This promising workspace provider is flying under the radar

India's commercial office leasing market is booming, thanks to the rising number of Global Capability Centers in the country. As a result, flexible office spaces are also flexing their muscles. The supply of these co-working spaces has grown 24 per cent annually between 2021-23 in tier 1 cities, up from 14 per cent prior to the Covid pandemic. This is fueled by demand from startups whose numbers have sprouted rapidly by 42 per cent annually between 2018-23. Another driver aiding the growth has been the adoption of hybrid work models.

Quest for the best bet available

All eyes are now on top players that are cashing in on the industry's growth prospects. And Awfis Space Solutions is at the top of the pile. The company, which is India's largest flexible workspace solutions player, got recently listed with flying colours on May 30, 2024, and has soared more than 30 per cent since then. The company's revenue grew rapidly by more than five times between FY19-24. However, it has also incurred losses during this period.

But what if we told you there is a profit-making competitor that is flying under the market's radar? That too, when it has a similar market cap and balance sheet size as that of Awfis.

The old runner

Established in 2014, EFC Ltd is India's first listed company that offers integrated services in the managed office space. The company, however, has not gained any spotlight in the market as it had gone public indirectly by acquiring a majority stake in a listed company-Amani Trading and Exports-and changing its operations, board of directors and name.

EFC operates in 35 centres across seven cities under various brands like Sprint, White Hills, and Ek Design, providing office space management solutions like co-working spaces, interior design and furniture manufacturing.

How does EFC fare against Awfis?

• Occupancy levels: EFC has grown judiciously over the years, consistently maintaining occupancy levels above 90 per cent. On the other hand, Awfis has yet to achieve such high occupancy due to its rapid expansion spree. Its occupancy rate was 71 per cent as of FY24.
  Occupancy levels are crucial for creating operating leverage that aids profitability. As of FY24, employee costs and other expenses made up about 48 per cent of Awfis' revenue, while these expenses were only 12 per cent of EFC's revenue. That said, Awfis was able to break even recently in Q4 FY24. Further improvement in occupancy rates can help it lift its profit figures.
  
• Backward integration: EFC has broadened its operations for value-added services, keeping a solid edge over Awfis that deals with third-party players. EFC incorporated White Hills for interior designing, which helps it offer fit-outs on its own i.e., setting up furniture as per the needs of its tenants. It also incorporated Ek Design recently to manufacture furniture, integrating its operations further. The company is setting up a furniture production facility, which will commence operations by Q2 FY25. The management expects the furniture segment to generate an EBITDA margin of 40 per cent ahead in line with the company's overall margins.
  
• Other growth vehicles: The company is opting for more vehicles to accelerate its core business growth. It is eyeing to reduce its dependency on landlords or office space owners. For this, it will soon set up real estate investment trust companies (REITs) and Alternative Investment Funds (AIFs) to use investors' money for owning real estate, including office spaces, and earning through their management fees.

Our view

The prospects for the co-working space industry are solid and will ensure good business for both the companies, given the penetration levels still remain as low as 14 per cent (for FY24) in the commercial office space across tier-1 and 2 cities. However, EFC fares better than Awfis given it is consistently profitable and is entering new growth ventures. EFC also targets to grow its seating capacity by 78 per cent in FY25 compared to Awfis' growth target of 58 per cent for the year.

That said, the flexible office space sector faces a risk of competition from not only new entrants, but also traditional real estate players. The success of the industry can encourage large commercial real estate developers to start offering flexispace solutions and even the value-added services themselves. This can reduce the co-working and managed office space industry's use case.

This story is not a recommendation. Please do your own research before making an investment decision.

Also read: From hero to zero: Why this iconic film producer is in crisis