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Tapping new markets; strong outlook on cash flows

FY23E launch pipeline raised to >11msf; pre-sales guidance reiterated

* Macrotech Developers (LODHA) reported its best ever first quarter pre-sales with bookings of INR28b. Of this, residential segment contributed INR24b (down 22% QoQ), while land sales and others accounted for the rest INR4b.

* Sales volume, however, dipped 27% QoQ to 2.2msf while blended realization improved 6% QoQ. LODHA raised prices by 1.5-2.0% QoQ at the portfolio level.

* The company launched 2.7msf of projects in 1QFY23 and further expects to launch 8.5msf in the remainder of FY23, taking the cumulative launches to 11.2msf v/s 8.7msf guided in 4QFY22. Additions included 2.1msf from new projects with saleable area of 5.1msf and GDV of INR62b.

* Management reiterated its FY23 pre-sales guidance of INR115b (+27% YoY), of which residential will contribute INR105b (+24% YoY).

Debt reduction continues; adopts formal dividend payout policy

* Collections rose 53% YoY but declined 8% QoQ to INR26b while OCF remained flat at INR14b in 1QFY23. Net surplus of INR4.4b was utilized to reduce net debt to INR88b. LODHA remains on track to reduce debt to below INR60b.

* Given the strong visibility on cash flows, the company adopted a formal dividend policy with intention to pay 15-20% of PAT starting FY23E. We estimate an annual payout of INR3-5b over FY23-26, at a yield of 0.5-1.0%

Key highlights from the management interaction

* Foray into Bengaluru: LODHA entered the Bengaluru market by signing one JDA project having GDV of INR12b. The city has only 4-5 large developers and the company is targeting 10% market share over the next five years.

* Cost: LODHA has witnessed 2.2% sequential decline in cost, bringing the overall annualized cost inflation to 9% p.a. since Apr’21. This, in turn, translates into an impact of <2% on cost basis on the overall portfolio. Further, it continues to take modest price hikes of 1.5-2% each quarter.

* Dividend: LODHA has deliberated on key parameters such as maintaining surplus cash, future growth requirement, etc. before arriving at 15-20% payout. The company can revisit this depending on how things move in terms of both macroeconomic and business perspectives.

Valuations imply limited premium for sustained growth; Maintain BUY

* We maintain our pre-sales and cash flow estimates for LODHA as new project additions are already built-in to our estimates. However, we reduce our FY23 EBITDA/ PAT estimates by 9%/15%, respectively, as we incorporate higher interest charge-off in cost of sales and lower other income.

* The company continues to progress well both on deleveraging as well as seeking its ‘20-20-20’ medium-term growth strategy as highlighted in our recent report.

* At CMP, the stock trades at 1.1x P/NAV indicating limited premium for growth that the company will achieve beyond FY23E. Maintain BUY with an unchanged TP of INR1,570, implying an upside potential of 39%.

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