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|Tuesday, 6 April 2021||
Leading real estate developer in MMR region
Dominance, diversified portfolio, brand, and debt reduction to be key drivers but high leverage ratio is an obstacle
Macrotech Developers, formerly known as Lodha Developers, is one of the largest real estate developers in India, by residential sales value for FYs 2014 to 2020, with residential projects located in the Mumbai Metropolitan Region MMR and Pune. The Lodha group has been involved in the real estate business since 1986. The company commenced operations in Mumbai, developing affordable housing projects in the suburbs of Mumbai, and later diversified into other segments and regions in the MMR and Pune.
The core business of the company is residential real estate developments with a focus on affordable and mid-income housing. The company also develops commercial real estate, including as part of mixed-use developments in and around core residential projects. In 2019, the company forayed into the development of logistics and industrial parks and entered a joint venture with ESR Mumbai 3 Pte (ESR), a subsidiary of ESR Cayman, an Asia Pacific-focused logistics real estate platform.
The company focuses on designing and developing branded products to address consumer needs across locations and price points. The core competency lies in professionally managing the real estate value chain as the company has in-house capabilities to deliver a project from conceptualization to completion. The company has a strong focus on de-risking projects and improving return on investment with fast turnaround time from acquisition to launch to completion. The strength of the brand and ability of the company to convert the surroundings of a location into attractive destinations for people across income groups have been a major driver of the success of the company.
The brands of the company include Lodha, Casa by Lodha and Crown - Lodha Quality Homes for affordable and mid-income housing projects, the Lodha and Lodha Luxury brands for premium and luxury housing projects, and the iThink, LodhaExcelus and LodhaSupremus brands for office spaces.
The in-house sales team is supported by a distribution network of multiple channels across India as well as key non-resident Indian (NRI) markets, such as the Gulf Cooperation Council, United Kingdom, Singapore, and the United States. The company believes that its understanding of the relevant real estate market, positive perception and trust in brand, innovative design and marketing and branding techniques enable it to attract customers.
The company is led by Abhishek M. Lodha, Managing Director and Chief Executive Officer. The company has a leadership team of experienced professionals, with relevant functional expertise across different industries, who are instrumental in implementing business strategies.
As part of the logistics and industrial park portfolio, the company has planned to develop a logistics and industrial park of over 800 acres of land near Palava, which is strategically located near the Jawaharlal Nehru Port, the proposed international airport in Navi Mumbai and the industrial hub of Taloja. Out of this area, approximately 290 acres was under development as of 31 December 2020, including an 89-acre logistics and industrial park that is being developed in partnership with ESR. The product offerings under this category include built to suit structures, standard structures and land parcels for logistics and industrial clients.
In the commercial portfolio, the office space projects comprise corporate offices, IT campuses and boutique office spaces, which are concentrated in suburban locations. The retail projects focus on high street retail with shopping and entertainment options for the local community.
The company has 91 completed projects comprising approximately 77.22 million square feet of developable area. The company also has 36 ongoing projects comprising approximately 28.78 million square feet of developable area and 18 planned projects comprising approximately 45.08 million square feet of developable area. In the logistics and industrial dark portfolio, the company had an ongoing development of 290 acres and planned development of 540 acres as of 31 December 2020.
In addition to ongoing and planned projects, the company had land reserves of approximately 3,803 acres for future development in the MMR, with the potential to develop approximately 322 million square feet of developable area end December 2020.
The company has invested in two real estate projects in London, namely Lincoln Square in the West End and No. 1 Grosvenor Square in Mayfair. Both these projects are now complete, and the net proceeds after repaying the indebtedness are intended to be repatriated to the company.
The company intends to continue to grow in the MMR real estate market, while it will evaluate and pursue growth opportunities in residential developments in select tier-1 Indian cities such as Pune, Hyderabad, Bengaluru, and the NCR with a vision to replicate its success in the MMR, using a business approach that is light on capital investments. The company proposes to continue to look for strategic lands to acquire and will select an optimal, capital-efficient, and value-accretive land acquisition strategy. The company aims to capitalize on the growing demand for warehousing and logistics as well as industrial developments because of the growth of the e-commerce sector in India and expand into other locations in India. The company intends to continue to focus on the development of commercial spaces as part of large mixed-use developments.
