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Resilient performance in challenging quarter

Macrotech Developers Ltd.’s (LODHA) delivered a resilient Q1FY22 performance with sales bookings of Rs9.6bn which are up 88% YoY and down 62% QoQ. Seen in context of significant second Covid wave impact in the Mumbai Metropolitan Region (MMR), we believe that this is a resilient performance. The company also reduced its India business net debt by Rs36bn QoQ to Rs125bn enabled by net IPO proceeds of Rs24bn and promoter loan repayment of Rs16bn during the quarter.

We believe that the company is on track to achieve Rs80-90bn of sales bookings in FY22E and also reduce its India net debt to Rs100bn by Mar’22. We revise our target price to Rs927/share (earlier Rs800) as we assign a 10% premium to our Mar’22 NAV of Rs843/share considering new JDA signings over FY22-24E. However, we cut our rating to ADD from BUY post the 44% appreciation in stock price in the last three months. Key risks to our rating are a demand slowdown in the MMR residential market and rising interest rates in India.

* Q1FY22 saw improvement from June 2021 in sales bookings: LODHA clocked Q1FY22 sales bookings worth Rs9.6bn which were up 88% YoY and down 62% QoQ. While April and May 2021 saw sales worth just Rs3.0bn owing to impact of second Covid wave in the Mumbai Metropolitan Region (MMR), the company has clocked sales worth Rs6.5bn in June 2021. The company has to clock ~Rs80.4bn of sales bookings in the remaining nine months of FY22E to meet its sales guidance of ~Rs90bn for FY22E. We believe that meeting the guidance will be contingent on no further impact from a third Covid wave in FY22, possible fillip from stamp duty cuts in Maharashtra, contribution from logistics/warehousing land monetization and new launches through the JDA route.

* India business net debt reduces by Rs36bn QoQ to Rs125bn: As of Mar’21, the company had India business net debt of Rs160.8bn. Post listing, the company has made significant progress towards debt reduction in Q1FY22 with net IPO proceeds of Rs24bn along with repayment of Rs16bn of promoter loans. Against the total inflow of Rs40bn from IPO proceeds/promoter loan repayment, the company’s India business net debt has reduced by Rs36bn QoQ to Rs125bn as of June’21 implying a cash flow deficit of Rs4bn for the core business. While the company clocked net collections of Rs15.1bn during the quarter, spend of Rs9.4bn on construction/overheads, interest costs of ~Rs5.6bn along with Rs4.0bn of land capex has led to the deficit. Company has given a formal guidance to reduce its India business net debt to ~Rs10bn by Mar’22 and improvement in sales of completed inventory, higher collections and reduction in interest costs remain key.

* New JDAs of 1.5msf added during the quarter in MMR: The company has added two new projects in MMR under the Joint Development Agreement (JDA) model spread over 1.5msf with 1.2msf in the Western suburbs and 0.3msf in Eastern suburbs. As per our channel checks, these projects would be in the micro-markets of Malad-Borivali and Mulund East, respectively with a possible launch targeted in H2FY22.

* Valuations: We revise our target price to Rs927/share (earlier Rs800) assigning a 10% premium to our Mar’22 NAV of Rs843/share considering new JDA signings but cut our rating to ADD from BUY post the 44% appreciation in stock price in the last three months. Our Gross Asset Value (GAV) of Rs477bn includes Rs324bn for FY23-30E post-taxFCFF, Rs133 for company’s land bank of 3,800 acres and Rs20bn from UK project surplus. Adjusted for FY22E India net debt of Rs101bn, we arrive at our NAV of Rs377bn.

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