Macrotech Developers (Lodha) is one of the largest real estate developers in India, by residential Sales value for the financial years 2014 to 2020. (Source: Anarock) Their core business is residential real estate developments with a focus on affordable and mid-income housing.
Currently, they have residential projects in the MMR and Pune. In 2019, they forayed into the development of logistics and industrial parks and entered into a joint venture with ESR Mumbai 3 Pte. Limited (“ESR”), a subsidiary of ESR Cayman Limited, an Asia Pacific-focused logistics real estate platform. (Source: Anarock Report) They also develop commercial real estate, including as part of mixed-use developments in and around their core residential projects.
As of December 31, 2020, their ongoing and planned projects accounted for an estimated Developable Area of 28.78 million square feet and 45.08 million square feet, respectively.
Objects of the Issue
- A substantial amount of debt, which could affect their ability to obtain future financing or pursue their growth strategy.
- The ability to identify suitable parcels of land for development is a vital element of growing their business and involves certain risks, including identifying land with clean title and at locations that are preferred by their target customers.
- There are material outstanding legal proceedings involving their Company, Subsidiaries, Associates, Directors, Promoters, and Group Companies.
- Further, pursuant to the terms of certain of their borrowings, entire equity share/ordinary share capital of Subsidiaries, Bellissimo Construction and Developers Private Limited, Homescapes Constructions Private Limited, Primebuild Developers and Farms Private Limited, Lincoln Square Apartments Limited, 1GS Investments Limited, Lodha Developers 1 GSQ Limited and 1 GS Residences Limited and 95% of the ordinary shares of Lodha Developers 1GSQ Holdings Limited, are pledged with lenders.
- As of December 31, 2020, they 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 in India.
- Their real estate development activities are geographically concentrated in and around the Mumbai Metropolitan Region (the “MMR”).
- They have entered into and may enter into development agreements in the future, which confer rights on them to construct, develop, market and eventually sell the Saleable Area to third party buyers. Such agreements generally will not convey any interest in the title of the immovable property to them and only the development right would be transferred. Under these agreements, they would typically be entitled to a share in the developed property or a share of the revenues or profits generated from the sale of the developed property, or a combination of the above entitlements after adjusting the amount paid earlier, if any.
- The title to the lands in India is often fragmented and the land may, in many cases, have multiple owners. This also makes the acquisition and development process more complicated and may expose them to legal disputes and adversely affect their land valuations.
- The securities of certain of their Subsidiaries, namely Sanathnagar Enterprises Limited (“SEL”) and National Standard (India) Limited (“NSIL”), were suspended from trading on the recognized stock exchanges in India due to certain non-compliances with the listing requirements and the securities of Roselabs Finance Limited (“Roselabs”) have been placed under Graded Surveillance Measures (“GSM”) (Stage 3) by BSE.
- As of December 31, 2020, of their total outstanding borrowings of ₹ 186,621.85 million, ₹ 108,191.22 million had floating or variable interest rates. Upward fluctuations in interest rates could therefore increase the cost of both existing (for floating or variable interest rate borrowings) and new debt, which may have an adverse effect on their business, results of operations, and financial condition.
- A significant portion of their working capital needs is funded by presales. Any cancellation of sales or change in the laws or regulations governing the use of presales may affect working capital and financial position.
Details of loans given to related parties as of December 31, 2020 as per Restated Financial Statements
Their 3Y (FY18 to FY20, as can’t annualize 9MFY21 figures) Revenue CAGR has been -5.34%, net profit CAGR has been -36.5%.
EPS for 9MFY20 was negative but if we take FY20 EPS, then the issue is priced at 26.3x P/E and 5.0x P/B. As of December 31, 2020, the debt to equity ratio was 3.87x which was extremely high.
With such high leverage, the company has little to no ability to absorb any shocks of unforeseen events. In the past 2-3 years Lodha has also found difficulties in servicing their debt. In such a scenario, where the balance sheet is stressed and where many listed players are available with a crystal clean balance sheet, we feel this issue can be avoided.
Real Estate Industry Insights
Overview of the Indian Real Estate Sector
The real estate market in India has grown at a CAGR of approximately 10% from USD 50 billion in 2008 to USD 120 billion in 2017 and is expected to further grow at a CAGR of 17.7% to reach USD 1 trillion by 2030. The real estate market contributed approximately 6% to India’s GDP in 2017 and is likely to contribute approximately 13% to India’s GDP by 2025. Residential, commercial, and retail are the three key asset classes that have primarily contributed to the growth of the real estate market in India.
The following graph sets forth the size of the Indian real estate market (in USD billion) from 2008 to 2030:
Key Growth Drivers of the Indian Real Estate Sector
- The inflow of Foreign Direct Investment
- Rapid Urbanization Boosting Urban Population
- Nuclearization of Families
- Improving Education Levels and Increasing Per Capita Income
- Growth in Income Level of Households in India
Key Reforms in the Indian Real Estate Sector
- Real Estate (Regulation and Development) Act, 2016
- Benami Transactions (Prohibition) Amended Act 2016
- No access to capital for tier-2 unbranded developers
Residential Real Estate Market in India
In the last three to four years, the real estate sector in India has witnessed several changes because of demonetization, the liquidity crisis, and the implementation of RERA and GST.
Despite the spiraling COVID-19 pressure across the country, the Indian residential sector made a significant comeback in Q4 2020 with absorption rebounding to 86% of the corresponding period in 2019.
