LODHA — earnings call
The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.
Prepared remarks
“Macrotech Developers Limited
EXECUTIVE · OFFICER
OFFICER -
MACROTECH · DEVELOPERS LIMITED
DEVELOPERS
LIMITED · MR. SHAISHAV DHARIA – CHIEF EXECUTIVE OFFICER,
MR. SHAISHAV DHARIA – CHIEF EXECUTIVE OFFICER,
RENTAL · ASSETS
ASSETS -
MACROTECH · DEVELOPERS LIMITED
DEVELOPERS LIMITED MR. SUSHIL KUMAR MODI – CHIEF FINANCIAL OFFICER - MACROTECH DEVELOPERS LIMITED MR. ANAND KUMAR - HEAD INVESTOR RELATIONS - MACROTECH DEVELOPERS LIMITED Macrotech Developers Limited November 02, 2022
Questions and answers
Moderator · Conference Operator
Yes Sir we will open it up for the Q&A session.
Ladies and gentlemen we will now begin the question and answer session.
The first question is from the line of Kunal from Bank of America.
Please go ahead.
Kunal
Thanks.
Hi!
Abhishek I was hoping to get some more color on the footfalls and conversions you would have seen during the festive season and if there was anything there that would have given an unchanged presales guidance for rest of the year?
Abhishek Lodha
So what we have seen is that like in previous years the strength of the sales interest continued even through the second quarter and the same trend has held up also in October so we are continuing to see similar conversion rates in the 8% to 10% range, we are seeing very good quality footfalls and I think the strength of the market can be only assessed from the fact that even in months like August and September which are traditionally very slow month we ended up on an average doing Rs.1000 Crores of sales which is how we got to Rs.3150 Crores for the quarter which is just showing that yes the demand is strong but not only it is strong it is also consistent and the throughput is coming through in a much more predictable manner now.
Kunal
The next one was on the monetization of the ESR JV.
I just wanted to check what is the broad realized rate per acre of land parcel that you would have fetched here and is that a good representative of how we could value the remaining land bank?
Abhishek Lodha
We have monetized the ESR land at about Rs.4 Crores an acre I may have mentioned to a similar query in the past the range at which we sell and will vary to an extent based on the users because data centers for example can sell for even Rs.20 Crores, Rs.25 Crores an acre and it will also depend on the extent of the land holding.
So warehousing land of large scale this was a 90-acre JV with ESR is probably the lowest value per acre this has gone at about Rs.4 Crores per acre and average the north of that.
Kunal
Last one from me for Sushil.
Sushil if we just look at your CFO target for H2 as debt reduction target it seems to leave about Rs.800 Crores that can be incurred towards interest expense and investments so broadly does it mean that you are looking at less outflow on the investment side in H2?
Sushil Kumar Modi
Yes, potentially you are right but nonetheless keep that in mind that our operating cash flow trajectory for the second half generally is far stronger than the first half and henceforth some of these debt reduction targets is going to be more and more visible from the quarters that we will speak up from Q3 and Q4, but nonetheless I think we reasonably kind of see the visibility of getting us anywhere in the band of 6000 net debt and some number around that by the end of this.
Kunal
Got that alright thank you so much.
Moderator · Conference Operator
Thank you.
The next question is from the line of Pritesh Sheth from Motilal Oswal.
Please go ahead.
Macrotech Developers Limited November 02, 2022
Pritesh Sheth
Hi thanks for taking my question.
First is on your micro market sales that you have reported.
So I can see a drop in sales in your affordable markets like Extended Eastern Suburbs and Thane affordable mid income so anything to read into in terms of interest rate that ways impacting the trajectory of these micro markets because they have gone down by at least like 30%, 40% if I compare quarter-on-quarter and on an average what the rate has been for last three to four quarters so your comments on that?
