Industry

The real estate market in India has grown at a CAGR of ~10% from USD 50 billion in 2008 to USD 120 billion in 2017 and is expected to grow at a CAGR of 17.7% to reach USD 1 trillion by 2030. The real estate market is likely to contribute ~13% to India’s GDP by 2025 compared to ~6% in 2017. Residential, commercial and retail are the three key asset classes that have primarily contributed to the growth of the market. Some of the growth drivers of the India Real Estate Sector are:

• Rapid Urbanisation – India has a population base of ~1.37 billion. Along with increasing population, India’s urbanisation is also increasing at a faster pace. As per the United Nations Development Programme, ~50% of India’s population is projected to be urban by 2046. Rapid urbanization is expected to drive the demand for residential, offices and other real estate asset classes in the medium-to-long term.
• Nuclearization of Families – India has seen reduction in overall household size in the past few decades, primarily on account of an increase in nuclearization of families. With an increase in nuclearization of families, more households are being added, resulting in an increase in consumption and demand for housing.
• Favourable Demographics – In 2011, India had ~61% of its population in the age group of 15 – 59 years, which is expected to reach ~65% by 2036. With increasing young population, the dependency ratio has been declining and India has entered a period of demographic dividend. The percentage of urban population and age distribution profile are key demand drivers for real estate in a country. India, with one of the largest workforces, is expected to be a huge market for both, residential as well as other real estate asset classes.
• Growth in Household Income – Growth in household income is expected to transform India from the bottom of the pyramid economy to a middle-class economy. ~140 million households are expected to be added to the upper mid income and lower mid income bracket between 2018 – 2030. Households belong to these two income brackets are expected to drive housing demand.

Residential Real Estate Market
In last 3–4 years, the Indian real estate sector has witnessed several changes on account of demonetisation, liquidity crisis and the implementation of RERA and GST. Despite the Covid-19 strain, the residential sector made a strong comeback with absorption rebounding to 86% of the same period in 2019. The Top Seven Indian Markets – the MMR, Pune, Bengaluru, Hyderabad, the NCR, Chennai and Kolkata – recorded absorption of ~1.38 lakh units in 2020 as against 2.61 lakh units in 2019. Further, new supply declined by 46% to ~1.28 lakh units in 2020 from ~2.37 lakh units in 2019. Additionally, there has been a decline in the overall unsold inventory primarily because absorption in the past years have exceeded total launches since 2016. The unsold inventory of the Top Seven Indian Markets declined by 2% from ~648,400 units as of the end of 2019 to ~638,020 units as of the end of 2020.

Residential Real Estate Market in the MMR
Supply and absorption declined in 2016 and 2017 in the MMR primarily on account of the impact of demonetisation, RERA and GST. Post 2017, absorption of units grew steadily. In 2020, the units launched were lower than the units sold. 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 reduction in the stamp duty by the Government of Maharashtra with effect from September, 2020, housing sales have increased continuously month-on-month.

However, Maharashtra government has decided not to extend the stamp duty waiver on property registrations from April and said it would reinstate its earlier system of stamp duty on property registrations from April 2021 (The stamp duty was reduction came in two phases. It was cut by 3% points between September and December, 2020; and was 2% points below the usual 5% till March 2021. The usual rate is 5% of the property value in Mumbai and 6% in the rest of the state).

Office Real Estate Market
The office real estate market in India has witnessed growth over the past few years until the Covid-19 pandemic hit the overall business in 2020. In 2019, net absorption and net supply in the Top Seven Indian Markets was ~40msf and ~45 msf, respectively. During the first half of 2020, occupiers were cautious in making any lease commitments with respect to their future office space plans. In 2020, absorption is estimated to decline by 40% - 45% in 2020 compared to 2019. While the pandemic had led to several trends in office spaces such as technology enabled designs, focus on safety standards, remote working in the short term, the office real estate market in India is expected to be on track in the long term on account of sustained growth of the IT and ITeS sector, emergence of other sectors as office occupiers and increasing organised investment environment.

