Macrotech Developers (Lodha) IPO review (May apply)

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Review By Dilip Davda on April 5, 2021

• Lodha group planned to launch its maiden IPO since Sept. 2009.
• BRLMs and the issue size kept changing every time as indicated in three draft offers.
• Its top line has shown inconsistency while bottom line kept declining.
• Based on negative earnings for 9M FY21, issue is priced at negative P/E.
• Pandemic has shown worst impact on company's performance.

PREFACE

Macrotech Developers Ltd. (erstwhile known as Lodha Developers Ltd.) has been trying to mop up huge money from the capital market since September 2009, but it could not see the light of the day on account of various reasons like disagreement on pricing of the IPO, bad market sentiments, dull atmosphere for the realty segment etc. The group also met with chaos on its some of the projects from the customers regarding quality of the work, delayed possessions, penalty for late payments etc. Now the IPO comes in the new name for which management clarified that while they are continuing their brand 'LODHA', they decided to change the name post-merger with one of its subsidiary and carrying its name for the merged entity.

Sudden change in lifestyle following pandemic, many have opted to shift to rural regions from urban and preferred affordable housing segment. This too had an impact on dull market sentiment in urban areas. Few other factors worth looking at in its September 2009, April 2018 DRHP and March 21 RHP are as under:

NB: The Company changed its name from Lodha Devlp to Macrotech Devlp in RHP

As per DRHP of April 2018, as on December 31, 2017, its total borrowings were Rs. 22327.21 cr. (page 520 of offer documents).

As per September 2009 and April 2018 DRHP it had appointed 9 and 11 BRLMs, and the issue size was for Rs. 2790 cr. And 3750 cr. Respectively. From this list of BRLM, we find names of CLSA India Pvt. Ltd., Morgan Stanley India Co. Ltd., HDFC Bank, UBS Securities missing and three new BRLMs included in March 2021 RHP are Axis Capital Ltd., J.P.Morgan India Pvt. Ltd., and SBI Capital Markets Ltd. March RHP indicates issue size of Rs. 2500 cr. With exchange of three BRLMs and withdrawal by 1 BRLM, the company has finally lowered fund raising target by Rs. 1250 cr.

ABOUT COMPANY

Macrotech Developers Ltd. (MDL) is one of the largest real estate developers in India, by residential sales value for the financial years 2014 to 2020 (source: Anarock Report). Its core business is residential real estate developments with a focus on affordable and mid-income housing. Currently it has residential projects in the MMR and Pune. In 2019 it forayed into the development of logistics and industrial parks and entered into a joint venture with ESR Mumbai 3 Pte. Ltd.

The company also develops commercial real estate including as part of mixed use developments in and around its residential projects.

Its ongoing large projects portfolio includes Palava (Navi Mumbai - Dombivli Region), Amara, Lodha Sterling, Lodha Luxuria, Lodha Spendora, Crown and Upper at Thane, Bel Air (Jogeshwari), Lodha Belmondo (Pune), Casa Maxima (Mira Road). As of December 31, 2020 it has completed 91 projects of approx. 77.22 million sq. ft. (including 59.13 million affordable, 12.15 million mid-incomes and the rest in premium segment. It has 36 ongoing projects for approx. 830 acres developable area.

As on December 31, 2020 the aggregate outstanding borrowings of MDL stood at Rs. 18662.19 cr. Management clarified that with the on hand inventory realization, likely cash inflow for sold properties and under construction inventory realization, the company is likely to be debt free by 2023-24.

ISSUE DETAILS/CAPITAL HISTORY

To part finance its plans for reducing outstanding borrowings (Rs. 1500.00 cr.), acquisition of land/land development rights (Rs. 375.00 cr.) and general corpus fund needs, MDL is coming out with a maiden IPO to mobilize Rs. 2500 cr. It has reserved shares worth Rs. 30 cr. (approx. 617280 shares), for eligible employees. From the residual portion, it has allocated 50% for QIBs, 15% for HNIs and 35% for retail investors. At the upper price band, MDL is likely to issue overall 51440340 equity shares of Rs. 10 each (including employees portion).

It has fixed a price band of Rs. 483 - Rs. 486 per equity share having a face value of Rs. 10 per share. The issue opens for subscription on April 07, 2021, and will close on April 09, 2021. Minimum application is to be made for 30 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 11.50 % of the post issue paid-up capital of the company.

Joint Book Running Lead Managers (BRLMs) to this offer are Axis Capital Ltd., J.P. Morgan India Pvt. Ltd., Kotak Mahindra capital Co. Ltd., ICICI Securities Ltd., Edelweiss Financial Services Ltd., IIFL Securities Ltd., J M Financial Ltd., Yes Securities (India) Ltd., SBI Capital Markets Ltd., and BOB Capital Markets Ltd. while Link Intime India Pvt. Ltd. Is the registrar to the issue.

Having issued initial equity at par, the company raised further equity in the price range of Rs. 100 to Rs. 1000 (based on Face Value of Rs. 10 per share) between March 2005 and December 2016. It has also issued bonus shares in the ratio of 15 for 1 in September 2008, 99 for 1and 12 for 100 in September 2009 and 5 for 2 in December 2017.

The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NIL, Rs. 24.17 and Rs. 760.00 per share.

Post issue, MDL's current paid-up equity capital of Rs. 395.88 cr., will stand enhanced to Rs. 447.32 cr. Based on the upper price band, the company is looking for a market cap of Rs. 21739.67 cr.

