are fairly confident of the Tier-2 expansion strategy. As I mentioned in my earlier summary that we have gone from 14 centers to almost now 20 centers, expanding our footprint in eight plus Tier-2 cities today. We feel that the economics going from 5 trillion to the 10 trillion economy is going to be built on some of these Tier-2 cities coming into the forefront and we have a market leadership position.
As for occupancy goes, I think it follows a similar approach that happens in our Tier-1 market. There are two types of strategies that we follow there. There is one where there is — we do a straight lease. In that scenario, we would have to have a portion of the demand, 50% to 100% of the demand with us day one. The second we follow is our managed aggregation strategy where we expand into these locations in partnership with our space owners. And the path to occupancy follows a similar approach when I have the ready client day one. Obviously, it starts off with a very strong occupancy. When typically this would be a managed aggregation center, then it follows the same process of anywhere between. six to nine months to get to 80-plus-percent occupancy.
Rishith Shah
Right. Thank you. That makes a lot of sense. Thank you so much.
Operator
Thank you. The next question is from the line of Mohit Agrawal from IIFL Securities. Please go ahead.
Mohit Agriwal
Yeah, good morning everyone and congratulations on a great quarter. My first question is your FY ’25 guidance was a 30% year-on-year revenue growth and 1.5 percentage point improvement in margins. I am talking about the IGAAP equivalent numbers and guidance on that. If I look at your first half numbers, it seems you’ve already achieved about — close to about 60% of what your guidance was on the — at the EBITDA level, again on IGAAP equivalent. So, then in that context, how do you look at the second half performance? And in that case, do we see that this performance that we have delivered in the first half, especially the second half, is sustainable? And would that mean that your guidance stands revised or any comments that you want to share on that?
Sumit Lakhani
So, Mohit, you are right. We are witnessing a very good business momentum from H1, and this is actually accompanied by what we see as a consistent behavioral shift in the occupier segment towards the flexible workspace sector. As you would have noticed, I have mentioned around our total new seats sold in H1 of FY ’25 versus what we did in the whole of FY ’24. So, that would also reflect the kind of momentum we are talking about. So with respect to the growth momentum and the overall occupier demand, it’s very strong and consistent. We expect it to happen over the next couple of quarters.
With respect to the guidance, the one thing what I can only say is that we anticipate about upside potential to the guidance which we have shared at the beginning of the financial year.
Mohit Agriwal
Okay. But with the second half — the second quarter performance of 40% revenue growth and close to 15% margins, is that a number that you expect probably to continue in second half as well?
Sumit Lakhani
So, Mohit, I would probably not want to get into specifics, but what I would say is we are expecting consistency with respect to our numbers. And so from a full year’s perspective, we are expecting that there would be upside potential to the overall guidance which we have given for the financial year.
Mohit Agriwal
Okay, okay. My next question is on the seat pricing, and I was just trying to do some math here. Is there — what I am seeing is a meaningful increase in the monthly seat price even when I calculate it on a per square feet basis. Just trying to understand that have you taken some hike which is over and above the usual 5% or is it a case of mix or if you could explain that if my calculations are incorrect, but I am seeing more than a 5% year-on-year increase in the seat pricing?
Sumit Lakhani
Yeah. See, if you look at the overall, as a trend, with respect to our seat pricing, our seat pricing has a direct correlation with the micro market rentals. And as the overall CRE demand has increased, the overall micro market rentals have increased and that is currently also reflecting in our seat pricing. So, in couple of our contracts of clients when — of the new contracts as well as when they are getting completely renewed, we see a larger kind of a jump in our seat pricing realization. So, that is one reason what you see.
Second, I would primarily say, on a quarter-on-quarter, there could be an overall variation in what we see as a seat realization. It’s also a function of the total number of new centers which went live in various kind of micro markets. To give you an example, if we go in a Tier-2 city micro market with a very low seat rental, you would see lot of seats which will have a — which will reflect a kind of a lower seat pricing versus, let’s say, if we set up centers in a higher-rental micro market, then you will see a kind of a higher kind of a seat price. So, it’s primarily a function on that. But, yes, overall, there is a trend towards a higher seat realization.