Abhishek Lodha
The Extended Eastern Suburbs is especially tend to be the one which is most affected by the monsoons because these are the individuals who tend to rely on public transportation as well as the auto rickshaw or taxi services most for their communities, so typically if you look at it while you are comparing the Q1 versus the Q2 numbers of course Q1 also has certain launches in the Extended Eastern Suburbs but even adjusted for launches Q2 will typically be weak on account of seasonality most affecting that segment, but we do not really read anything into it on the contrary as Shaishav mentioned we are well on track to deliver sort of mid teens in the townships business for this fiscal compared to the numbers for last fiscal of a fairly significant base.
Pritesh Sheth
In terms of collections as well it is broadly your comment on that so are you seeing any trend in terms of people delaying or customers delaying payments because they are adjusting to their budgets or any specific trend you are catching up there or collections are pretty much in tandem with what it is supposed to be?
Abhishek Lodha
No, we have not seen any increase in delayed payments.
We measure delayed payments is greater than 30 days delayed and we have actually seeing a fall in that absolute value on the larger base of units from which of course collections are coming through as each quarter we sell more units, so at this stage we do not see the Indian consumer in any manner at least our consumer in any manner affected by trying to delay or trying to delay their payments.
It is just the normal throughput of our sales, registrations and then cash flow coming in any quarter.
Sometimes the pitru paksha period is in Q2 sometimes it is in Q3 so that 15 days people do not like for example registering their documents they do not want to make major payment these are all sort of factors but we believe that the collections machine is pretty strongly in place first half we have collected just under Rs.5000 Crores and we have an internal target of about Rs.11000 Crores of overall the collections for the full year.
Pritesh Sheth
Lastly on your debt your target remains the same for below Rs.6000 Crores so you will have to literally reduce that by Rs.3000 Crores in second half.
Is it all going to be coming from operating cash flows or are you also building in that UK repatriation helping it reducing the debt initially I do not think that was built into our expectation but now the target is it including the repatriation?
Abhishek Lodha
We are targeting to be around Rs.6000 Crores by the end of the fiscal.
If it is few hundred Crores here and there, it will be for a maximum of a quarter but it will be somewhere around the Rs.6000 Crores handle.
We have some asset sales, we are disposing mall in Palava that is definitely a part of the number that we are looking at.
We also have a few other sort of leased spaces which are part of our normal divestment which will also happen in the second half of the year and I do not have a detailed breakup on when the money will come back from the UK Macrotech Developers Limited November 02, 2022 quarterly though we know that the Rs.1000 Crores will come back in the calendar year next year so yes we have assumed at about Rs.250 Crores out of those Rs.1000 Crores will come back in the first quarter of calendar 2023.
Pritesh Sheth
Got it thanks that is it from my side all the best.
Moderator · Conference Operator
Thank you.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
Please go ahead.
Sameer Baisiwala
Thanks and good afternoon everyone.
Shaishav great commentary on townships so thanks for that.
Just if you look out mid to long-term are there any risks that you see to Palava development something like airport coming and taking development away from you or any other thoughts if you can share with us?
Shaishav Dharia
Actually the airport development will be a positive because the new airport will be about 30 minutes from Palava city so in terms of connectivity it becomes even better for companies that are operating there as well as folks who are living in Palava so that is actually a positive.
I think we have been able to over the last 10 years as I mentioned developed this mote which is now very difficult to replicate by somebody else and more importantly to have this kind of scale is very difficult again probably in the history of MMR.
So I would say that natural black swan event that can impact any business always exist but we have reached a stage where I do not see any normal course of event causing major disruptions.
Sameer Baisiwala
If I have to just put some number around you talked about sustainable volume and price increase in about 2 to 3 million square feet per annum 5% to 7% price increase per annum for extended period of time and do these numbers look achievable or higher or lower your thoughts?
Shaishav Dharia
Let me take the price growth.
I think the 5% to 7% which is just below inflation is a healthy price increase and sustainable because affordability will always remain good with that particular aspect so that I think is yes very much possible and within our target.
