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Fresh ambition, fresh upside

Mahindra Lifespaces Developers Ltd (MLDL) is perceived to have missed the real estate cycle despite being an early starter. There is no point delving into what has gone wrong; instead we take a fresh look at what can transpire over the next few years. What has changed? Aggression: top management is a mix of Lodha (CEO, CMO, and CSO), Tata Housing (CLO) and Sobha (CPO). Financial strength: it has the lowest borrowing with ~20% lower cost than peers. Business Development (BD) pipeline: guidance of Rs 5bn/annum Capex on land with Rs 20-25bn pre-sales potential. Brand: invokes trust, transparency and corporate governance. Own land bank: captive land parcels and access to group’s land bank. MLDL is on the path to multiyear rerating. We initiate with a BUY recommendation and Mar-22 SOTP of Rs 773/sh.

* Recent management changes lend diverse expertise and scale (3-4x of MLDL): Under the leadership of Mr Arvind Subramanian, the group has seen many changes. The sales engine is strengthened with the hiring of Mr Viral Oza – ex-Chief Marketing Officer of Lodha Group. Legal – hiring of Ms Parveen Mahtani as Chief Legal Officer (ex-head legal and compliance at Tata Housing) bolsters the land due diligence. Execution – the hiring of Mr Sudarshan KR as Chief Project Officer (ex VP – Sobha) may strengthen the overall execution, budget compliance, project completion, etc. Mr Arvind Subramanian –CEO MLDL is ex-Regional CEO and Mr Vimalendra Singh – Chief Sales Officer MLDL - is ex-VP/Market Head of Lodha Group.

* Multiple triggers in place for long-term value creation: MLDL has multiple legs to its growth story: (1) launch pipeline/unsold inventory with Rs 23bn of cash flow potential; (2) captive land bank (60acres in Ghodbunder, ~400acres near Pune and 1,000 acres in Murud), where the development potential may add many times to overall value; (3) new BD land bank addition of 3-4mn sq ft annually; (4) land bank of the parent (like 40acres in Kandivili), which may get developed jointly on DM/profit share model; and (5) NAV premium, if all the above triggers fall in line. We ascribe 50% NAV premium to Godrej Properties for its growth orientation and aggressive land inventory additions. On MLDL’s low base of Rs 7-8bn annual pre-sales, the NAV premium can me much higher, given aggressive expansion plans.

*  2-3x existing pre-sales doable, with near net cash balance sheet: MLDL is focusing on MMR, Pune and Bengaluru as the key target markets for growth. The recent premium cuts in MMR augur well for MLDL as it has strong BS/liquidity. Borrowing costs at 5-7.5% are the lowest vs peers, which is a good sign for land bank acquisitions. On the one hand, landowners want to partner with strong groups like MLDL while on the other, banks want to lend, and buyers are inclined to buy under-construction projects. MLDL is in a sweet spot to capture and expand its market share.

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