Mohit Agriwal
And that would have also contributed to the higher margins? Do you think the higher seat pricing would have also contributed, or this would have been all offset in the way of higher rentals to landlords?
Sumit Lakhani
So, it is contributing because couple of centers with a higher realization from various customers have jumped in. One of the other reasons why contribution margins are getting impacted is because of the positive surge we are getting from our alternate space revenue. So, that is also helping us with respect to the better margins apart from the overall seat price realization what you see.
Mohit Agriwal
Okay. And one last clarification on the Elite portfolio, the initial centers. Could you share, are they all straight lease or managed aggregation or mix of both?
Sumit Lakhani
So, they are a mix of both, so they are straight lease and managed aggregation. So it’s a mix of both.
Mohit Agriwal
With the Prestige portfolio also, it’s a mix of both or is it managed aggregation?
Sumit Lakhani
So, from a Prestige portfolio also, it’s a mix of both, with respect to in few of them where there is the capex contribution by Prestige and a share.
Mohit Agriwal
Okay. Great. Thanks a lot. All the best. If I have more questions, I’ll join back the queue. Thank you.
Operator
Thank you. The next question is from the line of Ashish Shah from HDFC Mutual Fund. Please go ahead.
Ashish Shah
Yeah. Hi, good morning, Amit and Sumit. Just a couple of questions. So, we did speak earlier about the guidance being broadly on the lines that we had indicated earlier. But this margin that we are seeing here of almost close to 15% for this quarter, is this how you would expect the margins to be going ahead, given all the mix changes and diversification into Tier-2 towns, etc.?
Amit Ramani
So, Ashish, I think obviously, it’s partly because of the operating efficiencies that we are able to drive in the business, a bit in operating leverage. So, as Sumit mentioned earlier, the guidance for the year obviously is going to be better than what we had given earlier and the margin profile, obviously the business is continually looking to get these efficiencies and leverage into the mix. And I think we will be somewhere close to that itself for the rest of the year.
Ashish Shah
Right. And the blended occupancy at about 73%. So, this is obviously better than close to 70% that we used to be earlier. And you think that, given the rate of expansion that we are having, again, should one look at similar 73% plus/minus occupancy or do you think 70% still is a good benchmark to hold on to for the blended occupancy?
Amit Ramani
So, Ashish, I think it’s a — for a year basis, I think the 70% blended would be a good benchmark to hold. Obviously, as you can see, we added about 10,000 seats in this quarter, but we also sold almost 14,000 seats. So, the momentum of sale of seats for the full — for the H1 is almost 25,000 and for the full last year, FY ’24, we were at about 37,000. So, I think the sales momentum is keeping up with the seat addition, but I think in terms of guidance, if you were to ask us, I think the 70% benchmark is a good benchmark for the whole year. This quarter, obviously, we have done much better than that.
Ashish Shah
Right. Moving on to the cash flows, so this quarter we have done actually well. We have generated a positive cash flow. The capex — what would be the capex number for the full year? I think first half, we’ve done something like INR83-odd crores. So, given your expansion plans, where would you put the year’s capex at?
Ravi Dugar
So, Ashish, we will continue investing in capex basis our ROCE. So that — I mean we’ll continue, obviously, we will exceed the capex guidance, what we have given at the start of quarter one, but obviously, looking at our growth needs, we will keep evaluating our capex spends.
Ashish Shah
So, sorry, if — just to just recap the number, are we looking at INR130 crores, INR140 crores, if I recall, is that the number we have?
Ravi Dugar
INR140 crores was the guidance what we had given at the beginning of the year and keeping the capex in line with our growth, we will keep evaluating our spends.
Ashish Shah
Right. But for this year, for the plans that are already rolled out, INR140 crores seems to be like a number that — to go by?
Ravi Dugar
Yeah.
Ashish Shah
And maybe just one last thing. Obviously, we are doing well, the sector itself is also doing well, but we see that there is obviously a lot of competition also building up, right? A lot of other players are getting funded, and we’re hearing a lot of new names coming up. So, how are you seeing the impact of that competition coming in? Is that impacting our ability to lease at reasonable rates or some sort of distortion is happening there?