Second I would think as a business of township much more than 2 to 3 million is what we should achieve especially given the growth the developments on the external infrastructure side that will connect us better to the business hubs both with road and rail so I would think we have the potential to do more than that.
Sameer Baisiwala
Just to be sure 2 to 3 million is excluding DI it is just the residential part?
Shaishav Dharia
Correct.
Sameer Baisiwala
So you can do better than that, but it would get the benefit of the commercial in the DI development over there that is the point you are making, right?
Shaishav Dharia
Correct.
Sameer Baisiwala
Second question I have is on one Lodha phase Abhishek now that it is coming to completion what percentage is leased out and how do you plan to realize the capital value here?
Macrotech Developers Limited November 02, 2022
Abhishek Lodha
As we started the leasing process for the building the lower one third of the building was under the spot sale model and that is almost 58% sold.
We intend to lease the building out over the next 18 months and then post stabilization we in all likelihood will dispose off our interest in the building, the recurring rent from the building will be in excess of Rs.200 Crores per annum and therefore you can see a significant one time income will accrue to the company when we divest this asset most likely some time in calendar 2025.
Sameer Baisiwala
Great initiative on Embedded EBITDA so that will definitely help us a lot.
If I understood you correct you are saying that this is calculated using the launch price but the cost is over the cycle of the project so there is certain inflation over there?
Abhishek Lodha
Yes, the cost side has taken for the lifecycle of that building and the price is the actual price realization for the quarter so it is not necessarily the launch price in case it is launched in that quarter it will be the launch price but whatever is the actual realization in a given quarter and the estimated life cycle cost including the inflation that one would expect in the life cycle of the building.
Sameer Baisiwala
Thank you so much.
Moderator · Conference Operator
Thank you.
The next question is from the line of Parvez Qazi from Edelweiss Securities.
Please go ahead.
Parvez Qazi
Good afternoon Sir, and thanks for taking my question.
My first question is about the pricing.
Given the increase in mortgage rate what kind of pricing increase can we take from our customers keeping affordability in mind?
Abhishek Lodha
Very important question and the one which we think about long and deep.
Believe generally that the total cost growth which is a function of the price growth plus any increase or change in the cost of mortgages should be below wage growth so that affordability keeps getting better.
We had guided at the start of the year that price growth should be in the range of 5% to 6% given that wage growth would be in the range of 9% this year.
Given our initiative around interest costs are being kept at 7% till mid 2024 our consumers are not having any significant impact on account of the increase in mortgage rates and as I mentioned earlier the cost to us so far has been averaging about 0.25% of the value done in any given quarter therefore we continue to guide to the same number of 5% to 6% price growth for the full year for fiscal 2023.
Parvez Qazi
With regards to our South & Central Mumbai projects how do we see sales velocity there and in general what has been the sales momentum seen in that micro market?
Abhishek Lodha
As you would have looked at in terms of the sales done during the quarter South & Central Mumbai was a very strong contributor bringing in about Rs.1100 Crores of sales in this fiscal and just under Rs.2000 Crores of sales for the half year.
So South & Central Mumbai continues to see a good strength and we are seeing growth over comparable period last year with strong growth over comparable period last year.
I think our variety of products in South Mumbai across Macrotech Developers Limited November 02, 2022 different price points starting from as low as Rs.2.5 Crores and all the way to the top end of the market but with a great concentration between Rs.2.5 Crores to Rs.7, 8 Crores and we are having different points of the lifecycle we have ready product, we have advanced under construction product, we have just launched for example Lodha Bellevue opposite Vivarea at Jacob Circle or Saat Rasta it is colloquially called gives us ability to serve that market quite well and we are seeing good traction.
Parvez Qazi
Thanks and that is it from my side.
All the best for the future.
Moderator · Conference Operator
Thank you.
