 "Abhisheck Lodha")
Two global rating agencies, Moody’s and Fitch, have downgraded the outlook on Lodha’s ratings from ‘stable’ to ‘negative’, due to weaker operating performance. And, the enforcement directorate has sought details about its foreign investments. There has also been a buzz about payment delays to suppliers and contractors.
What happened to the company that beat DLF, the largest listed developer, in terms of sales in 2014-15? According to Moody’s Investors Service, the company made collections of Rs 5,400 crore in FY15 against expectations of Rs 7,500-8,000 crore, and five per cent lower than those in FY14. Sales were Rs 7,800 crore in FY15 against expected Rs 8,000-8,500 crore but the mix did not support high cash collection levels, Moody’s said. “The projects sold had fairly low levels of mature inventory, which usually boost collection levels,” it observed.
“'The change in outlook reflects the company's weaker-than-expected cash collection for FY15, which makes it less likely that Lodha Developers will improve its credit metrics to a ratings-appropriate level by FY17," said Vikas Halan, vice-president at Moody's.
Lodha used debt to fund nearly Rs 3,000 crore in land payments. This increased its borrowings by about Rs 2,600 crore, bringing the total debt to Rs 12,000 crore as on March 31.
Explanations
Many in the sector believe most of Lodha’s problems have to do with the subdued property market in the region in and around this city. Last year, the Mumbai Metropolitan Region (MMR) saw a 23 per cent dip in sales on a yearly basis and 35 per cent down from 2011, which was a considerably better period for the real estate market, according to real estate research firm PropEquity.
High prices and lack of affordability had pushed Mumbai to accumulate the highest number of unsold homes in the country, about 200,000 in December 2014. Lodha, founded in 1980, made 13.2 per cent of home sales in Mumbai’s metropolitan region in FY14, according to the company’s US bond prospectus.
“Markets are bad and things are down. Besides, Lodha is a pure residential player, which gets cash flows only if it sells,” said an executive at the Mumbai-based Raheja group, adding residential markets will improve only if developers go for a sharp price cut. “People have got single-digit salary hikes and do not have much of surplus funds. Investors are struggling with their investments,” he added.
According to consultants, Mumbai property markets are expected to remain subdued for the next one to two years. A chief executive of a Mumbai-based private equity firm calls this an issue of “asset-rich but cash-poor companies”. “It is an industry problem. Cash flows are not meeting developers’ obligations as sales are down. The only option is to sell assets. If they don’t, problems will aggregate,” the executive adds.
Some find flaws in Lodha’s strategy. For instance, the head of a housing finance company says, Lodha has spread itself too thin and across various levels, from luxury to value housing. He notes it has a luxury project in South Mumbai and an affordable housing one at Dombivali, on the outskirts. “They have done all types of projects, without any clear positioning. Oberoi and Hiranandani do only premium projects,” he said.
Lodha defence
“In spite of the general lack of momentum in the economy, we marginally grew our sales. We believe this reflects the success of our strategy to focus on high-quality housing and office space across all segments, and ensure all our customers can have access to high-quality housing,” said Abhisheck Lodha, managing director, in an e-mailed response.
On delay in payments to suppliers, Lodha said: “We are currently undergoing a business process transformation and technology upgrade across all our business verticals, due to which there has been an implementation delay in our payment systems, as well. We are doing all it takes to complete the upgrade successfully and have also informed our esteemed partners and vendors of the same.”
As on June 30, the company said, it had Rs 1,500 crore of cash and cash equivalent, one of the highest levels in their history and in line with targets. Lodha said it had got strong responses to recent launches, such as demand for 1,800 units at its latest launch in the Thane area. The MD expects these would be be fully sold in the first phase. He said Lodha had five focus projects, each with a top line of over $2.5 billion, across the city – two in central Mumbai, one on the Eastern Freeway, one in Thane and one in the extended suburbs (Palava).
“Last year, we spent over Rs 2,500 crore on construction and delivered over 6,000 units to our customers. This shows the strength of our delivery system, on the back of which we can continue to develop and sell large values and volumes across multiple projects,” he said.
Adding: “We are focused on ensuring that FY15-16 is a record year for us on sales and deliveries. We have targets of sales of over Rs 10,000 crore and deliveries of almost 7,000 units.”
Though the agencies have assigned 'junk' status to Lodha’s US bonds, Goldman Sachs has put Lodha among its top junk-bond bets, due to coupon rates of 12 per cent, which the US bank says is the highest coupon of any Indian offshore debt.