Sumit Lakhani
Ashish, if you — the way we look at business is, in our business, the competition had always been there. It had been there since last seven to eight years. Now rather post-COVID what has happened is the Top 4 players are taking a larger portion of the market and the whole competition has become more organized, and which has become more interesting. So, we are not worried about the competition intensity because as of now, what we see is, it has probably diluted a bit because it has become more organized and streamlined and because it’s a kind of a physical brick-and-mortar business and the behavioral changes on the sector is there, so there’s a extraordinary kind of demand across various micro markets, across various kind of products, which is driving it.
Where we see our primary differentiation is a much larger network of centers, the ability to cater to multiple segment of occupiers, so someone requiring less than 25, 25 to 50 or 100-plus seats, ability to swim across various segment of customers or larger enterprises to start-ups, so these are the few differentiations which we think are strong moats for us and lot of our competition what we see, players are very focused on one or two segments around. So, we feel very confident around on swimming across the current competitive intensity.
Amit Ramani
Plus, Ashish, clearly our supply strategy is completely differentiated, right? Hence our capital requirement is probably the lowest and hence we get to about 70-plus-percent on the ROCE numbers, right? So, I don’t think this is a capital — if you get a great amount of capital, you can just continue to expand. It’s a very execution-heavy business and I think capital has a role to play. But I think the ability to cater to the demand, we have 2,700 plus customers today and obviously the ability to cater to multiple micro markets, we are in 57 micro markets across the country today. So, I think that differentiates and our ability to cater on the supply, having a differentiated model, and on the demand catering to less than 100 seats, being almost 50% of our business, I think clearly differentiates us from the competition and I think we will continue to have healthy growth in the business.
Ashish Shah
All right. Thank you and wish you all the best, Sumit. Thanks.
Amit Ramani
Thank you.
Operator
Thank you. The next question is from the line of Adhidev Chattopadhyay from ICICI Securities. Please go ahead.
Adhidev Chattopadhyay
Yeah. Good morning everyone. Thank you for the opportunity. Sir, the first question is on our expansion plans. We are around 150,000 seats with the pipeline. So, by the end of March — by the — as we get into March of ’25, any indicated number on the total operational plus pipeline which we are targeting? That is the first question.
Sumit Lakhani
So, in terms of the operational seats, Adhidev, we are expecting about — to close at about 135,000 live seats and at any single point of time, we have generally about 10,000 to 20,000 seats which are under fit-out and a similar kind of seats, which are — where we have signed the LOI. So, in March ’25, I expect that we will be in a similar kind of a situation where we will have about 135,000 live seats. A large number of seats, 10,000 to 20,000 seats will be under fit-outs and then we will have signed LOIs of about another 10,000 to 20,000 seats.
Adhidev Chattopadhyay
Okay. So, to understand, over the 135,000 seats, would have another 40,000-odd under construction plus LOI seats, right? Is that the right way of understanding it, over and above the operational seats?
Sumit Lakhani
Yes, you can assume around 30,000 to 40,000 over and above 135,000 across the category of under fit-out and signed LOIs.
Adhidev Chattopadhyay
Sure, sure, sure. Sir, second question is obviously on the margins you already highlighted for the quarter. Sir, but on the rental costs and other things, are there any one-offs or any one-time savings which would be built in which may again come back in the next few quarters over there? Just a clarification on that?
Ravi Dugar
Yeah. Hi, Adhidev. This is Ravi this side. No, there is nothing of that sort.
Adhidev Chattopadhyay
Okay, okay, okay. Sir, next question is…
Ravi Dugar
Except for the Care transaction what’s shown as an exceptional item.
Adhidev Chattopadhyay
Okay, okay, okay. Sir, next question is on our whatever ESOP policy that we have obviously highlighted now. Is there any expected P&L impact over the next few years or next couple of years rather on that or has it all just taken the normal dilution level?
Ravi Dugar
So, Adhidev, for this new ESOP policy, I mean we are obviously exiting the — most of the vesting will happen for the existing policy which is 2015 ESOP policy. So I think that vesting will get completed in the next two quarters and probably in the first quarter of the next year. So, after that, obviously, with the new policy coming in, so we can expect a similar trend on the ESOP cost between the years.
