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Strong deal addition momentum to drive pre-sales growth

* Macrotech Developers (LODHA) reported a strong all-round performance in 3QFY22. It delivered the best pre-sales in the last 12 quarters along with 44% YoY growth in collections that led to INR4b reduction in net debt.

* Progress on business development gathered momentum post the recent QIP, as the company signed six new projects in 3QFY22 with saleable area of 4.8msf and revenue potential of INR100b.

* We retain our FY23E/FY24E pre-sales backed by strong momentum in both sales bookings and deal additions; but, we lower our FY22/23 collection and OCF estimates by 2-8% to adjust for the ongoing collection and construction spend run-rate. We maintain our BUY rating on LODHA with an unchanged SoTP-based TP of INR1,700 (implying 34% potential upside).

Best quarterly sales performance over the last 12 quarters

* LODHA’s pre-sales grew 40% YoY/30% QoQ to INR26b, the highest in last 12 quarters, led by higher contributions from South & Central Mumbai (+34%QoQ) , Ext. Eastern suburbs (EES; +42%QoQ) and Western suburbs (+4x QoQ).

* Sales in Western suburbs were buoyed by a launch in Kandivali (LODHA Woods). Overall, the company launched 2.2msf across three projects in EES (1.6msf), Western suburbs (0.5msf) and Thane (0.1msf).

* Realization declined 10% YoY but improved 4% QoQ despite higher contribution from affordable/mid-income projects (63% in 3QFY22 v/s 61% in 2QFY22).

* LODHA’s revenue increased 36% YoY to INR20.6b. Adjusted EBITDA rose to INR7.0b, up 55% YoY, while margin improved 400bp YoY to 34%. Adj. PAT grew two-fold YoY to INR2.8b with a margin of 13%.

Net debt reduced to below INR100b led by strong cash flows and QIP

* Collections improved 44% YoY to INR21.3b. Operating cash flow remained flat at ~INR10b due to marginal increase in construction spends.

* By netting off land-related investments (INR1.6b) and interest costs (INR4.2b), the company generated a surplus cash flow of INR4b in 3QFY22.

* During 3QFY22, it also raised INR40b via QIP of which it has spent INR19b towards new project additions, approval costs and stake buyout in Palava.

* Thus, with INR21b of surplus QIP money and strong internal accruals, the company’s net debt declined to INR99b. Net debt-to-equity stood at 0.9x versus 1.6x in 2QFY22.

* Going forward, LODHA expects its collections run-rate to match up to presales run-rate of INR25-27b. Backed by reduction in net debt and lower interest rate, interest outflow is expected to decline to INR8b in FY23 from INR18b in FY22, leading to further cash flow improvements.

Key management call highlights

* Demand – LODHA continues to witness healthy on-ground sales momentum across its projects and locations with consistent increase in customer site visits and conversion rates. During the quarter, it witnessed 10% YoY rise in site visits to ~27,000 along with the highest ever conversion rate of 9%, up ~200bp YoY.

* Pricing – Over the last nine months, LODHA has taken 3-9% price hikes (average 5%) across its portfolio and expects to end FY22 with an average 6% YoY rise in realization. However, management expects realization growth would continue to remain below wage growth of 7-8% in future.

* Deal addition momentum to continue – Management reiterated that it is still at the initial stages of capitalizing the consolidation opportunity and there are ample prospects for business development. LODHA expects the deal addition momentum to continue and will spend ~INR3-4b/quarter for JDA investments.

Valuation and view: FY22 pre-sales guidance maintained; retain BUY

* LODHA saw a minor impact from Omicron on its business activities as sales runrate declined by INR2b in Jan’22, though construction activities remained on track. It anticipates recovering the lost sales during the quarter and hence maintained its pre-sales guidance at INR90b for FY22.

* Underpinned by continued demand momentum and strong deal additions, we maintain our FY23/24 pre-sales estimates. However, we reduce our FY22/23 collection and operating cash flow estimates by 2-8% to adjust for the ongoing collection and construction flow run-rate.

* We reduce our FY22E/23E EBITDA by 3-9% due to lower-than-expected 3QFY22 margin, but it is offset by higher other income that kept our Adj. PAT estimates largely constant.

* We maintain our BUY rating on LODHA with an unchanged SoTP-based TP of INR1,700 (implying 34% potential upside).

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