LODHA — earnings call

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Prepared remarks

“Macrotech Developers Limited

CHIEF · EXECUTIVE

EXECUTIVE

MACROTECH · DEVELOPERS LIMITED

DEVELOPERS LIMITED MR. SUSHIL KUMAR MODI – CHIEF FINANCIAL OFFICER - MACROTECH DEVELOPERS LIMITED MR. ANAND KUMAR - HEAD INVESTOR RELATIONS - MACROTECH DEVELOPERS LIMITED MR. AUN ABDULLAH - HEAD OF ESG INITIATIVES - MACROTECH DEVELOPERS LIMITED MS. MAHIKA SHISHODIA - SOCIAL IMPACT LEAD - MACROTECH DEVELOPERS LIMITED Macrotech Developers Limited January 25, 2023

Moderator · Conference Operator

Ladies and gentlemen, good day and welcome to Macrotech Developers Limited Q3

Thank you very much.

We will now begin the question and answer session.

The first question is from the line of Saurabh from J.P.

Morgan.

Please go ahead.

Saurabh

Thank you for this opportunity.

My first question is you said that the impact of mortgage increases on demand is not very significant yet, but have you seen any slowdown in terms of footfall from your site or anything, your presales are still good, but in terms of footfalls have you seen any slowdown and if rates were to go to 9.25% at what point do you think the demand kind of slows down so that is the first one, the second one is essentially on slide #12 where you have kind of given this embedded EBITDA disclosure so is the overhead calculation basis the current run rate or you have taken a two-year out run rate of your overheads to get to this 32% EBITDA and third question is essentially the guidance for INR 70 billion of net debt by March 2023 that is slide #10 that is still intact right?

Thank you.

Abhishek Lodha

Your last question was not very clear could you just repeat the third question?

Saurabh

So the slide #10 so you have the INR 70 billion net debt by March 2023, we are at INR 80 billion so we are expecting about a INR 10 billion odd reduction in this quarter will that be a way to think about it?

Abhishek Lodha

Thank you understood.

So yes, in terms of what we are seeing in the demand environment and we measure it in a number of ways, we measure it in terms of incoming inquiries, we measure it in terms of footfalls, we measure it in terms of conversion rates, and whichever metric one has seen one has found that the desire for homeownership there has been no flagging of that over the last nine months in spite of the significant increase in the mortgage rates.

To give you an example the total number of footfalls that we had coming into our sites in December, which again due to holidays and other things tends to not be such a strong month was almost 10000 families walked in, and it is probably the second highest in any month of the year, so one has not seen any flagging of footfalls nor have conversion rates reduced per se, which is really reflected in the fact that we have delivered the INR 9000 odd Crores of sales in nine months.

In terms of your second question around overhead costs we estimate our company’s overhead costs on the basis of the project’s entire lifecycle and that is taken into account when one is looking at the embedded EBITDA margin.

If you look at the explanation at the bottom of slide #5 you will note that we explained that embedded EBITDA is calculated taking into account the actual sales price that the unit is sold at and then we take into account the lifecycle cost, which are all lifecycle costs including construction, overhead and so on with only finance cost obviously not deducted from the EBITDA numbers so that is taking into account lifecycle cost.

In terms of your third question around debt reduction, yes, we are looking at reducing debt by approximately Macrotech Developers Limited January 25, 2023 INR 10 billion in the current quarter as you would have noted even with the significant investment in land and approvals we were able to reduce our debt by almost INR 750 Crores, 7.5 billion in the last quarter and we feel pretty good about being able to further reduce it by a slightly higher quantum in the current quarter.

Not only that, I think even going forward I would like to clarify to you as well as all the others on the call that our guidance of debt at about INR 60 billion is our peak debt number which is really comes out of our limit of debt, our peak debt being 1x operating cash flow and 0.5x equity, but given the fact that we have been able to consistently show growth while reducing leverage we expect our debt to continue to reduce through fiscal 2024 and therefore being meaningfully lower than the INR 60 billion number.

Saurabh

Just one last question what will be the mix of JDA and presales for this year?