The next question is from the line of Abhinav Sinha from Jefferies.
Please go ahead.
Abhinav Sinha
Just a follow-up on the Embedded EBITDA part so just to be clear this is gross share or this is the project total Embedded EBITDA that we are looking at here?
Abhishek Lodha
This is the total for us of course numbers are the same because for us our EBITDA is the same as the project’s EBITDA because any payments made to the land owner is treated as land cost in our accounting so there is no share of EBITDA which goes to the land owner in most of our joint developments so the actual EBITDA which would accrue to us.
Sushil Kumar Modi
On the sales that we announced so if the sales is 100 that means be it coming from the joint development or be it coming from our own land the EBITDA margin is the blended that we have indicated applies on 100.
Abhinav Sinha
In case of our own land how are we treating the land cost here because you have some very legacy sort of projects also?
Sushil Kumar Modi
Obviously those will carry the historical cost of acquisition along with to the extent that if any interest has been incurred during the construction period and has got capitalized that interest will also be getting capitalized but we are giving you EBITDA number so thereby meaning any finance cost incurred would not be there but in any case as we move away from capitalization of finance cost effectively we will completely get kind of out of picture when it comes to anything that is including in the cost of project because our debt itself is going to getting down to the Rs.6000 Crores handle or below whereby you can have the finance cost separately taken below the line from the EBITDA downwards.
Abhinav Sinha
Just for my clarification also and maybe we are talking about FY2024 now it seems in another three odd quarters you should be done with reducing the net debt so what is the utilization of cash there will you say abandoned the JV model and go back to buying land or there is something that comes in your mind?
Sushil Kumar Modi
Firstly we would like to say that the target of Rs.6000 Crores of debt is one milestone we are seeking to achieve.
We will of course review the macroeconomic situation and even lower level of debt we will definitely even use our cash flows towards that we have not made any decision because we are of course watching the externally evolving situation closely.
Having said that whatever is the growth capital available will be significant and we will continue to use the Macrotech Developers Limited November 02, 2022 growth capital in a prudent in order to generate the ROEs that we are targeting of approximately 20%, In order to generate those ROEs we will have a blend of joint development and ownership in our sales mix, we expect that for the next 12-18 months, it will continue to remain focus towards JDAs and in the medium term it will settle down incrementally 40% of sales value coming from joint development and 60% coming from outright own land and such that, that mix allows us to generate the 20% that we are targeting.
Abhinav Sinha
Thanks for that.
That is all from my side.
Moderator · Conference Operator
Thank you.
The next question is from the line of Saurabh from JP Morgan.
Please go ahead.
Saurabh
I just had two questions.
So one is this 33% margin you have given this is margin at the project level or is it your share?
Abhishek Lodha
This is the net margin to us this is our margin after all expenses including overhead cost as well as whatever goes to the land owner this is margin to us.
Saurabh
So 33% is the EBITDA and this is the gross margin right or the EBITDA?
Abhishek Lodha
Whatever very miniscule depreciation and amortization we may have and then only the interest cost and taxes.
Saurabh
I am just asking you because normally we have seen the JDA margins are much lower with the industry they are in the 20%, 25% handle that case so what could explain that you are getting these kind of margins on incremental basis?
Sushil Kumar Modi
No, you are right to the extent the composition of JDA will always have the lower margin but from an EBITDA standpoint as if you recall what it will be indicated on any JDA that we target anywhere between 15% to 20% handle of a PBT.
But as in this quarter the contribution of the JDA is not that significant and in essence what you are seeing is more coming out of our own project as time goes and thereby the JDA some position improves you have potentially this margin as I think potentially will have a downward trajectory.
Abhishek Lodha
If I may just come in, in addition to what Sushil has just said we estimate obviously it will vary project-to-project but the own lands have the margins in the mid to high 20s and the JDAs have PBT margins in the high teens so there is definitely a delta between the two and therefore the blend of course depending on how much JDAs are contributing to sales in any given quarter.