The Offer and the Objects
The initial public offer comprises fresh issue of equity share of Rs 2500 crore, aggregating to 517.60 lakh equity shares, at the lower price of Rs 483 and 514.40 lakh equity shares at the upper price band of Rs 486.
Out of net proceeds from the fresh issue of Rs 2500 crore, an amount of Rs 1500 crore is proposed to be utilized towards prepayment, repayment, or redemption (earlier or scheduled), of all or a portion of certain borrowings availed by the company and some of its subsidiaries. Further, an amount of Rs 375 crore is proposed to be used for acquisition of land or land development rights. The balance net proceeds will be used for general corporate expenses.
The promoters currently hold 100% shareholding in the company. The post issue promoter shareholding in the company will decline to 88.5%.
The offer includes a reservation of equity shares aggregating up to Rs 30 crore, for subscription by eligible employees.
The issue, through the book-building process, will open on 07 April 2021 and will close on 09 April 2021.
The company expects that listing of the equity shares will enhance visibility and brand image and provide liquidity to the shareholders and will also provide a public market for the equity shares in India.
The company believes it is well positioned to exploit the growth opportunities in the Indian real estate market.
The company was one of the largest real estate developers in India, by residential sales value for FY 2014 to 2020 with a leadership position in the attractive MMR market. The MMR is considered the most attractive real estate market in the Top Seven Indian Markets, having the largest share of supply and absorption, as well as the highest average base selling price, of residential units from CY2016 to 2020, catering to a wide spectrum of income and demography.
The company has a strong brand, existing land reserves and industry knowledge and regulatory environment know-how.
The company has several planned projects in the MMR, which the company believes will enable it to have a robust launch pipeline over the next few years.
The company believes that it has been able to leverage its brand presence, customer confidence, track record of successfully delivering projects and superior construction quality to increase sales volumes and command premium pricing for products against other projects in the respective micro-markets.
The company has adopted an integrated real estate development model, with capabilities and in-house resources to carry on a project from its initiation to completion. The company places significant emphasis on cost management and rigorously monitors projects to ensure that they are completed within committed timelines and budgeted amounts.
The company has a diversified portfolio of residential developments, spread across price points and micro-markets in the MMR, catering to a wide spectrum of economic and demographic segments.
The residential customers in India have started to prefer ready-to-move homes and the covid-19 pandemic has further accentuated this trend. With 5.5 million square feet of ready-to-move inventory of residential projects with the company accounting for 29.6% of total unsold residential inventory, the company is one of the few real estate developers in India with a diverse portfolio of ready-to- move homes.
The company can identify land, acquire it at competitive cost, aggregate it from several landowners and design a master plan to develop township projects.
The marketing and sales team of the company comprised 605 professionals as of 31 December 2020. The company uses differentiated sales strategies and multiple channels to sell products. Further, the company has an extensive distribution network of 1,745 active channel partners.
The company has a substantial amount of debt, which could affect its ability to obtain future financing or pursue growth strategy. As of December 2020, the company had Rs 18662.18 crore of aggregate outstanding borrowings on a consolidated basis.
If the company does not have access to funds required on favorable terms, it may be required to delay or abandon some or all planned projects or reduce the scale of operations.
The ratio of total liabilities plus contingent liabilities to net worth was 9.5 end December 2020. If a significant portion of contingent liabilities materialize, it could have an adverse effect on financial condition and cash flows.
The ability to identify suitable parcels of land for development is a vital element of growing business and involves certain risks, including identifying land with clean title and at locations that are preferred by target customers.
The extent to which the coronavirus disease may affect business in the future is uncertain and cannot be predicted.
There are material outstanding legal proceedings involving company, subsidiaries, associates, directors, promoters, and group companies. As of 31 December 2020, an amount of Rs 617.78 crore had been disclosed by the company in contingent liabilities in relation to outstanding litigations.