Sushil Kumar Modi

For the quarter it was around 33%, but for the nine months it would be somewhere around 23% so perhaps for the year it should settle somewhere around 25%, 26% is what we can estimate sitting today.

Saurabh

This will go to about mid 30s longer term?

Abhishek Lodha

Around 40% is our sort of stable state, yes, is what we expected to get.

Saurabh

Got it, thank you.

Moderator · Conference Operator

Thank you.

The next question is from the line of Kunal Lakhan from CLSA.

Please go ahead.

Kunal Lakhan

Just a question on the guidance side.

So we have done well on the presales, and we are likely to exceed for the full year, but on the operating cash flow side we have lagged the guidance so what is happening here, is it because of the collections are lagging or are we spending more or is it a combination of both?

Sushil Kumar Modi

So on the cash flow actually we are reasonably tracking as you would have seen we have indicated too, so not that the cash flow we have any kind of negative, adverse performance it is just the kind of investment or the kind of business growth that is going hand-in-hand in tandem, which automatically then decides potentially from the cash flow how much the debt reduction happens so it is just a function of that and which is where we continue to remain confident that INR 1000 Crores minimum we would reduce in this running quarter.

Kunal Lakhan

Sure.

Just a related question on that.

The dividend policy that we had set out last year or beginning of this year said that 15% to 20% of the PAT you would pay out as dividends now for the PAT purpose would you consider the reported PAT where you have the Macrotech Developers Limited January 25, 2023 provisioning of INR 1100 Crores odd or would you consider the adjusted PAT just trying to understand that?

Sushil Kumar Modi

No, in all phases we would be looking for an adjusted PAT taking out any extraordinary measures such as like this, but obviously the policy suggests perhaps the max that we would be considering.

How much we would be considering will be a function of as is stated in the policy equally our capital structure vis-à-vis the business growth that is ongoing.

So as a combination of all of these we will get to arrive at in consultation with the Board a rightful number as dividend, which when we declared in any case so that you note would be kind of paid out more like September-October because it will be more like a final dividend, so after the shareholders’ approval.

Kunal Lakhan

Sure that is helpful and lastly on the accounting side we say that our embedded EBITDA margin is better than the reported EBITDA because of the period costs but just trying to understand this.

We say whatever is getting recorded in our P&L those projects must have also had that period cost so if you are talking about 1.9 million square feet of deliveries against 2.3 million square feet of new launches to which the period costs have been allocated to so I am just trying to understand like so more or less over a period of time that should get netted off so is that the ways one should look at it?

Sushil Kumar Modi

While the principle of what you are saying is absolutely correct.

What has to be taken into account is the differential rate of growth.

The current period costs are basis the fact that the organization is running at INR 11500 Crores plus sales run rate and equally construction and business development and all of those activities.

Over a medium-term obviously the embedded EBITDA margin that we are reporting and the adjusted EBITDA which will actually be in the P&L they will converge and if you see over the last few years on an ongoing basis our quarterly numbers when it comes to adjusted EBITDA are between the 30% and 35% range so the percentage wise it will be the case but when one looks at absolute numbers because when one is looking at the period cost it is an absolute quantum which is deducted from the lower revenue which is recognized and that is what affects or that is why we say is that the P&L revenue and the P&L EBITDA are lagging indicators whereas when one looks at the presales and the embedded EBITDA one can get a much more real time picture of the performance of the business.

So just so that you understand in any case our embedded EBITDA percentage that we are indicating is pretty much tracking the current performance as well as you would have seen adjusted EBITDA even for be it nine months or be it for the quarter is in the range of around 32% so pretty much on track what you are not getting effectively is a flow through of that EBITDA to the PAT which is on account of our past capital structure being tilted towards debt where the significant amount of interest got capitalized and hits the P&L included in the cost of projects, so as our trajectory on the net debt reduction continues then effectively all of that kind of completely wipes out and which is what when you see the pro forma P&L we have Macrotech Developers Limited January 25, 2023 indicated for the current year on an average debt that we would have for this current year our interest cost, finance cost would be around INR 1000 odd Crores and we have taken the entire INR 1000 Crores in the pro forma P&L showing it coming into the P&L as is and then what should be the PBT or a PAT.