Peer comparison

Risks

• The company's balance sheet is highly leveraged. Its total borrowing as of December 2020 is Rs. 18,633.5 crores, with a debt/equity ratio of 3.87x, up from 3.63 in FY20. Even though the company has proposed to minimise the total outstanding debt, the debt will remain high and debt/equity ratio is expected to be at ~3.5x.
• During 9MFY21, the company has made a loss of ~264 crores (PAT Margin – 9.07%). Its PAT Margins has been declining from 13.23%in FY18 to 5.99% in FY20.
• As of December 2020, the company has a contingent liability of Rs. 781.17 crores. If these liabilities materialise, it will have a direct effect on the company's financial results.

• The Covid-19 pandemic has had an effect on the company's operations, including a decrease in general business activities, a slowdown in unit sales in residential developments, obtaining/renewing lease commitments for commercial developments, and construction delays on ongoing projects, among other things. Furthermore, India is experiencing a new wave of the coronavirus, which is leading to an increase in the number of cases, especially in Maharashtra, where the company operates. The state government of Maharashtra has issued strict guidelines in response to the pandemic's uncertainty and the rising number of cases. These factors could affect the company's operations and profitability in the near-to-medium term.
• There are several material legal proceedings (criminal matters, civil matters, consumer matters, direct tax matters, etc.) against the company involving the company, its subsidiaries, associates, directors, promoters and group companies amount to Rs. 7,836.70 crores.
• Real estate development activities of the company are focused in and around the Mumbai Metropolitan Region (the MMR). As a result, it is vulnerable to risks raised by economic, regulatory, and other changes in the MMR, which could impact the company's operations, cash flows, and financial position.
• August 2020, the state government of Maharashtra decided to temporarily reduce stamp duty on housing units from 5% to 2% until December, 2020. It was raised to 3% from January, 2021, until March, 2021. Now the state government has decided not to extend stamp duty waiver on the property registrations. As the company is subject to stamp duty for the agreements entered into in respect of the properties for buying and selling, this could have an impact on the company’s business and results of operations.

Company Description

Macrotech Developers Limited is one of India's largest real estate developers by residential sales value. Its core business is residential real estate development with a focus on affordable and mid-income housing and currently has residential projects in the MMR and Pune. It ventured into the development of logistics and industrial parks in 2019 and formed a joint venture with ESR. As part of its logistics and industrial park portfolio, it has planned to develop a logistics and industrial park of over 800 acres of land near Palava. It also develops commercial property, such as mixed-use developments in and around its core residential projects; Corporate offices, IT campuses, and boutique office spaces are among the projects in its commercial portfolio. Its brands include Lodha, CASA by Lodha and Crown – Lodha Quality Homes for affordable and mid-income housing projects, the Lodha and Lodha Luxury brands for premium and luxury housing projects, and the iThink, Lodha Excelus and Lodha Supremus brands for office spaces.

Valuation

The Macrotech Developers Limited has a highly leveraged balance sheet which could impact the business in any unforeseen events. Also, the company suffered losses during 9MFY21 mainly on account of Covid-19 induced lockdown. Give the company’s concentrated operations in the MMR region and Pune, the recently announced stricter curbs by the state government of Maharashtra to contain the growing cases of covid-19, we believe that there would be an impact in the company’s business to some extent. Further, there are several material legal proceedings against the company which, if materialise, could severely impact its business. Also, we believe that the recent decision by the state government of Maharashtra of not extending the stamp duty waver, could impact the sales of the company to a certain extent. At the upper price band of Rs. 486, the company is valued at 26.3x of FY20 earnings. We recommend to Avoid the issue.

Key Information

Use of Proceeds:
The net proceeds of the issue is proposed to be utilised for the reduction of aggregate outstanding borrowings on a consolidated basis, acquisition of land or land development rights and for general corporate purposes.

Book running lead managers:
Axis Capital Limited, J.P. Morgan India Private Limited, Kotak Mahindra Capital Company Limited, ICICI Securities Limited, Edelweiss Financial Services Limited, IIFL Securities Limited, JM Financial Limited, YES Securities (India) Limited, SBI Capital Markets Limited and BOB Capital Markets Limited.

Management:
Mukund Manohar Chitale (Independent Director and Chairman), Abhishek Mangal Prabhat Lodha (Managing Director and Chief Executive Officer), Rajendra Narpatmal Lodha (Whole-Time Director), Ashwani Kumar (Whole-Time Director), Raunika Malhotra (Whole-Time Director) and Sushil Kumar Modi (CFO).