Macrotech has managed to pull off deleveraging as well as a growth story: Abhishek Lodha

How do you see the state of the housing market?
The housing market in our opinion is at the cusp of a very significant change and that is reflecting in the numbers both for this quarter as well as the previous two quarters. The demand is very solid. People especially are very keen to upgrade their homes to bigger, better homes.Various factors including the cost of mortgage, the impact of Covid are driving the need for some extra space and in general the fact that Indians have under-bought on housing over the last few years.

In addition, salary growth has been quite strong and as salary growth is increasing affordability, people are finding that buying homes is the right thing to do. We are also seeing prices moving up modestly, maybe 5% annually but as they move up, people get more keen to go for a house in right time. All those factors are leading to a groundswell of interest, much more footfalls and better conversion levels.

In the third quarter, we have seen strong pre-sales momentum. Can it continue for the next few quarters too?
What we are seeing on the ground even in January is that the momentum is continuing. It is not only remaining strong but potentially building up further. Overall, the state of the housing market is quite linked to the state of the economy and the confidence in the job market. We see that those factors are likely to remain positive in India for some more time and therefore we believe the housing market will continue to strengthen going forward.

Are you on track for your pre-sales guidance despite the third wave?
Yes, we are on track for our pre-sales guidance for the current fiscal of about Rs 9,000 crore of sales. There has been a modest impact of the third wave caused by Omicron and while Mumbai was first to get hit, it has also been the first to start normalising. The impact on sales has been quite modest so far – about Rs 200 crore in January. We figure that we will be able to make that up and continue to maintain our guidance.

One has clearly seen project addition as well as capex surge post your mega QIP. Help me understand what is happening with the UK project? How much of it is still unsold and when is do you expect it to get fully booked?
In the UK, we had two investments. The first project Lincoln Square is at the very fag end of its sales cycle and should be completely sold out in either one or two quarters. The second project, Grosvenor Square, had a very strong rebound after the UK reopened travel starting from September. Between September and December, that project had sold about 290 million pounds or just under Rs 3,000 crore in Indian rupee terms. As a consequence of that, we will be pre-paying our bonds. We had raised a bond for investing in the Grosvenor Square project which will be pre-paid almost a year ahead of maturity in the next three to four months. That is a significant repayment of about $225 million. Subsequent to that, in the next five to six quarters starting in FY23, almost all our investments in the UK will come back. That is ahead of our original estimate of FY24.

How many new JVs do you hope to sign in the coming few quarters?
We had estimated that with the QIP we will accelerate our pace of growth into serving the markets where we believe there is a gap in terms of supply demand and where we have limited or no presence. We have showcased that we are able to execute pretty quickly on the ground with our capital light model of growth, wherein we partner with landowners rather than buying the land and we focus on the development.

In the last quarter itself, we added six new ADA projects with the GDV or sales potential value of about Rs 10,000 crore and we expect that over the next four to five quarters, we will further keep adding projects such and total up to almost Rs 40,000 crore of new projects. We see very good interest in partnering with Lodha, given the strength of our brand, the sales that we can bring to the table as well as the rapid execution. We see this capital light model as the right mode of growth because it allows us to serve the markets we are not present in but at the same time keep solidifying our balance sheet and allows the business to grow in a manner which is low risk.

Macrotech Developers is currently poised at a deleveraging growth combo. Now that your cost and debt have come down significantly, will your financing costs go further down in the coming quarters?
Absolutely. It is a deleveraging cum growth story which is not easy to pull off but we find that we are able to deliver on both fronts. Our cost of debt has moderated by 120 bps or 1.2% over the last nine months and we expect this to significantly fall going forward. We are targeting that by sometime in FY24 our average cost of borrowings will be somewhere in the eights and that is a reduction of about 250 bps from where we are today.

So not only are we going to reduce our cost of leverage which we think we will but furthermore. we will continue to de-lever our balance sheet. We are not at a stage where we are feeling that this is the right level of debt. Every quarter, there will be a continued reduction in our debt numbers because of the strong operational cash flows that the businesses are generating.

The other thing which is currently at play at a macro environment level for your industry is that labour cost, steel, cement – all have seen a very big inflationary impact especially in the last three quarters. Add to that, there is a big overhang that the interest rate trajectory may turn. Could this be a big overhang for sales which are coming back for the realty industry?
Inflation is a reality. It has to be dealt with in a manner where value engineering as well as the scale of buying helps us moderate the cost that goes in. We find that the construction cost intensity i.e. the cost of construction as a proportion of sales price in India and especially in Mumbai, is modest at somewhere between 30% and 40%. Therefore, even if there is a reasonable amount of inflation, it does not have a very significant amount of impact on margins.

So far, we have seen that costs have gone up by about 3-4% as a percentage of margin. We find that with price growth back now, we can definitely pass that cost on to the consumer because wage growth is even higher and potentially even a slightly higher price growth will help add to margins. We believe that inflation is real and there are modes and ways of trying to moderate this impact. But overall, the scenario is such that the supply is moderate now. It is constrained, it is consolidated and since there is going to be ongoing price growth in this sector, which is great for the consumer. That is because 70% of the wealth of the Indian middle classes is held in housing and if every year home prices grow by 5%-6%, then one suddenly starts seeing the impact of that from a wealth perspective in the middle class and that sparse consumption. We are quite comfortable with where inflation is and where price growth is.

How are you going to deploy surplus funds from the rest of the QIP money?
The focus of the QIP was capital for growth and that is how we are going to continue to deploy that capital in the capital light model of joint development. We are focussed on growing in markets where there is not enough high quality supply and where our presence is limited and we find those opportunities quite available on the ground. There are a large number of developers who are not so keen to continue developing. They have a significant amount of projects that are ready to go and that is where a developer like us steps in and helps bring the project to life and at the same time, helps the existing developer and their lender eventually find an exit through the cash flows of the project.

Could you spell out which are the new markets that you are looking at?
Geography wise, we believe that real estate requires a lot of focus in every city that one operates in and also as long as there is growth opportunities within the geographies one is operating in, there is no point in adding to this pie by going into many geographies. Our focussed markets are Mumbai and Pune and as we mentioned at the time of our QIP, we continue to evaluate Bangalore. We are quite excited with the facts that we are seeing on the ground and the gaps and opportunities that a brand like us are able to serve.

These are still early days and probably sometime in the next three to six months, we will come to our conclusion on whether Bangalore is the right place for us but as things stand, we are focussed on Mumbai and Pune