Kunal Lakhan

Sure, thanks so much and 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

Thank you very much and good afternoon to everyone.

Just on the new project acquisition side JDA how is the outlook for next 12 months, in the sense that is the space getting very competitive from a bidding point of view and for the deals that you have done so far what is the sort of a typical land owner, is it an industrial or if you can just share some light on that?

Abhishek Lodha

What would I say our BD cup is flowing over as it stands right now it has not only seen in terms of the quantum that we have been able to do in nine months but also in terms of what the pipeline is and how much of deal inflow is coming through.

So very clearly we see that we are quite the preferred choice especially in our focus cities of Mumbai and Pune for joint development and we are seeing a very steady pipeline there in terms of your question around who are the providers of this land.

Sameer Baisiwala

Yes.

Abhishek Lodha

Mix there are landowners, there are financial institutions who have historically been stuck with some assets, there are developers who are stressed and so it is a wide mix as it has been over the last 20 months as we have sort of added almost INR 30000 Crores plus of new projects.

Sameer Baisiwala

At any point in time are you thinking of reverting back to outright purchase of land and for Bengaluru is there any update and would JDA be the principle way of expansion over there?

Abhishek Lodha

In terms of Bengaluru we are in what we call the seed phase.

The seed phase is where we do a few projects, deliver the projects so that is really why we entered Bengaluru almost three years before we really needed to enter for growth purposes, almost all our growth up to fiscal 2026 is going to come from Mumbai and Pune, Bengaluru we are using this time to establish our brand become local, establish a strong operating structure and team and we continue to be operating with a low risk model which is JDA driven.

In terms of whether we will acquire land outright the answer of course is yes as you will note in our presentation we expect our medium-term mix to be about 60% outright and 40% JDA.

So obviously we are moving from a situation where we were almost 100% outright and are now slowly over the Macrotech Developers Limited January 25, 2023 next 18 odd months going to get close to the 40% JDA mark.

This will also be the time period in which we have corrected our balance sheet through a combination of capital raise and operating cash flow generation you saw last quarter and in this year overall we will reduce debt by almost INR 2500 Crores which is all organic and therefore it has been quite useful for us to use the JDA model to keep growing while we have made our balance sheet as strong as we like it to be.

With the strong operating cash flow that we have close to INR 60 billion this year a higher number next year will of course give detailed guidance in our April call we expect to have the ability to of course acquire land outright the JDA will like I said be about 40% the balance being outright.

Sameer Baisiwala

Just one final question from my side.

Macrotech has always been known to be more of a South Central Mumbai company so I can see on slide #22 you have 1.2 million square feet of own land and then nothing so this is all in the park project, and the second is going forward how do you plan to continue your dominant position in this micro market?

Abhishek Lodha

We have as you rightly pointed out about 1.2 million square feet of own land and then about 1.7 million square feet of JDA land in South and Central Mumbai totaling to about 3 million square feet currently, beyond of course whatever is under construction as well as what is ready and unsold.

So there is quite a significant quantum available with us if you look at the numbers we have about ready unsold of INR 37 billion and ongoing unsold of INR 70 billion so that in itself is almost a INR 110 billion that we have and in addition beyond that we have 3 million square feet and you can ascribe whatever value let us say another INR 100 billion to that.

So between the two buckets that is more than INR 200 billion of inventory that we have which is a good three years plus of sales in the market so we see very good and given our strong performance in this market the marquee quality of projects that we deliver the business development pipeline also is very strong.

So very clear visibility as you will already have noted for the next three to four years and very significant business development which is available for us.

So we do not see any concern in terms of our ability to continue to provide high quality product to the South and Central Mumbai market.

Sameer Baisiwala

0.9 million is all in park, right?

Abhishek Lodha

You are talking about the 0.9 million of…

Sameer Baisiwala

The own land, beyond 12 months slide #22.

Abhishek Lodha

That is our project in Prabhadevi.

That is partly in Prabhadevi and partly there is another location.

So park I think almost everything will be under ongoing unsold.

Sameer Baisiwala

Okay got it.

Thank you.

Macrotech Developers Limited January 25, 2023

Moderator · Conference Operator

Thank you.

The next question is from the line of Pritesh Sheth from Motilal Oswal.

