Markets
Lodha strives to balance pace of project additions and debt uptick
Summary
- Lodha’s aggressive project expansion into new markets like Bengaluru and premium offerings in Palava signal growth ambitions. However, sequential rise in debt is a sentiment dampener, highlighting the need for careful pacing to sustain momentum.
Macrotech Developers Ltd, formerly Lodha Ltd, aggressively pursued business development activities in H1FY25, adding four new projects—two in Pune and two in Bengaluru—with an aggregate gross development value (GDV) of around ₹5,500 crore in the September quarter (Q2FY25). This brings the real estate major’s H1FY25 business development to seven projects, totalling ₹16,600 crore in GDV, or about 80% of its FY25 guidance for new project additions.
In real estate, business development typically involves land acquisitions and joint ventures for project development.
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Lodha’s expansion into new micro-markets aligns with its strategy to penetrate and grow in these regions. This should help mitigate the concentration risk as most of its residential unit offerings are in Mumbai Metropolitan Region (MMR). Plus, large unsold inventory in the crucial MMR market could keep realizations under check.
The company is betting big on Bengaluru, where it invested ₹3,800 crore in Q2FY25 for business development in the city’s north and east. This brings Lodha’s inventory in Bengaluru to ₹6,000 crore, providing good visibility for scaling-up in this market over the next two to three years, according to the management.
The Bengaluru pilot phase pilot was launched in FY24 and now contributes about 7% to Lodha's pre-sales. Having changed its stance from pilot to growth, the company's management expects Bengaluru to contribute around 10% to its pre-sales mix in FY25. Overall, it expects to grow its market share in the region to 15% by 2030 from 2-3% currently. This implies an annual gain of about 2% in Bengaluru market share.
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On the flipside, aggressive business development has led to a sequential rise of around ₹600 crore in net debt to ₹4,920 crore as of end of September. Still, it remains below 0.5x net debt-to-equity. The management aims to keep debt below the ceiling of 1x net debt-to-operating cashflows or 0.5x net debt-to-equity for FY25. It expects operating cash flow (OCF) to increase significantly in H2FY25, driven by robust collections and moderation in the pace of business development. H1FY25 OCF stood at ₹1,800 crore, tracking far behind the FY25 guidance of ₹6,500 crore.
Even so, the increase in debt has come as a disappointment. Analysts at Kotak Institutional Equities have revised the fair value (FV) for the stock to ₹1,340/share from ₹1,450/share. “The revision in the FV is primarily due to higher net debt, as we factor new business development and rent-seeking annuity assets (against the traditional plan for asset monetization)," they said in a report on 29 October.
Lodha achieved pre-sales of ₹8,300 crore in H1FY25, marking a 21% year-on-year increase and reaching 49% of its FY25 target. With a robust pipeline of ₹10,000 crore across its focused markets in H2FY25, the management is confident about exceeding the FY25 pre-sales guidance of ₹17,500 crore. Lodha is also intensifying its focus on the premium residential segment with launches slated for H2FY25 in Palava, Maharashtra, where improved infrastructure connectivity supports higher pricing. These projects will be priced about 50% above ongoing projects.
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Shares of the company have gained 15% so far in 2024, underperforming the Nifty Realty index. The second half of the financial year tends to be stronger than the first half, so some catch-up in stock performance can be expected based on the pre-sales trajectory. However, that would be easier said than done this time around. With a high base, achieving a 20% compound annual growth rate beyond FY25 could be challenging, cautioned an Antique Stock Broking report dated 29 October.
