Macrotech Developers: Building a strong edifice

13 Sep 2023 , 11:16 AM

Recommendation: Add

Target Price: Rs 825

Company is building a meaningful annuity income portfolio, across the warehousing, office, retail, and property management businesses. With a shift in revenue recognition and adjusted EBITDA margins >30%, LODHA is guiding to achieve proforma RoEs >20% by FY24, along with maintaining healthy debt levels at lower of 1x OCF/0.5x equity. Valuations at CMP imply ~40% premium to NAV.

Strong pre-sales momentum to continue

LODHA has guided to presales of ~20% CAGR over FY23-26 (FY20-23 ~19% of CAGR) through: 1) JD projects share ~40% by FY24-end (versus 35% for Q1FY24) 2) Entering new micro markets/Tier-1 cities in a calibrated manner and eventually, garner 15-20% market share (MS). Management expects a steady increase in walk-ins (~10% YoY), rise in conversions and price hikes to drive growth. Further, the company aims to monetize 4,300 acres of land into cash flows over 15-18 years (~Rs. 5 billion p.a.); so far, the progress has been modest.

Annuity portfolio to grow steadily

LODHA plans to build annuity portfolio of Rs. 5 billion by FY26 through: 1) ~Rs. 1.5 billion from digital infra vertical (rentals, asset and development management). 2) ~Rs. 1 billion from property management, 3) ~Rs. 2.5 billion from leasing income from the office/retail portfolio. LODHA’s platform-deal with Bain and Ivanhoe will scale up steadily and gradually. Property management business benefits from captive base of 60,000 homes (250,000 by FY30), while the leasing (office and retail) business is now being scaled up.

Continuing with aggressive guidance

So far, LODHA has achieved its guidance on pre-sales and broadly on debt reduction. The company’s guidance over the next few years entails: achieving >30% adjusted EBITDA margins (from a typical 60:40 outright, JDA mix), >20% RoE (on proforma earnings by FY24), dividend of 15-20% of net profit and net debt lower of 1x OCF or 0.5x equity. Moving to percentage completion accounting will narrow the gap between reported and proforma earnings steadily over FY25/26.