Please go ahead.

Pritesh Sheth

Thanks for the opportunity.

First question on Mumbai as a market from overall macro perspective we have seen upsurge in demand in last two years I think Mumbai has been one of the best market, but now over the last probably five, six months the volumes which we have seen in terms of registration as well as the consultants’ reports have been kind of steady there has not been much growth what is your outlook on Mumbai as a market will we continue to see growth in terms of the industry volume that currently the region is clocking in and how do you see the upcoming infrastructure development helping boost further demand?

Abhishek Lodha

Thank you that is an important question.

Our view is that Mumbai is at a cusp of a breakout driven by two things one of course is the infrastructure creation which has been in the work for almost a decade now, but a number of those projects will culminate in the next 24 months and I think those are going to be really game changing for Mumbai including the Trans Harbour Link, the coastal road, several arms of the metro and a lot of many other not so prominent projects.

This I think is coming at the right time for Mumbai because I think in India now we are going to see the impact of manufacturing leg of growth in addition to of course the strong services leg that India has, and as capital investment, whether under the PLI scheme or otherwise, whether led by the domestic consumption or the China Plus One Strategy all of these fructify, Mumbai is likely to be an outsized beneficiary of that through front office as well as banking.

So generally we believe that Mumbai is very well poised because of these things that I mentioned.

However, in our own internal assessment we remain to do our numbers on a conservative basis we expect nominal growth in the Mumbai market to be in the 10% to 11% range with a mix of about 5% to 6% in price and the balance in terms of volume so generally we are expecting Mumbai market nominal growth to be, our internal assumption is being conservative are below nominal GDP growth.

Pritesh Sheth

Just a followup on that, I think initially while we were targeting the markets like Western suburbs, Eastern suburbs, as well as Pune, Navi Mumbai was also one of the markets where we were looking for growth opportunities, but I think we have not materialized anything in that any separate challenges that we are facing in that market and what is your additional outlook in that market?

Abhishek Lodha

That is very good read.

You are right that most of our new project additions have been in the other markets you mentioned including Western suburbs, Eastern suburbs, and Pune, in addition to the three markets of South Central Mumbai, extended Eastern suburbs and Thane where we have historically been very strong.

Navi Mumbai and Eastern suburb is a joint market for us and we have opportunities available in the Navi Mumbai market, we have just found that the profitability levels there are not as strong as what we are Macrotech Developers Limited January 25, 2023 comfortable with and therefore we have been choosy in picking what to work on.

We continue to evaluate opportunity but as we said in a different context we are not only chasing toplines we are chasing profitable toplines and therefore will always be disciplined in the kind of projects we take up so there both the topline and the bottomline should be understandable by us.

Pritesh Sheth

Just one last question, I think you mentioned in your initial commentary that the embedded EBITDA margin even if we are at full scale contribution from JDA that is at 40% the EBITDA margin can remain at 30% kind of a range versus in presentation you have mentioned the mix probably we are calculating at 25% so just a clarification of that whether 30% can be achievable with 40% JDA contribution or I misunderstood something?

Abhishek Lodha

We do expect that even as the contribution from JDA stabilizes around 40% that given a combination of our scale and therefore our ability to make sure that construction costs are continuing to be value engineered and our overhead costs also given the larger scale are improving plus the price growth that one is seeing in the market place which adds to margin we will be able to maintain the approximate 30% in terms of our EBITDA margins even with the 40% contribution from JDA obviously there may be a quarter where it may become 29%, in another quarter where it maybe 32% but over any meaningful period that 30% should be achievable.

Sushil Kumar Modi

Actually you can do the math straight right.

The difference between the outright and the JDA typically would be somewhere around let us say 10% to 12% and if you just extrapolate to the fact that we would have 25% of JDA mix this year and even if you go to the 40% in the FY2024 that means incremental 15% on that if you take that 12% equation being paid out the differential between the two land model that net impact would be somewhere around 2% and that 2% if you then look at from a price rise standpoint, price rise being around 5%, 6% even if netted down with any construction cost inflationary impact if at all has to further play out for any conservatism you can safely see that, that will get reasonably offset with the price rise and thereby 30% in itself perhaps should not have any challenge maybe even more.