Adhidev Chattopadhyay
Okay.
Ravi Dugar
So, to answer your question, there is no incremental impact. The impact that you see today has already been baked in.
Adhidev Chattopadhyay
Okay, okay, okay. Fine, fine, fine. Sir, and the last question is again on the seat pricing, this is for obviously the normal co-working which we do, right? So, any
Indication of year-on-year growth in the pricing of the seats which you would like to share for the normal co-working which we do?
Sumit Lakhani
So, Adhidev, primarily, most of our contracts generally have escalation clause built in. For larger enterprises, it ranges from about 4% to 5%. For enterprises of smaller cohorts — companies with smaller cohorts, about 5% to 7%, and this is how even our new sales are happening for this segment of customers. We expect it to continue in a similar line. Now, when we are signing up new centers completely on new clients, the seat pricing is a direct correlation with the base micro market rentals. And as of the current vantage point, what we see this CRE micro market rentals are going up steadily, and that’s why you see a kind of growth. So I think for the upcoming couple of quarters, at least internally we have a view that across major micro markets, there is a bit of supply constraint. So, the rentals will continue to be on a higher side.
Adhidev Chattopadhyay
Okay. Sir, I’m excluding the enterprise, I am just saying excluding the larger enterprises, right? For the normal retail, which we do, are we able to command now sort of higher pricing because obviously that would depend on the demand/supply, right, playing out in that specific micro market? So — yeah.
Sumit Lakhani
Interestingly, if I can tell you and that’s where our business becomes more interesting because a decent portion of our business, about 43% of our business also comes from less than 100 seats. The general trend we have across over the last couple of years we have seen is the smaller cohort, the seat realization is always higher than the enterprise cohort. So, someone looking at 400 to 500 seats versus someone looking at 30-seater, the seat realization is always higher around for us. And so we don’t see — and the competition in the less than 100 seat cohort is very limited. I am talking about the branded competition. So, we have a good ability to provide — get high realization in this segment, so prime leader, in the core co-working segment, in the non-enterprise segment there because customers are looking at a very strong consistency of service within that segment as well.
Adhidev Chattopadhyay
Okay, okay, fine. Okay, sir. That was all very helpful. I’ll come back in the queue if I have more questions, yeah. Thank you.
Operator
Thank you. The next question is from the line of Saatvik Shetty from IIFL Securities. Please go ahead.
Saatvik Shetty
Good morning everyone. Thank you for the opportunity. And congrats on a great set of numbers. I have two questions. Firstly, sir, if you can talk about the current growth trends that you are seeing in the commercial real estate space and the flex market, and what’s the outlook there in the coming years and how you as Awfis are looking to capitalize on the same? And secondly, if you can explain the rationale behind the sale of your Awfis Care segment and what benefits do you see coming out of these transactions for you?
Amit Ramani
Sure. So, on the first part, which is the growth trend, so we are witnessing obviously a dynamic shift in the sector. This is obviously marked by strong growth trends overall in the Indian office space market, which is projected to grow at about 6% to 8% CAGR. However, the flexible office side market is experiencing even more traction than the commercial real estate market, so, with the remarkable projected CAGR of 25% to 27% in the next five-odd years across Tier-1 and Tier-2 markets.
In FY ’24, the flex space leasing absorption was 25% of the total CRE absorption. Flex space industry size is looking to treble to about INR380 billion by FY ’28, right, and from the current about INR108 billion which was in FY ’24. The flex space workspace penetration is expected to increase to about 20% by FY ’28 from
The 10% currently. So, obviously, the key reasons as we see it is, one is flexibility, customization, and the bespoke offering. Obviously, the rise of GCCs in the country, and the core and the flex of hub-and-spoke strategies that the companies are implementing right now.
