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Turning the tide with renewed vigor

Gaining market share through a focused growth strategy

* Mahindra Lifespace Developers (MLDL), a part of Mahindra group, is one of the leading residential developers with a strong presence in Mumbai and Pune. It is gradually expanding its footprint in Bengaluru. MLDL also operates the Integrated City & Industrial Cluster (IC&IC) segment in which it monetizes the land bank by providing plug and play industrial infrastructure for manufacturing units.

* Despite being in business for close to three decades, MLDL’s lack of aggression has led to a stagnant pre-sales of INR7-8b over the last seven years and has lagged its peers in terms of growth. However, given the industry tailwinds and shift towards branded developers, Mahindra group is now gearing up to unlock the growth potential in its real estate vertical and has also undergone some key senior management changes.

* Management aims to grow its pre-sales by 2.5x to INR25b in the next three years (FY25E) by scaling up launches and project additions. The company has already added 9msf of projects over the last three years in its core markets and is further evaluating projects worth INR50b.

* MLDL currently has 9msf of inventory across ongoing and upcoming projects, with a revenue potential of INR90b. It is also looking to unlock 68 acres on Ghodbunder Road (Thane), which should add 8-10msf to its project pipeline. Given the strong pipeline, we believe its FY25 pre-sales target can be achieved a year in advance.

* The IC&IC segment will continue to be a cash contributor, with ~2,000 acres of inventory across existing and upcoming locations that is likely to generate cumulative surplus cash of INR20-22b over next 10 years.

* We are confident of MLDL’s ability to add projects in the future, given its: 1) strong visibility and recent success, and 2) robust cash flow potential from both the Residential and IC&IC businesses. We initiate coverage on MLDL with a BUY rating and an SoTP-based TP of INR550, implying a potential upside of 17%.

* Key risks: a) inability to close land deals and b) slowdown in IC&IC leasing

Strategic focus to revive the real estate vertical

? Over the years, MLDL has earned a strong brand recall through its superior execution but has however lagged peers on growth due to lack of aggression.

? However, given the industry tailwinds and an ongoing shift towards organized developers with solid execution track record, Mahindra group is now sensing a strong growth opportunity for its real estate vertical.

? Over the last two years, the company has undergone some key management changes including the appointment of Mr. Arvind Subramanian as MD & CEO in FY21. It is also building internal capabilities through appointment of new heads across functions such as marketing, sales, project execution, and legal.

? New management, with its aligned growth vision, is targeting to grow its presales by 2.5x to INR25b over the next three years (FY25E) through scaling up launches and augmented business development.

Strengthening project pipeline; targets INR25b in pre-sales by FY25E

* Over the last three years, the company has already made a strong progress in business development and has signed 9msf of new projects with a revenue potential of INR80b across its core markets of Mumbai and Pune. 200 300 400 500 600 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Mahindra Life. Sensex - Rebased Initiating Coverage | Sector: Real Estate Mahindra Lifespace Developers Mahindra Lifespace Developers October 2022 4

* Backed by strong project additions, the company currently has 9msf of inventory across ongoing and upcoming projects, with a revenue potential of INR90b expected to be realized over next four-to-five years.

* The company aims to add projects with a gross development value (GDV) of INR20b, annually, for next two-to-three years. It is currently evaluating projects with a GDV of INR50b, indicating strong visibility.

* MLDL is also in the process to unlock a large 68-acre parcel on Ghodbunder Road (Thane) and aims to launch the first phase of the same in 1HFY24E.

* While we expect its pre-sales to touch IN22b by FY24, further project additions and timely launch are likely to ensure that the MLDL achieves its targeted presales of INR25b by FY24 itself.

IC&IC segment to be the enabler of growth in the Residential segment

* MLDL’s Residential segment is expected to generate cumulative operating cash flows of INR14b (net off the overheads) from its existing pipeline over FY23-25E.

* The company saw a pick-up in leasing in its IC&IC segment as it leased 110 acres in FY22 (v/s 46 acres in FY21) and generated an income of INR3b.

* With 990 acres of inventory at its existing locations in Chennai and Jaipur, and 1,000 acres in Ahmedabad, Pune, and Chennai Phase II to be monetized under the IC&IC segment, the management aims to clock an annual leasing income of INR5b by FY25E.

* A large part of the land and supporting infrastructure cost is already paid out, which will lead to healthy annual cash generation of INR1.5-2.0b as leasing further scales up. These cash flows will be sufficient for the company to meet its growth capital requirements for its Residential business.

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