Pritesh Sheth

That is what I wanted to clarify thanks for that answer and all the best.

That is it from my side.

Moderator · Conference Operator

Thank you.

The next question is from the line of Alpesh Thacker from Antique Stock Broking Limited.

Please go ahead.

Alpesh Thacker

Thank you for taking my question.

Sir my first question is kind of continuation from one of the previous questions that we had.

So as we understand that we are in a midst of a strong housing upcycle and this comes with increased expectation of every stakeholders including Macrotech Developers Limited January 25, 2023 the land owners so just want to make sure that how do we ensure that we still make reasonable returns on the projects that we get into so what is the thought process behind that and how do we ensure that we do not get into projects which are really not very profitable or meet our benchmarks?

Abhishek Lodha

It is an important question.

Two things you will have to take into consideration as you determine how land owners are thinking about the situation.

Point number one is that with the steady consolidation in the industry while the quantum of land supply is the same or similar or may even get higher as prices move up the number of takers of that land are limited and therefore the negotiating leverage or negotiating power is tilted towards those who are taking the land that is one element.

The other element especially in the joint development model is that the land owner continue to benefit from the upside in pricing so they need not push hard on the percentage of revenue or profit that they would get because in absolute terms as the market strengthen they will benefit from that upside too so we have not seen any circumstance or anecdotes right now where we see undue pressure.

Obviously every landowners wants to make sure they get a good deal, but the good deal is not only the percentage of profit or revenue it also includes who is the partner, what is the transparency, how likely is the project’s timeframe and price realization to be close to business plan, what is ultimately going to be the NPV, so all these factors have been taken into account by the land owners and we do not see any undue pressure on the land cost.

Alpesh Thacker

My second question is I am referring to the slide where you guys provide price inflation of different materials there we see sharp increase in lifts and elevated costs so how should one read it so what has really gone wrong there what is the reason behind that, that is it from my side?

Abhishek Lodha

I do not really know the specific answer to that nor it is my area of expertise.

I can only guesstimate that given the lockdowns in China and because China tends to be a provider of both input materials as well as finished goods in the elevator space one may have seen a spike and because it is a December 2022 number you may see that up to March 2022 the impact was limited but then suddenly you saw a much bigger impact in this period up to December 2022 but we will do a deep dive and hopefully be able to give you an offline answer on that.

Alpesh Thacker

Thanks a lot for the clarification.

That is it from my side.

Moderator · Conference Operator

Thank you.

The next question is from the line of Abhinav Sinha from Jefferies.

Please go ahead.

Abhinav Sinha

I wanted to ask a question on the digital infra side so you have put up some numbers on slide #17 so can you just provide some clarity on the area under development and area Macrotech Developers Limited January 25, 2023 under construction what does it mean, is this what we have, let us say part of JDA where we can earn earnings, etc., so that is one, and also on this what is the cost of the Kurla land parcel, and you have also given some numbers, some targets for this business can you just elaborate that?

Thank you.

Abhishek Lodha

Your first question if I understood correctly is what is the difference between area under development versus area under construction.

Area under development is the total land which we have acquired and started infrastructural activities around, area under construction is where the physical construction of the box has started so that is the two so you can read it as saying that we have approximately 5.7 million square feet which is available for development and the infrastructure activities around that has started out of which 1.4 million square feet are under construction as physical boxes so that was one.

In terms of the consideration for the Kurla land the exact amount was I think it is approximately INR 150 Crores we will get you with the exact figure, and I think while your line was little unclear the last question you had is what are our growth plans in this area.

As you are aware the platform has been earmarked very significant amount of investment into this area we believe that warehousing and industrial are secular growth stories in India and are supply constrained and we expect to scale this platform up meaningfully in the next three years such that our share of income which is our one third share in the propco plus our fee income from managing the opco will be approximately INR 3 billion by fiscal 2026.

Abhinav Sinha

If I may ask one last question the office space at World Towers I believe it is now completed right so by when are we expecting to monetize it and will we go for say a part monetization as it leases or you would like to do it in one shot?

