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Our Take

Mahindra Lifespace Developers Ltd (MLDL) is a leading real estate and infrastructure development player, and a part of the USD 19.4 billion Mahindra Group. It came into existence with the demerger of the property development division of Great Eastern Shipping. The company is into design, development, construction, and marketing of residential and commercial projects. MLDL, along with its subsidiaries, is engaged in various infrastructure projects including development of SEZs, development of real estate, residential projects in the mid-premium and affordable housing segments, integrated cities and industrial clusters.

The company has an established track record, backed by a strong brand name, timely execution, and high salability of projects. Currently, it has over 5,000 acres of ongoing and forthcoming integrated townships and industrial cluster projects in three cities. MLDL’s development footprint spans 25.7 million sq. ft. (2.4 million sq. m.) of completed, ongoing and forthcoming residential projects across seven Indian cities. A pioneer of the green homes movement, MLDL is one of the first real estate companies in India to have committed to the global Science Based Targets initiative (SBTi). The group also enjoys a strong presence in renewable energy, agribusiness, logistics, and real estate development.

MLDL follows a mixed strategy of real estate development, viz. industrials clusters, integrated cities, mid luxury, affordable housing, etc. It has adequate liquidity, driven by cash equivalents of about Rs 132cr as of FY20. The company is expected to continue generating healthy surplus cash flows from its residential projects in the near to medium term. In its commercial segment, it generates a stable O&M/lease rental income of about Rs 80cr per year, while incremental investments are expected to be modest. On the one hand, landowners want to partner with strong groups like MLDL while, on the other, banks want to lend and buyers are inclined to buy under-construction projects from renowned players like MLDL. We believe MLDL is in a sweet spot to capture and expand its market share.

Valuations & Recommendation:

MLDL has guided for an outlay of Rs 500cr per annum for land acquisition, with potential of 4x gross development value (Rs 2,000-2,500cr of sales value, 3-4mn sq ft in volumes). This shall add about Rs 1,000cr annually to the legacy pre-sales average of Rs 700-1,000cr, implying doubling of sales from FY23E, assuming one-year time from land acquisition to launches. Low market rates and lockdown infused demand has boosted affordability, particularly for low and mid income and affordable housing consumers who are reliant on home loans to make their purchase. Most of the sites are operating at between 70% to 80% of the target labor strength. MLDL has appointed Mr. K.R. Sudharshan as a Chief Project Officer, who has had over 20+ years of experience with Sobha. New additions to the management team, which are a mix of Lodha (CEO, CMO, and CSO), Tata Housing (CLO) and Sobha (CPO), are expected to bring superior business acumen in identifying growth opportunities.

There has been monetization of finished goods, which is proceeding faster than completion of projects; this means finished goods inventory will be coming down for a couple of quarters. MLDL’s internal accruals, cash & cash equivalents and unutilized bank lines are sufficient to meet its repayment obligations as well as incremental construction costs. It has access to cheaper funds and enjoys ~20% lower cost than peers. Further, the company’s focus on affordable housing and lower ticket sized apartments bodes well. We currently like the stock due to (a) uptick in housing demand, (b) concessions on FSI premium by Maharashtra State Government and cuts on stamp duty, and (c) quickly managing dwindling inventories. Further, various micro and macro tailwinds are in place for a comprehensive recovery over the next 2-3 years.

Residential real estate sector - affordable housing is enjoying favorable government policy support. Low interest rates environment is improving affordability and driving demand. Government reforms like demonetization and RERA have led to widespread consolidation in the sector and improved accountability of the players. MLDL benefits from the strong pedigree, brand name, trust and reputation of the Mahindra group. Customers are looking to buy from large, organized and well-known corporate players like Mahindra. MLDL is substantially scaling up its operations with the help of top-notch talent in the sector.

Over the past decade, real estate has seen a sea change and current tailwinds are favoring organised players. MLDL, according to us, is a value play in all the residential segment, viz., luxury, mid-income and affordable, and stands to be a beneficiary of the cyclical uptick.

Though SOTP / DCF would be the right way to value real estate companies (although with a lot of assumptions), we have tried to ascribe P/E valuation that could consider the effect of the other two valuation methods. We believe investors can buy at Rs. 454.0 (16.0x FY23E EPS) and add on dips at Rs. 418.0 (14.8x FY23E EPS) with a base case target of Rs. 511.0 (18.0x FY23E EPS) and bull case target of Rs. 567.0 (20.0x FY23E EPS) over the next two quarters.

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