And as far as we go, obviously, we are among the Top 5 players in the country across all organized players and when it comes to the network, we are the Number 1 in the country with the number of centers, plus clearly, the strategy in terms of Tier-2, we have one of the largest coverages in Tier-2. We are also the only player to have a large portfolio of risk-averse supply, which is managed aggregation, makes us capital efficient and risk-mitigated. Last year, we had sold about 37,000 seats in a single year. This year, in the first H1 itself, we have sold about 25,000 seats. So, very strong sales team that supports the supply acquisition team. And obviously, we are one of the first players in the industry, we are the pioneers in the co-working space and so we believe that we can continue to keep that momentum and continue to differentiate ourselves in the space.
On the second part of your question on the Awfis Care transaction, so we had strategically divested this transaction, right, to SMS, which is integrated facility management service company, strong in terms of technology and process. So, essentially, this is the transaction for about INR27.5 crores, right? This move allows, obviously, us to prioritize, to focus on our current business, position ourselves better in the flex workspace market, expand our network, and obviously drive innovation and the customer experience and technology integration.
The benefit that we see in terms of the overall transaction, one, the divestiture will benefit us by reducing administrative overheads, a lot of compliances were required in terms of 3,000 plus people being directly on our rolls. It also enhances operational efficiencies while providing additional financial flexibility to invest in our growth and expansion. The transaction is expected to be cash flow-accretive, improving our working capital cycle, providing increased liquidity which will help positively impact the ROCE. This will also optimize the use of capital to generate higher and long-lasting returns for its shareholders. It reinforces obviously a commitment to delivering strong financial performance, operational excellence and exceptional service to our clients and creating
Value for our stakeholders. So, those are some of the things that we believe will have a positive impact.
Saatvik Shetty
Great, sir. Thank you.
Operator
Thank you. The next question is from the line of Pranav Shrimal from PINC Wealth Advisory. Please go ahead.
Pranav Shrimal
Hello?
Operator
Yes, sir. You’re audible.
Pranav Shrimal
Yeah. I had a couple of questions. Firstly in the managed scale model, is there some risk or something we have to take care of if anything go wrong? [Technical Issues] Hello?
Sumit Lakhani
Yeah, sorry. Can you just repeat your question? You were saying in the managed space? It means? Sorry, I didn’t understand that.
Pranav Shrimal
Hello?
Sumit Lakhani
Yeah.
Pranav Shrimal
Yeah. My question was that in the aggregation model, what can be the risk or what can go wrong with that model?
Sumit Lakhani
Okay. So in a typical managed aggregation model, what we try to do is we try to create a win-win situation for us as well as the landlord. So, it’s not a one-sided kind of an agreement. The primary risk we run in this managed aggregation model is that these are the speculative centers. When I say speculative, that means that we need to build the occupancy of these centers post committing to sign up these centers. Now, the risk we run is whether we are able to build the occupancy in a right timeframe for these centers because if the occupancy is not built in the right timeframe, we will not be able to get the desired contribution margins for ourselves as well as the returns for the space owner.
Generally to mitigate it, we spend a lot of time and resources in terms of running various kind of research of micro markets, buildings, and the potential demand in these markets. So, occupancy buildup risk is the primary risk in the managed aggregation supply centers.
Pranav Shrimal
So, sir, vendor demand goes down, let’s say, over a time, so will this model be affected the most?
Sumit Lakhani
No. So, actually it works the other way around. The model will not be affected the most. Think of it this way, if we have a 700-seater straight lease center versus a similar size managed aggregation center and in the fourth or fifth year of operation of that center, the demand completely goes off in the micro market or the other aspect. In a straight lease, we will be more adversely impacted because we will have to continue paying the fixed rental. Now, in a managed aggregation, the impact of reduced demand or reduced occupancy is going to be shared between us and the landlord. So, we will be less impacted in managed aggregation versus in a straight lease kind of a center.
Pranav Shrimal
Okay, sir. And sir, the second question…
Operator
Sorry to interrupt you, sir. I would request you to rejoin the queue for your follow-up question. Thank you. The next question is from the line of Akshat [Phonetic] from Niveshaay Investments Advisory. Please go ahead.
Akshat
Congratulations. First of all…
Operator
Sorry to interrupt you, sir. I would request you to please use your handset.
Akshat
Okay. Am I audible now?
Operator
Sir, I would request you to speak a little louder.