Saurabh
The second is I just want to understand this impairment you have done in UK better so your cash flow receipt has not changed so what has changed for this Rs.1100 Crores impairment to happen can you just throw a better light on this?
Abhishek Lodha
Of course Sushil will be able to explain better but I will take a little bit of an attempt and then Sushil can add.
We had made the investments in the UK by means of a debt instrument and the debt was accruing interest at high interest rate of 12% to 14% so that is what the balance sheet Macrotech Developers Limited November 02, 2022 was carrying in terms of what would be returned from the UK.
Now this quarter the net received from the UK have started coming back and we know with a fair degree of certainty what the final amount that is going to come back is that rate of return is not going to be in that 12% to 14% handle but that rate of return on our investment is going to be more in the single digit handle and therefore the delta between the two is that impairment that we are taking which is really just an impairment in terms of the return.
The principle of course is all being returned and it is being returned with a return but the return is not high as the debt instrument was assuming.
Sushil Kumar Modi
While from a cash flow standpoint we always kind of guided you on a conservative basis that we would be targeting repatriation of around Rs.1500 odd Crores handle number but internally we were still optimistic looking at how things perform and potentially there was a scenario whereby we can have a repatriation even higher, but knowing where how things has evolved and how what UK is seeing in terms of economy and obviously equally the kind of deflation in our own inventory having received expedited sales thereby to concentrate more and more on India side so that is some of those optimism which we had internally but that is no more relevant but in any case to all the stakeholders we always guided conservatively to be in the handle of Rs.1500 and if you really see on the whole while the form of this 1500 now changes whereby the Rs.1100 Crores, Rs.100 Crores already received in this quarter and Rs.1000 Crores expected in next calendar year but on this provision we will have the tax break and the tax benefit which will also be in the handle of around Rs.350-400 Crores so net-net effective result from a cash flow standpoint rather decide for the business for the company would continue to be in the handle of Rs.1500 Crores in line with what we have guided.
Saurabh
Okay I think I will take this offline Sir and just one last question Abhishek what is your end March debt guidance and March 2024 gross is expectation of net debt zero where do you think this by March 2024?
Abhishek Lodha
At this stage we do not have a March 2024 guidance to provide we will of course do it when we share the entire guidance for the fiscal year 2024 and that is what I mentioned in response to an earlier question this is the first milestone of getting to approximately Rs.6000 Crores of debt by March 2023 we are working aggressively towards getting there even if we miss it by a little bit it will be maximum for a quarter but we will get there quite soon and then of course whether to continue to further reduce debt will depend on the external environment we are quite open minded about making sure that the company at no time has any risk when it comes to leverage so while Rs.6000 Crores given the scale of our business is not significant leverage but if we believe that it is better to be lower we will go lower.
Saurabh
Just one final question, can you just provide what percentage of your borrowers would be taking a mortgage this is my final question thanks, what percentage of customers will be taking a mortgage maybe after booking a flat?
Abhishek Lodha
I do not sort of right now have an exact number but what I remember from memory is that it is in the mid 60s the numbers as a percentage of the total buyers who take mortgages.
Macrotech Developers Limited November 02, 2022
Sushil Kumar Modi
To be precise it is around 68% at this point of time.
Saurabh
Okay understood thank you.
Moderator · Conference Operator
Thank you.
The next question is from the line of Kunal Lakhan from CLSA.
Please go ahead.
Kunal Lakhan
Thanks for taking my questions.
Firstly on the spend on new projects that we spent close to about Rs.1300 crores plus in the first half, how should we look at this in the second half considering like we have already achieved GDV worth Rs.9300 Crores versus Rs.15000 Crores guided so how should we look at the spend in the second half?
Abhishek Lodha
That number will moderate because obviously we have already done 60% plus of our target in the first half then the second half that number will be lower.
Kunal Lakhan
My second question was to Abhishek.
