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Palava likely to be big beneficiary of infra boom in MMR

Township segment can be a USD6-8b opportunity

Successfully penetrating in new markets

* In FY24, LODHA reported pre-sales of INR145b, up 20% YoY and in line with its medium-term growth strategy. While bookings in its core markets of South & Central Mumbai, Thane and extended eastern suburbs grew by 6% YoY, a large part of the growth was led by new markets.

* As part of its strategy to deepen its presence in MMR and Pune, LODHA has so far acquired ~30msf of projects with GDV of INR550b spread across the new markets of eastern (INR163b) and western (INR52b) suburbs and Pune (INR60b).

* As a result, LODHA has strengthened its presence in new markets, especially in eastern suburbs (MMR) and Pune, which now contribute 14%/13% to total sales compared to 2%/7% in FY22.

* The company successfully forayed into Bengaluru in FY24 and also added a couple of projects. Both projects have received a strong response as 63% of the total launched inventory has been absorbed, resulting in bookings of INR12b (8% of overall sales).

Growth in townships impacted by lower affordable housing demand

* The headwinds of inflation and higher interest rates have significantly impacted the affordable segment as the segment’s share in total sales in top 7 cities decreased to 18% in CY23 from 40% in CY19.

* Similarly, LODHA’s township segment has witnessed subdued growth due to its dependency on affordable housing demand.

* While pre-sales in its township segment recovered to INR22b in FY24 from lows of INR11b in FY21, they remained flat compared to FY18. As a result, the contribution of LODHA’s township segment to overall bookings declined to 15% in FY24 from 30% in FY18.

Changing product mix to drive sales

* As highlighted above, bookings at Palava were traditionally driven by the affordable segment with a ticket size of INR5-7m. However, given the significant upgrade in social ecosystem (schools, retail mall, hospitals, etc.), the township has attracted upper mid-income households.

* The share of 3BHK and large homes has steadily increased to 22% in overall bookings over FY20-1HFY24 compared to 18% before FY14. Its recently launched villa project has also received an encouraging response, with bookings of over INR4b or ~18% of total township sales.

* The management, hence, foresees townships evolving into hubs for premium housing and plans to launch multiple premium products in FY25 at 40-50% higher realization compared to the current pricing. The management is confident of growing its bookings by 30% in FY25 and double its bookings from township projects over the next three years.

Improving infrastructure a key catalyst for scale-up in townships

* MMR is currently witnessing the execution of few large infrastructure projects, which will enhance Palava’s connectivity to key commercial hubs of Mumbai and make it a center of key economic corridors of the city.

* With the absence of any like-for-like competition around Palava, LODHA will be the biggest beneficiary of this improved connectivity and is expected to see a surge in demand for housing as well as industrial land. However, a large part of this scale-up is contingent on timely completion of these projects.

* Palava is already being accepted as a key industrial hub, with the entry of several marquee logistics/warehousing players. As a result, land prices have jumped to INR100m/acre vs. a historical rate of INR30-35m/acre in FY21, catching up with the nearby market, Taloja.

* We expect a similar trend to unfold in the residential segment too as prices in Palava continue to trade at a 45-50% discount to nearby markets of Airoli and Thane. The management’s focus on the premium segment can further intensify this re-rating. The company aims to monetize 250msf over the next three decades, and during this period, we assume the realization at Palava could converge with neighboring markets – implying an 8% CAGR in realization.

Valuation and view

* LODHA has been delivering a steady performance across key parameters of presales, cash flows, profitability and return ratios for the last two years. It has successfully expanded beyond its core markets and as it further strengthens its position in geographies, we expect this consistency in operational performance to continue

* While ex-Palava business will continue to grow at a steady pace, a bigger delta in value is likely to emerge from Palava, which is expected to witness a surge in volumes as well as pricing due to the factors discussed above.

* As per the company, Palava’s ~4300-acre land provides over 600msf of residential development potential. However, we assume a portion of that to be monetized as industrial land sales. We value 250msf of residential land to be monetized over the next three decades at INR528b and during this period, pricing would reach at par with nearby markets - implying an 8% CAGR in realization.

* The infrastructure upgrades, along with strong focus on increasing the share of its premium segment, can lead to higher price growth. Thus, a sensitivity analysis with a CAGR of 8-12% in realization yields a value of INR528-670b or USD6-8b.

* We use our usual DCF-based method for ex-Palava residential segment and arrive at a value of ~INR1,115b, assuming WACC of 11% and a terminal growth rate of 5%.

* Accordingly, we raise the fair value to INR1,762b or INR1,770 per share (vs. INR1,415 earlier), indicating 14% upside potential. Reiterate BUY.

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