Akshat
Okay, okay. So, first of all, I would like to ask what will be the effect of disbursement [Phonetic] of Awfis Care segment? It has around 3,000 employees. So, would we reduce employee cost at large number?
Amit Ramani
So, if I understood your question correctly, the question was with the Awfis Care reduction of 3,000 employees, will it have an impact on our employee cost, right?
Akshat
Yes.
Amit Ramani
Yeah. So, see, in this Awfis Care business, the employee cost is kind of a cost of goods, right, in some way. So, technically, the business went away, and the cost went away, so I don’t think overall on the employee cost, there would be a major impact. But, obviously, we had certain impact which was not billed to the client — the staff was not billed to the client. So, to that effect, it will have a positive impact to the overall employee cost. It will actually go down a little bit.
Ravi Dugar
But that cost will come under other expenses line.
Akshat
Okay, okay. So, another, what is — is there any breakup for seats under managed office and seats available for co-working?
Sumit Lakhani
Sorry, I couldn’t understand your question. You have to be a bit louder.
Akshat
So what number of seats are available under managed office model and how many seats under co-working model?
Sumit Lakhani
So — okay. So your question is basically the total number of seats under straight lease model and the managed aggregation model.
Amit Ramani
No, no. So I’ve understood. You are asking under managed office and under co-working, what is the split? Broadly speaking, about 30% of our business is from managed offices and about 70% of our business is from co-working.
Akshat
Okay, okay. So is there any trend about like…
Operator
Sorry to interrupt you, sir. I would request you to rejoin the queue for your follow-up question. Thank you. The next follow-up question is from the line of Rishith Shah from Nuvama Wealth PCG. Please go ahead.
Rishith Shah
Yes, thanks for the opportunity again, sir. Just one question on the Elite brand. So, we have mentioned the number of centers that we are planning to go ahead with. But in terms of seats, if you can tell us what is the seat count in the Hyderabad center and also the four centers that we are planning?
Sumit Lakhani
So, the typical seats we are exploring is about 700 to 1,000 seats per center. So, that’s the typical guideline with which the supply team is working. 700 seats is primarily across the Hyderabad center. With respect to a few other centers, a couple of them are a bit larger. Their seats ranges from about 1,000 to 1,300. But, overall, from our overall expansion in Elite, we are looking at a sweet spot about 700 to 1,000 seats per center.
Rishith Shah
Okay. Thank you. That was it for me. Thank you.
Operator
Thank you. The next question is from the line of Krishna Shah from Ashika Stock Broking. Please go ahead.
Krishna Shah
One small question. Do we plan to launch a SM REIT at any point in time to raise funds?
Sumit Lakhani
So, as of now, there is no plan.
Krishna Shah
Okay. Got it. Thank you so much.
Operator
Thank you. The next question is from the line of Simanto [Phonetic] from H.S. Securities Private Limited. Please go ahead. Mr. Simanto, I would request you to please speak — ask your question.
Simanto
Yeah. Hi, thanks for the opportunity. Am I audible?
Operator
Yes, sir, you’re audible.
Simanto
Yeah. So just wanted to know that in terms of seasonality, how it affects our business like Q-o-Q or Y-o-Y if you can highlight on that?
Sumit Lakhani
So, from the overall seasonality perspective in terms of the demand of seats, we don’t see any kind of a major impact. Some minor impact we see is a bit of seat signing gets a bit deferred for few weeks during the festival seasons or the end of the calendar year, but it doesn’t have any kind of meaningful impact on the business.
On the cost side, there is a bit of impact during the — on utilities. So, across various regions during the summer months, there is a bit larger impact and utility bills are a bit on a higher side.
Simanto
Okay, thank you. All the best.
Operator
Thank you. Ladies and gentlemen, due to time constraint, we will take that as the last question. I would now like to hand the conference over to the management for closing comments.
Sumit Lakhani
We thank everyone for joining the call today. We hope we have been able to give you a detailed overview of our business and also answer your queries. Should you have further queries or clarifications, please feel free to reach out to SGA, our Investor Relations Advisors Thank you and wish you all a very happy and prosperous day.
Operator
[Operator Closing Remarks]