The company had unsold inventory in residential projects of approximately 14.8 million square feet and approximately 5.5 million square feet of ready-to-move unsold inventory of residential projects as of December 2020. If the company is unable to sell such inventory at acceptable prices and in a timely manner, it could adversely affect the business.
The real estate development activities of the company are primarily focused in and around the MMR, so the company is exposed to risks from economic, regulatory, and other changes as well as natural disasters in the MMR. About 96.72% of developable area and 35 of 36 ongoing projects, 99.45% developable area of 18 planned projects and 100% of total land reserves of 3,803 acres were in the MMR.
The ongoing projects accounted for an estimated developable area of 28.78 million square feet and planned projects for 45.08 million square feet, which may be subject to significant changes and modifications from currently estimated management plans and timelines.
Approximately 26.31% of total land reserves are such parcels of land where the company either do not hold title and/or do not have independent title reports and the company do not have and may not obtain title insurance guaranteeing title or land development rights.
Changing laws, rules and regulations and legal uncertainties, including the withdrawal of certain benefits or adverse application of tax laws, may adversely affect business.
The business faces competition from both national and local property developers with respect to factors such as location, facilities and supporting infrastructure, services, and pricing. Intensified competition between property developers may result in increased land prices, oversupply of properties, lower real estate prices, and lower sales at properties, all of which may adversely affect business.
The business is capital intensive and is significantly dependent on the availability of real estate financing in India to develop and market ongoing and planned projects. Difficult conditions in the global capital markets and the global economy generally may adversely affect business with limited availability of funds.
The company depends significantly on residential development business, as 86.5% of developable area in ongoing and planned projects comprises residential projects.
Large construction projects in all parts of the world provide opportunities for corruption, fraud or improper conduct, including bribery, deliberate poor workmanship, theft or embezzlement by employees, contractors or customers or the deliberate supply of low-quality materials, which may delay development of projects.
The consolidated total revenue and net profit of the company declined from Rs 16527.19 crore and Rs 1785.52 crore in FY2018 to Rs 12442.59 crore and Rs 730.87 crore in FY2020. In the nine months ended December 2020, total consolidated revenues were Rs 2915.01 crore and consolidated net loss stood at Rs 270.40 crore.
On post issue equity, the EPS for FY2020 stood at Rs 16.2 on consolidated basis. The upper price of Rs 486, discounts the FY20 EPS by about 30.0 times.
Among the comparable peer companies, Godrej Properties is trading at 143.0 times FY2020 consolidated EPS, Sunteck Realty at 54.3 times, Brigade Enterprises at 43.2 times, Prestige Estates at 30.7 times, Oberoi Realty at 30.5 times and Sobha at 15.0 times.
Macrotech Developers is highly leveraged, with an elevated debt equity ratio of 2.9 times. Among the peers, the debt-to-equity ratio for Brigade Enterprises stands at 2.0 times, Prestige Estates at 1.7 times, Sobha at 1.3 times, Godrej Properties at 0.4 times, Sunteck Realty at 0.3 times, DLF at 0.2 times and Oberoi Realty at 0.2 times.
In terms of EV/EBIDTA, the company is offered at 16.8 times. Among the peers, Godrej Properties is trading at EV/EBIDTA of 57.8 times, DLF at 35.2 times, Sunteck Realty at 27.1 times, Oberoi Realty at 20.5 times, Brigade Enterprises at 14.6 times, Prestige Estates at 8.6 times and Sobha at 6.2 times.
The company is planning substantial reduction in its debt to Rs 12500 crore in the near term through net proceeds from IPO, cash receivables from sales, monetization of industrial parks, and monetization of commercial assets from the existing level of over Rs 18000 crore end December 2020. This will help to reduce leverage ratio slightly below 2 times.
The high leverage ratio limits the scope company to absorb any shocks of unforeseen
events. The company had earlier difficulties in servicing their debt. The company also
availed moratorium issued by the RBI for a period of six months (March to August 2020).