Macrotech Developers IPO: Challenges on the ground

The initial public offer (IPO) of Macrotech Developers, formerly known as Lodha Developers, is open for subscription between April 7 and April 9, 2021. This Mumbai-based developer is one of the largest realty players in the industry with strong presence in Mumbai Metro Regions (MMR) and Pune and good brand recognition. However, investors can give this IPO a skip for now, and can consider it after a few quarters, given the company’s weak financials.

About the issue

This is the third attempt at IPO by the company and is expected to raise ₹2,500 crore. The price band for the offer is at ₹483-486 per share. Out of IPO proceeds, about ₹1,500 crore is proposed to be utilised to repay a portion of their debt and about ₹375 crore for acquisition of land or land development rights and the remaining for general corporate purposes.

Concerns

The company’s debt is a cause for concern. As of December 2020, the total debt of Macrotech Developers stands at ₹18,662 crore, of which, about ₹ 16,144.8 crore is under current liabilities which is mostly project related debt. Any delay could impact cash inflows and may cause a problem. The debt-equity ratio before the issue is around 4.4 times and post issue, it is likely to come to around 2.5 times, which is still very high, especially when compared to other large players operating in the same region. For instance, Godrej Properties’ debt-equity ratio is around 0.6 times while that of Obeori Realty’s is as low as 0.19 times. The high debt of Macrotech Developers will also restrict expansion plans.

Two, though at the given price band the IPO is priced at around 26 times its FY20 earnings, at a modest discount to its Mumbai-based peers including Oberoi Realty (30 times FY20 earnings), Macrotech’s financials are weak. For the nine-months ended December 2020, the company’s revenue fell 66 per cent to ₹3,161 crore when compared to the same period last year. During the same period, the company registered a loss of ₹264 crore vs profit last year. Though most of the company’s peers too witnessed the same trend, the fall in revenue and profit had not been that steep. For instance, Oberoi Realty’s revenue fell by 22 per cent and it registered a low single digit profit growth of 3 per cent y-o-y during nine months ended December 2020. Even if one considers the last three years’ performance (during FY18 and FY20) the company registered a revenue decline at an annualised rate of about 4 per cent Similarly, during the same period, the profit too witnessed a decline of over 30 per cent. On the other hand, in Oberoi Realty’s last three performance, the revenue and profit grew 33 and 23 per cent respectively.

Three, even based on price to book metric, the company trades relatively high at 5 times while its Mumbai-based peers, who had delivered better performance in recent years, are trading at 1 to 2 times. And lastly, though it is diversified across segments — affordable, mid-income, and luxury and premium housing — MMR and Pune already have a large backlog of unsold units. According to ANAROCK, a property consultant, MMR has about 1.97 lakh units unsold. As of December last year, Macrotech Developers has about 38 per cent of unsold completed units (5.5 million sq ft) while the balance unsold units is in under-construction properties. While the company’s projects may have locational advantages, the company could find it difficult to sell their on-going housing units as higher preference is witnessed for completed units.

Operations

Macrotech has a steady pipeline projects.It has 36 projects (about 28.78 million sq ft) in various stages of construction. Most of the on-going projects are in affordable and mid-income housing (about 82 per cent). About 79 per cent of the company’s pipeline in the coming years, (18 projects comprising 45.08 million sq ft) too are in this category. Also, the company has land bank of about 3,803 acres in favourable locations, mostly in micro-markets of Mumbai.

While the residential segment is the main-stay business of the company, it has presence in commercial segment as well, 6-8 per cent. This portion (commercial) may not be sufficient to cushion its earnings if there is any volatility in the residential segment. Also, any slowdown in residential real estate too could dampen growth prospects for the company. Additionally, the stiff competition from existing players, including Godrej Properties, and Oberoi Realty could take a toll on the company’s revenue.

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