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On a strong footing; initiate with BUY

We initiate coverage on Macrotech Developers Ltd. (LODHA) with a BUY rating based on 1x March 2022 DCF based NAV of Rs800/share. The company is among India’s leading residential developers by sales value over FY17-21 and is the market leader in the Mumbai Metropolitan Region (MMR) with a double digit market share.

We expect the company to clock Rs300bn of cumulative sales value over FY22-24E and generate a post-tax operating surplus of Rs121bn over the same period. The robust cash flows combined with inflows of Rs40bn from IPO/promoter debt repayment in H1FY22 is estimated to enable the company to significantly reduce India business net debt to Rs37bn by FY24E from Rs161bn in FY21. Key risks to our rating are a demand slowdown in the MMR residential market and rising interest rates in India.

* Largest residential player in MMR with double digit market share: Macrotech Developers Ltd. (LODHA) is one of the largest real estate developers in India, by residential sales value for FY17-21 with an estimated 5% pan-India market share. Further, the company is the largest residential developer by sales value in the Mumbai Metropolitan Region (MMR) and has been able to consistently clock strong sales momentum and collections at an adjusted EBITDA margin of over 30% during FY18-21. The MMR is the largest market in terms of sales value among India’s Tier 1 cities with a 45% share of pan-India sales value and we estimate that the company has been able to maintain a ~10% market share across the region over FY17-21.

* Estimated cumulative sales value of Rs300bn over FY22-24E: As of Mar’21, LODHA has a total unsold inventory value of Rs238bn consisting of Rs78bn of ready-to-move inventory with balance Rs160bn in ongoing projects. We believe that the monetization of this inventory over the next 24-36 months combined with new launches will enable the company to generate cumulative sales value of Rs300bn over FY22-24E. While the company has given a formal FY22E sales booking guidance of Rs90bn, we have built-in Rs88bn of sales bookings for the same period and expect LODHA to clock over Rs100bn of sales bookings each in FY23-24E including logistics/warehousing land monetization.

* On track for significant debt reduction by FY24E: As of March 31, 2021, the company had consolidated net debt of Rs160.8bn in its India business. Post listing, the company has made significant initial progress towards its intent of becoming a net cash company by March 2024. This includes IPO proceeds of Rs25bn in Q1FY22 along with Rs15bn of total promoter loans expected to be repaid in H1FY22 (Rs4bn already repaid in Q1FY22). While these inflows will effectively reduce net debt levels to Rs120.8bn in the near-term, we expect LODHA to generate post-tax operating cash flow surplus of Rs121.4bn over FY22-24E along with Rs10.0bn of proceeds from London business. Combined with reduced interest costs, we expect company’s consolidated net debt to reduce to Rs36.7bn by March 2024 (net debt/equity of 0.3x). We believe that the company can comfortably manage with a net debt/equity ratio of up to 0.5-0.6x across cycles.

* Valuations: We initiate coverage on LODHA with a BUY rating and target price of Rs800/share based on 1x March 2022 DCF based NAV of Rs358bn. Our Gross Asset Value (GAV) of Rs458bn includes Rs324bn for FY23-30E post-tax-FCFF, Rs114bn for company’s land back of 3,800 acres (25% discount to market value) and Rs20bn of UK project surplus. Adjusted for FY22E India business net debt of Rs101bn, we arrive at our NAV of Rs358bn. Our NAV excludes value accretion from potential JDAs in FY22-23E.

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