You mentioned that you expect demand to remain healthy even after another 50 bps increase in mortgage rates according to you at what mortgage rates you think the demand or affordability will get impacted?
Abhishek Lodha
I think it is a question which we can only guesstimate we had earlier said that up to 9% demand remains unaffected and therefore another 50 basis points from wherever we are right now 8.25 within that thing but to provide another way of thinking about this I do not think it is too much about mortgage rates.
Of course it is if mortgage rates are at 12% it will matter but it is not so much about mortgage rate as it is job security and job creation.
As long as there is job security and job creation even if mortgage rates were modestly higher than 9%, it does not meaningfully impact on demand.
It really is about that job security and job creation question.
Kunal Lakhan
Sure thanks a lot and all the best.
Moderator · Conference Operator
Thank you.
The next question is from the line of Kushagra from Old Bridge Capital.
Please go ahead.
Kushagra
Thanks for the opportunity.
Few questions, one, can you give us cash outflows which we are expecting on construction, SG&A and those land in JDA investments over next two years not probably the second half but FY2024-2025?
Abhishek Lodha
Good question but not something we have prepared for I do not want to answer something of that nature of the cuff so let us sort of revert to you on that offline.
Kushagra
Sure no worries and second question is on your JDAs basically so till now whatever JDAs you have signed what would be the cash outflow towards the land owner share in the project which probably you would have given if it would have been your own project you would have given as your land purchase acquisition cost so what that amount would be out of Rs.17000, 18000 Crores of JDAs which you have signed till now?
Macrotech Developers Limited November 02, 2022
Abhishek Lodha
We were answering what percentage would we expected as outflows to the land owners it would be in the range in our expectation around the 20% to 25% of those revenues so if the revenues are about 25% it will range between Rs.5000 and Rs.7000 Crores of outflows.
Kushagra
Got it and just one last question on this wage inflation so at one point you sort of mentioned that wage inflation will continue to sort of pickup resulting in better affordability but at the same time wages which is almost one third of your cost there seems to be lower than inflationary numbers than the other components so just taking your thoughts on how you are thinking about this dichotomy between the wage inflation at the lower end of the pyramid wage inflation which is somewhat in the broader affordability factor like in this percolate in your wage cost as well and are you building anything over there in your price hike strategy?
Abhishek Lodha
I say it is a very thoughtful question.
Obviously wages are determined by the tradeoff of supply and demand and as we know India is abundantly supplied with the semi-skilled labor at the bottom of the pyramid if you look back at the data series over many, many years the wage growth for those at the bottom of the pyramid tends to be disconnected from the wage growth at the middle and the top of the pyramid purely based on level of skill and the supply demand level so I do not really see this as a dichotomy this is historical fact.
We do build in construction cost inflation into our models which is a blend of the material as well as the labor cost inflation and we have found that the way we model it is quite reasonable and accurate.
So far we have not been surprised negatively but the inflations of the middle and the upper end of the pyramid of more skilled people who ultimately end up being home buyers to be a home buyer with annual income at the minimum has to be between 6 to 10 lakhs that is a very different situation from a construction worker whose monthly wages would range between Rs.15000 to Rs.25000 a month and therefore a very different parts of the pyramid.
Kushagra
Sure got it that is helpful thanks a lot and all the best.
Moderator · Conference Operator
Thank you.
Ladies and gentlemen due to time constraint we take that as the last question.
I now hand the conference over to the management for their closing comments.
Over to you Sir!
Anand Kumar
Thank you everyone.
Feel free to reach out to me or Sushil.
As we have highlighted we are in a very exciting time period where the sector continues to perform very well so if you have any further questions please feel free to reach out to me.
Thank you.
Moderator · Conference Operator
Thank you.
Ladies and gentlemen on behalf of Antique Stock Broking that concludes this conference.
Thank you all for joining us.
You may now disconnect your lines.