The Mumbai Metropolitan Region (“MMR”), Pune, Bengaluru, Hyderabad, the National Capital Region (“NCR”), Chennai, and Kolkata (“Top Seven Indian Markets”) recorded absorption of approximately 1.38 lakh units in 2020 against 2.61 lakh units in 2019. Further, new supply declined by 46% to approximately 1.28 lakh units in 2020 from approximately 2.37 lakh units in 2019.
In addition, there has been a continuous decline in the overall unsold inventory, primarily because absorption in the past years has exceeded total launches consistently since 2016. The unsold inventory of the Top Seven Indian Markets declined by 2% from approximately 648,400 units as of the end of 2019 to approximately 638,020 units as of the end of 2020.
The following graph sets forth inventory overhang trend and forecast in the Top Seven Indian Markets (in months):
Supply and Absorption in the Top Seven Indian Markets in 2020
With a share of 24% of the total supply (by units), 32% of total absorption (by units), and 46% of total absorption (by value) in the Top Seven Indian Markets, the MMR was the top performer in overall residential activity in 2020.
The following graph sets forth supply (by units) and absorption (by units) in the Top Seven Indian Markets in 2020:
Sales in the Top Seven Indian Markets
In the last six years, the Top Seven Indian Markets witnessed cumulative sales of ₹ 11,881 billion of organized residential developments. With a maximum share of absorption and highest capital pricing in the Top Seven Indian Markets, the MMR contributed approximately 32% to 46% in the overall sales value in the last six years. Assuming a similar gross profit margin across different markets, the MMR is likely to have the highest gross profit pool among the Top Seven Indian Markets.
In 2019, the Lodha group accounted for the highest share (3.47%) in terms of sales value across the Top Seven Indian Markets, followed by Godrej Properties (2.6%) and Prestige Group (2.16%). During Fiscal 2020, the Lodha group accounted for the highest sales value, collections, and revenue from operations among real estate developers in India. With increasing buyers’ preference towards branded developers and consolidation among developers post-implementation of the regulatory reforms, the market share of tier-2 developers is likely to decrease and the same is likely to be acquired by branded players.
The following graph sets forth year-on-year sales in the Top Seven Indian Markets (in ₹ billion):
Top Developers in India
Indian residential real estate market is dominated by a few pan-India and branded players and multiple local players. The top five developers in terms of highest cumulative sales from Fiscal 2014 to 2020 are Lodha group, Godrej Properties Limited, Prestige Estates Projects Limited, Sobha Limited, and DLF Limited.
While Prestige Estates Projects Limited primarily operates in South India, Lodha group has a majority of its projects in West India. DLF Limited, Godrej Properties Limited, and Sobha Limited have a pan-India presence. With approximately ₹ 500 billion of cumulative sales and 57 million square feet of area delivered over Fiscals 2014 to 2020, Lodha group is one of the largest real estate developers in India by residential sales and area delivered
The following graph sets forth sales and deliveries by key developers across India:
Impact of COVID-19 on the Indian Residential Real Estate Market
- Signs of revival in the backdrop of economic recovery and demand
- Demand re-configuration
- Preference towards large, branded players with a proven track record
Policy Level Support by the Government
- Reduction in stamp duty
- Loan moratorium
- Reduction in home loan interest rates
Key Emerging Trends in the Indian Residential Real Estate Market
- Branded Developers Command Premium in Terms of Pricing and Sales
- Preference for Branded Developers
- Consolidation of Developers
- Need for Large and Functional Homes
- Luxury Projects Garnering Interest Among Buyers
- Demand for Ready-To-Move-In Units
Residential Real Estate Market in the MMR
Supply, Absorption and Unsold Inventory Trends in the MMR
Supply and absorption declined in 2016 and 2017 in the MMR, primarily on account of the impact of demonetization, RERA, and GST. Post-2017, absorption of units grew steadily and outpaced the supply of units. In 2020, the units launched were lower than the units sold. Until Q3 2020, only select developers were launching projects with high inventory size in the MMR, and the buyers who visited sites before the lockdown was going ahead with their buying decision. Q4 2020 was better than earlier quarters, on the back of the festive season, low-interest rates, and an improving employment scenario.
Since the announcement of a reduction in the stamp duty by the Government of Maharashtra with effect from September 1, 2020, housing sales have increased continuously month-on-month. Between September 1, 2020, and December 31, 2020, Mumbai recorded registrations of 41,681 units, with numbers growing incrementally month-on-month, according to the Department of Registration and Stamps, Government of Maharashtra. In December 2020, the figure grew two times over the same period last year. While December 2019 recorded registration of 6,433 units, December 2020 recorded registration of 18,854 units.
Total sales in the MMR during 2020 were 44,323 units (approximately ₹ 53,150 crores), of which Lodha group sold 4,475 units (which attributed 10% of the market share, the largest in the MMR) at approximately ₹ 4,522 crores (which attributed 8.5% of the total sales value of the sold units in the MMR).
The following graph sets forth supply and absorption trends (in units) in the MMR from 2015 to 2020:
The overall unsold inventory gradually decreased from 2017 and is at its lowest in the last six years, on account of strong absorption trends, which was higher than newly launched units and previously unsold inventory.
The annual absorption in the MMR in 2021 is expected to be similar to that of 2019. Anarock expects that post-2021, there will be a gradual increase in absorption until 2025. New launches are likely to be lower than that of 2019 but are expected to gradually increase year-on-year. On account of disciplined supply, the unsold unit overhang is expected to reduce significantly and will likely fall to under two years of forecasted sales by 2022.
Market Segmentation of MMR
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