Strong pre-sales growth, debt reduction to support Macrotech stock

Capital raise to aid joint development projects and expansion

The second largest listed realty player by market capitalisation, Macrotech Developers (Lodha) raised Rs 4,000 crore last week via the qualified institutional placement route. The company plans to use the funds to grow in the under-represented micro markets of Mumbai Metropolitan Region and Pune. Given the demand from the IT sector, the company is also looking at entering the Bengaluru market.

The fundraise through the equity route was expected, given that the promoter holding in the company needs to be reduced from 88.5 per cent to 75 per cent within three years from listing. However, Ayush Bansal and Rahul Jain of Emkay Research say that the timing of the capital raise is much sooner than anticipated, as Macrotech in its Q2 concall indicated a capital raise in the next 12 months.

The near-term trigger for the stock, which has gained a sharp 29 per cent this month, would be continued momentum on bookings or pre-sales and reduction in leverage. The company reported pre-sales of Rs 2,003 crore in Q2 which is up 88 per cent YoY and 104 per cent sequentially; it is confident of achieving pre-sales of Rs 9,000 on the back of new launches. Post the fund raise, the company indicated that it plans to increase its pre-sales to Rs 14,000 crore by FY24 and scale it up further to Rs 20,000 crore by FY26. This translates into a compounded annual growth rate of 22 per cent over the FY22-26 period.

Given the targets, the street will keep an eye on capital required and debt levels. The company’s managing director, Abhishek Lodha, however indicated that the fund raise will help the company in achieving the dual target of deleveraging and capital light expansion through joint development agreement or the JDA model. Macrotech has a strong pipeline of JDAs and seeks to invest Rs 3,000 crore over the next six quarters, he added.

Analysts at JM Financial say the company post the recent fund raising plans to sign JDAs that could translate to Rs 40,000 worth of sales over the next 1.5 years. It remains well placed to gain from a consolidating residential market as well as revival in primary markets of the Mumbai Metropolitan Region with projects across ticket sizes, they add.

While net debt at the end of September quarter stood at Rs 12,500 crore, the company has guided for net debt reduction to Rs 10,000 crore by the end of FY22. The company expects cash inflows of Rs 5,500 crore in the second half of the financial year as compared to outflows of Rs 3,000 crore over the same period.

While near term prospects are strong, the stock after listing in April is up nearly 3 times (about 200 per cent increase). It is currently trading at 45 times its FY23 earnings estimates; investors can consider it on dips.