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Operational performance on track

Second best quarter in its history and best ever 2Q in terms of pre-sales

* LODHA reported its second best quarter of pre-sales in its history and its best ever second quarter, with sales bookings of INR31.5b, up 57% YoY and 12% QoQ. Residential sales grew 52% YoY and 19% QoQ to INR29b, including INR5.2b of sales from the DM project.

* Micro-market performance: Sales in south-central Mumbai, western and eastern suburbs, and Pune were driven by launches. The same fell by 40% QoQ in its Township projects in Thane and the extended eastern suburbs.

* Sales volume fell 5% QoQ to 2.1msf, while blended realization rose 25%. LODHA raised prices by 2% YTD and expect a 5-6% increase in FY23. It launched 1.7msf of projects, and expects to launch 7.3msf in 2HFY23, taking the cumulative launches to 11.7msf.

* P&L performance: Revenue fell 17% YoY and 34% QoQ to INR17.7b due to higher contribution from low realization projects. Adjusted EBITDA stood at INR5.3b, at a margin of 30%. Adjusting for INR11.8b of one-time provision against UK investments and INR3.5b of tax benefits thereon, PAT rose 28% YoY and 3% QoQ to INR3.7b, resulting in a margin of 21%.

FY23 guidance intact across parameters

* LODHA clocked pre-sales of INR60b in 1H, which is 52% of its FY23 guidance of INR115b. We expect the company to report pre-sales of INR119b.

* Collections fell by 9% QoQ to INR24b in 2Q and stood at INR50b in 1HFY23. The management expects collections to pick-up in 2H and reiterated its FY23 guidance of INR11b, leading to higher operating cash flow.

* Net debt declined by just INR0.6b to INR88b. With an expected rise in OCF and INR2.5b of repatriation proceeds from UK entity, the management remains confident of paring its net debt to INR60b.

Key highlights from the management commentary

* Mortgage rates: The company hasn’t seen any impact on demand due to a rise in mortgage rates as conversion rates remain at 8-10%. It expects rates to peak out with another 50bp hike. The management highlighted that demand is more dependent on job creation and security than on mortgage rates. As long as it continues, it expects demand to stay strong.

* Business development: LODHA added four new projects in 2QFY23, with a GDV of INR31b. The pipeline remains strong and its FY23 BD guidance will be comfortably achieved. Given that the company has achieved over 60% of its FY23 BD guidance, investments towards the same will moderate in the second half of the fiscal.

* UK investments: The company received INR1b in 2QFY23 and will receive an additional INR10b in CY23. To reflect the impact of the depreciation in the GBP v/s the INR and a weakening UK economy, LODHA made a one-time provision of INR11.7b.

Valuations imply limited premium for sustained growth; maintain our Buy rating

* We maintain our pre-sales estimate, but reduce our FY23 PAT estimate by 7% to reflect one-time provisioning. We incorporate lower repatriation from UK investments, both in NAV and cash flow estimates, resulting in a 3% decline in our TP to INR1,530, implying a potential upside of 55%.

* We remain confident on the company pre-sales growth trajectory as well its ability to build its future project pipeline. At the CMP, the stock trades at 1x P/NAV, indicating limited premium being assigned to growth beyond FY23. We maintain our Buy rating on LODHA.

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