FINANCIAL PERFORMANCE

On the financial performance front, on a consolidated basis, MDL has reported turnover/net profit (loss) of Rs. 13726.57 cr. / Rs. 1789.39 cr. (FY18), Rs. 11978.87 cr. / Rs. 1643.98 cr. (FY19) and Rs. 12560.99 cr. / Rs. 744.84 cr. (FY20). For the nine months' period ended on December 31, 2020, it has reported a net loss of Rs. - (264.30) cr., on a turnover of Rs. 3160.49 cr. While it posted inconsistency in top lines with declining bottom lines for the concluded three fiscals, it has posted negative earnings for the 9M FY21. Lower turnover and losses are attributed to impact of COVID-19 pandemic.

For the last three fiscals, the company has (on a consolidated basis) posted an average EPS of Rs. 30.52 per share and an average RoNW of 41.8 %.

If we include data from April 2018 DRHP for its working since FY2015, then, on a consolidated basis it has posted turnover/net profit of Rs. 6269.48 cr. / Rs. 798.01 cr. (FY15), Rs. 8290.95 cr. / Rs. 702.81 cr. (FY16) and Rs. 7957.33 cr. / Rs. 582.03 cr. (FY17). Thus for these three fiscals too it has shown inconstancy in top line while bottom lines have shown declining trends. If we add FY18 to FY20 data, then too it shows inconstancy in top line with declining trends in bottom lines. The most important is for 9M FY21 it has suffered losses which is attributed to pandemic scare. 

The issue is priced at a P/BV of 5.01 based on its NAV of Rs. 97.03 per share as of December 31, 2020 (on a consolidated basis) and at a P/BV of 3.43 based on its post-IPO NAV of Rs. 141.76 per share (at the upper price band). Based on FY21 9M earnings, the issue is priced at a negative P/E. Based on its FY20 earnings, the issue is priced at a P/E of around 29.19 and thus it appears fully priced.

DIVIDEND POLICY

MDL has not paid any dividend for the last three fiscals as well as 9M-FY21, but will follow a prudent dividend policy based on its performance and future prospects.

COMPARISION WITH LISTED PEERS

As per offer documents, MDL has shown Brigade Enterprises, DLF Ltd., Godrej Properties, Oberoi Realty, Prestige Estates, Sobha Ltd., and Sunteck Realty as its listed peers. They are currently trading at a P/E of around 45.07, 00, 325.14, 59.27, 92.19, 42.12 and 100.86 (as of April 01, 2021). However, they are not truly comparable on an apple-to-apple basis.

MERCHANT BANKER'S PERFORMANCE

The ten BRLMs associated with the offer have handled 38 public offers in the past three years, out of which 12 issues closed below the offer price on the listing date.

Conclusion

Based on its last three offer documents comparisons, latest financial data and rising scare following recurrence of pandemic, immediate future appears gloomy. The issue is priced at a negative P/E based on FY21-9M workings. Though IPO pricing appears lucrative, based on its current working and likely impact of continued corona scare in near term, its 'High Risk-Low Return' proposal. Considering all these, cash surplus - risk savvy investors may consider investment at their own risks in this IPO having negative P/E.

Additional Insights

• Lodha is the largest residential developer in India, and the dominant player in MMR which is the largest and most profitable real estate market in India
• Over last 7 years, Lodha has done 50,000 crores of sales (~2x of any other developer) and delivered 5.7 crore sq. ft, which is 10x of the next biggest listed Mumbai based developer
• The last three FYs (FY 18-20) were most challenging for real estate, and several developers shut down. In such a period, Lodha averaged 8500 cr. of annual collections (equivalent to next 3 guys put together), which is evidence of a very strong customer brand, sales and speedy construction
  Lodha has sufficient land across MMR for its growth in Mumbai and Pune. Lot of opportunity to grow through JDA as banks and NBFCs want a developer like Lodha to take over stalled projects that they have funded
• Average Completed Developable Area has increased from 56 Lakhs sq. ft over FY14 to FY16 to 109 lakh sq. ft over the FY17 to FY20
• Execution and delivery capabilities are growing every year, where in in FY20, despite of covid - the Group has delivered 77% of the deliveries made in the last two years
• Almost 2/3rd of sales coming from affordable & mid-income housing - focus on this segment. Palava, where Lodha has almost 4000 acres, is in the centre of high growth markets of Navi Mumbai, Thane and Kalyan and will benefit from the metro line, suburban train station and new road connectivities
• For the industry the profitability numbers are muted for residential business: Adj EBITDA Margin ~20 % | PAT Margin ~5-10%, where in speaks volume on Lodha's position with a consistent track record of profitability with 29.9-30.9% adj. EBITDA margin (FY18-20) and 12.6-14.0% restated PAT margin (FY18-20) 
• Lodha has brought its London investments to an end and focus is solely on development in India. Units in the London project are selling well. 
• Lodha's Board has eminent names such as Mukund Chitale (board member of L&T), RP Singh (board member of Maruti Suzuki and former chairman of NHAI) and Ashwani Kumar (former chairman of Dena Bank) and is putting lot of focus on governance
• Lodha looks to be providing a fabulous valuation with leading across metrics and is coming at P/E (FY 22 E) of 18, whereas Godrej Properties is 90+ and DLF is 40+. 
• The Net Present Value of Lodha Projects works out to over Rs. 40,000 crs thus the Market Cap/NPV is about 59 pct whereas the others in the same league are much higher, with Godrej at about 126 pct of NPV
• Housing is at the start of a long-term upcycle driven by great affordability. There is likely to be tremendous volume growth focussed on affordable and mid-income housing
• Q4 housing sales have been amongst the best ever across various markets in the country. The trends in home loan and the Q4 results of listed housing players are evidence of the sustainable recovery in housing. 

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