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Clarity on expansion strategy provides strong growth visibility

We recently met with the management of Macrotech Developers to understand: a) their mitigation plans to tackle the rising interest rate scenario, b) its medium-term growth strategy, with its entry into the Bengaluru market, and c) outlook on the digital Infrastructure business after entering into an USD1b platform partnership.

‘Interest locked’ initiative to sustain affordability

* In the management interaction after announcing its 4QFY22 earnings, it said it has mitigation plans in place to absorb the impact of the over 50bp increase in interest rates, which, as per an internal study, does have a minor impact on housing affordability.

* RBI raised the repo rate by 90bp, which led to a subsequent rise in mortgage rates to 7.6%. As a result, LODHA recently introduced its ‘interest locked’ initiative, which offers fixed-rate loans at 6.99% to its customers until Jun’24.

* As per its assessment, these lower rates will help home buyers save 1- 1.5% and mitigate the higher EMI burden, until it is offset by income growth in two years. The margin impact for LODHA will not exceed 1.2%

The ‘20-20-20’ strategy - Targets pre-sales of INR200b by FY26

* The management has guided for INR115b of pre-sales (up 27% YoY) in FY23, of which the Residential segment is expected to contribute INR105b, up 24% YoY.

* Beyond FY23, LODHA will follow its ‘20-20-20’ strategy over the medium term to deliver 20% growth in pre-sales, maintaining PAT margin at 20%, and generate a RoE of 20%. Under this strategy, the management expects pre-sales to reach INR200b by FY26.

* The company currently has an upcoming pipeline of 30msf over the next three years, which, along with ready and ongoing unsold inventory, is valued ~INR500b. The existing pipeline is expected to contribute residential pre-sales of INR110-120b, which should suffice for targeted growth over the next two years, but will need further project additions to sustain the growth beyond FY24.

* The management aims to continue the momentum in deal additions and add projects with a GDV of INR150b in FY23. While it has progressed well in increasing its exposure in Mumbai, it is aiming at scaling up project additions in Pune and the newly entered market of Bengaluru.

Deleveraging to continue despite aggressive growth targets

* The management expects to generate INR60b of operating cash flows in FY23, which will be largely utilized to pare down its debt below INR60b from INR90b as of Mar’22.

* We expect operating cash flows to sustain at INR50-60b over the next three years, leading to a healthy surplus for growth. Beyond FY24, LODHA is looking to introduce a formal payout policy for a regular dividend stream to shareholders.

* As the company strategically continues its disciplined execution approach and avoids any over commitment on land with asset light approach, we expect its Balance Sheet strength to remain intact post de-leveraging.

An USD1b digital platform to enable faster land monetization

* In May’22, LODHA entered into a Green Digital Infrastructure Partnership with Ivanhoe Cambridge and Bain Capital to form a USD1b platform that will develop ~30msf of industrial and logistics parks and an in-city fulfillment center in multiple cities.

* LODHA will infuse land into the partnership as a part of its equity contribution, while the other two partners will contribute USD200m in equity. It has the option to infuse land higher than its stake, which will enable an upfront capital release. Construction will be taken care of by USD400m of debt in the platform

* The fund once fully deployed over the expected timeline of four-to-five years will help generate an Annuity income stream of INR5-6b for the company

Valuation and view

* We raise our FY24 pre-sales estimate by 7% to incorporate recent JDA additions in the Eastern suburbs and South-Central Mumbai.

* The management has laid out a clear growth strategy as it looks to capture market share in micro-markets with a niche presence. In line with its growth strategy, the company has already added 14 new JDA projects with a GDV of INR210b, which gives us confidence on future project additions.

* At the CMP, the stock trades at 1.1x its existing project NAV, which indicates that the market is not offering much value to its ability to undertake further project additions beyond FY23. We maintain our Buy rating on the stock with our unchanged SoTP-based TP of INR1,570, indicating a potential upside of 44%.

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