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Operating scale resetting higher

* We believe Macrotech’s scale of operations is geared for a reset following the soonerthan-anticipated Rs40bn capital raise. Over the next 12-18 months, the developer plans to deploy a majority of the capital in joint development agreements (JDAs) amounting to Rs400bn in gross development value (GDV). This implies a quarterly GDV run rate of Rs60-65bn of new JDAs vs. the previously envisaged run rate of Rs20-30bn per quarter.

* Going deep into new micro markets remains the core strategy. Macrotech enjoys a leadership position in its existing micro-markets with a ~15-30% market share. It aims to replicate a similar market share performance in new markets. In our view, a faster turnaround in terms of both launches and absorption of recently signed JDAs supports the company’s market share ambitions. Notably, the sales-to-launch ratio in Pune/Kandivali has been in the range of 15-60% in 3-4 months after a soft launch.

* We raise our Dec’22 TP to Rs1,600 (vs. Rs1,250 previously), valuing the development NAV at ~Rs1,000 per share and a development NAV premium of Rs600 per share. Key factors driving our TP change include: 1) annual JDA assumption of ~Rs160bn through FY23 to FY27 vs. Rs110bn earlier; adding Rs74 per share to NAV; and 2) development NAV premium of 60% (vs. 35%) arrived by using our proprietary NAV premium framework.

* Operating scale geared for a reset: Since listing in Apr’21, Macrotech has already signed ~4msf of JDAs amounting to Rs46bn as of H1FY22. The listing was followed by a Rs40bn capital raise, which in our view is largely growth capital as we believe Macrotech’s large fast-churning ready inventory and receivables amounting to >Rs200bn are sufficient to address the company’s deleveraging exercise and growth opportunities in the existing portfolio. The developer plans on deploying the capital over the next 12-18 months in JDAs amounting to Rs400bn in GDV, implying a quarterly GDV run rate of Rs60-65bn of new JDAs vs. previously envisaged at Rs20-30bn per quarter. As of H1FY22, we note that the company already has proposals worth Rs70-100bn lined up for H2FY22. We forecast Macrotech achieving sales targets of Rs140bn/Rs200bn well ahead of its guidance for FY24/FY26

* The TP increase factors in the higher scale in existing markets and the expansion into new cities. We raise our annual JDA assumption to ~Rs160bn through FY23 to FY27 from Rs110bn, adding Rs74 per share to NAV. We now also build Bangalore in our JDA assumption with a cumulative market share of ~2% through FY23-FY27. Overall, the blended market share (basis market size in msf) for Macrotech in the three markets (MMR, Pune, Bangalore) is estimated to be ~6.5% for FY23-FY27. For our NAV premium framework (forecast starting FY28), we also include Noida in our assumption with a blended market share of 10% across four markets vs. 8.8% previously for MMR+Pune.

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