Abhishek Lodha

As you have noticed we have about INR 30 billion worth of office or retail assets which are ready or almost ready now including the one Lodha place office building which you mentioned.

In terms of our monetization plans we do not have a clear decision yet on the form of monetization obviously we do not expect to continue to hold it long-term on our books our current focus is on leasing.

The leasing activity has started off well, we are having a number of marquee clients including companies like Condé Nast and Gucci, who have signed on and we are focused now on leasing the building out and once the leasing activity substantially progress we will decide on what is the best way of monetizing the asset.

Abhinav Sinha

Thank you.

Moderator · Conference Operator

Thank you.

The next question is from the line of Parvez Qazi from Nuvama.

Please go ahead.

Macrotech Developers Limited January 25, 2023

Parvez Qazi

My question is regarding our township business so what is the kind of presales that we saw from that segment in Q3 and what are the future launch pipeline in that segment?

Thank you.

Abhishek Lodha

The township business is classified largely under what we call extended Eastern suburbs, so if you look at the details on slide #20 of our presentation you will note that we had about INR 5.5 billion of presales from the extended Eastern suburbs and we obviously have very significant land holdings in our developments there.

The number for the nine months so far is just under INR 17 billion and we expect that segment will grow to over INR 20, INR 22 billion or thereabouts for the full year.

The launch pipeline is quite significant.

For those who are in Mumbai you may have even seen an ad this morning of a new segment which is the Crown segment in Dombivli, and we continue to add in new segments like including plotting, higher end aspirational housing, the continuing mid income housing under our Casa brand then lower down more affordable housing under the Crown by Lodha brand we are doing office spaces there in terms of office sales, so we are seeing a number of different drivers on the product side.

There is a lot of interesting and positive infrastructure activity in that area.

The Thane-Dombivli link road is now physically complete and should be open for operations in the next three months which will make Upper Thane just a 10-minute drive to Dombivli West station.

The Nagpur-Mumbai Samruddhi Mahamarg will also touch the Upper Thane project on one side and that will make the drive from Upper Thane will basically become the gateway to Mumbai for all of Northern Maharashtra.

Similarly in Palava we have seen a lot of augmentation of roads.

The Airoli tunnel work it looks like it is quite a bit progress and will make Airoli a predictable 20 minutes away from Palava, which we expect to be a meaningful contributor to additional demand, and we also are seeing other activities.

So overall we feel quite bullish about the reset in the townships business both helping reset in terms of pricing as well as in terms of volumes and we do expect that maybe from fiscal 2025 onwards you will see a meaningful shift upwards in the total contribution from the townships business.

Parvez Qazi

Thank you.

That is it from my side.

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.

Just one question.

If I look at your JDA signings launch timeline on slide #15 and if I compare this with your earlier disclosures just curious to know that majority of the timelines have sort of postponed, like for example certain projects which were about to get launched in starting FY2023 or mid of FY2023 have been sort of postponed to FY2024, I remember one of the key differentiating factors for JDA signings, which we have highlighted are the lower launch timelines from the date of signings right so correct me if I am wrong or should we read anything over there?

Macrotech Developers Limited January 25, 2023

Abhishek Lodha

No, I think the fact is that if anything shifts by a month or two months you will see that shifting from fiscal 2023 to fiscal 2024 because you are in the last quarter of fiscal 2023.

So that is about it actually if you look at it from our new projects launches which is probably the better way to read what we are launching and what time it is taking to get us to launch which is I think the previous slide #14 and then there is a detailed summary of that also you will continue to see that our launch activity is very robust, you will see the slide #13 that our launch activity is quite robust and that is summarized on slide 14.

So really no change in how we are able to get projects to market timely, often one or two months swing will happen but when you see it in the last quarter of the year it will look like a year has shifted.

Kushagra

Yes, totally understand that.

Sure, thanks and all the best.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen that was the last question for today.

I now hand the conference over to the management for closing comments.

Anand Kumar

Thank you everyone for joining the call.

It was a pleasure to answer all your questions.

Feel free to reach out to me or Sushil for any further updates.

We will be happy to help you.

Thank you.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen on behalf of Antique Stock Broking Limited that concludes this conference.

Thank you for joining us.

You may now disconnect your lines.