Lodha Developers Limited analyst Q&A

Our first question is from the line of Pritesh Sheth from Axis Capital.

Firstly, on the volume numbers for this quarter and first half, we are seeing a bit tepid. Probably as per the calculation, roughly we are down by 20% on Y-o-Y, while large part of the growth that we saw in the first half was driven by realization. What's the outlook here in terms of volume growth going ahead? And how much more can the realization growth contribute in terms of the overall presales growth? That's my first question.

Pritesh, I think you observed rightly that the volume growth has moderated. And that is part of our communicated strategy, as I mentioned to you, of in the extended eastern suburbs moving away from the very lower mid-income entry-level housing more towards the upper mid-income and premium housing. For us, this targeted mix change will obviously lead to higher realizations and lower volume for some time. And I would say likely on a sustainable basis that these will get reset. Probably a new base will be established by the middle of next calendar year. And then one can start looking at that going forward. So yes, we do see that volumes are moderating due to our stated strategy at the very entry level, and that's where volume play a much bigger role. And therefore, on a cumulative basis, you will see a moderation in the volumes.

Sure. That's helpful. And in line with that st rategy, on I think Palava, where we are in terms of launching our luxury project there, last quarter's call, you stated Q4 or second half is the timeline. Where are we on that timeline?

Yes. So I would say is that Palava, as I said, there is a variety of things which are happening. There will be an upper mid-income launch in Q4. There will be a premium launch in Q3. There is already a luxury project has been launched earlier this year. And we then expect to do all of these categories on and scale that up. I think the opening of the Airoli-Katai link, which has been delayed, is something beyond our control, but it will have some kind of a.. I would say, it would have a significant positive impact whenever it opens up most likely in the first quarter of the next calendar year, i.e., calendar year 2025 1st quarter. So we expect all of these launches plus this opening of the link to have -- to contribute to the more -- a bigger share of sales coming from upper mid-income and higher segments.

Yes. Sure. And this quarter, and I suppose the sales that we had on the land side with the data center player was part of the extended eastern suburbs presales that we have indicated. If I exclude that, then we were at roughly INR 200 crores, INR 250 crores presales on the residential sales. What's the outlook going ahead here? I mean large part of the growth will be reliant on the premium segmentation that we are looking to do there? Or this quarter was just an aberration from the affordable mid-income, which have been our conventional segment there, and probab ly, we will see that recovery going ahead as well?

Pritesh, the numbers are broadly correct, a little bit off, but broadly correct. But having said that, I think we are, as we've discussed in earlier calls, too, in a planned transition away from the very entry-level housing and more towards the upper end of the mid-income and beyond. As a consequence of that, as we mentioned, we will be moving from a tilt of about 85% to 90% of our sales coming from lower mid-income and entry-level housing to that moving to 50%, obviously, over a period of 3 years. What does that mean in terms of your direct question? It means that this quarter was an aberration. It was an expected aberration, again, partly driven by the fact that the monsoon tends to affect that segment quite a bit. They don't typically have their own transportation. And so typically, Q2 has some impact, partly also with the fact that we didn't plan or do any launches this quarter. So overall, if you were to look at the sales numbers for Palava, just excluding anything to do with the data center, we are in spite of the tran sition plus the delay in the opening of the Airoli tunnel, we feel good about the fa ct that we will match or exceed last year's number. And then obviously, the impact of the Airoli tunnel plus the data center will be further positive beyond that.

Sure. Got it. And then one last, since Maharashtra, as a state, is going for election, how much of risk we have in terms of launches, etc? And I know, I mean, we are not too much launch dependent. We have enough inventory. But just from industry-level perspective, do you see some slowdown in terms of launch activity, considering generally, there is some delays in terms of approvals postelection, et cetera? So what's your outlook there?

No real outlook, right? These things are truly unknown and not possible to have an outlook on. The way we deal with it is to make sure that our -- we plan our launches around this period in advance, which we have done. And generally, because of our business model, which is not so heavily launch reliant, we are able to deal with these 1 or 2 month related of slowdown in decision-making with reasonable comfort. Sometimes, it has an impact but not a huge impact. So ideally no outlook, right? This is 2 months around the national elections and 2 months around the state elections once every 5 years. So it's 4 months out of 60 months. It's not really meaningful. It just happens in Maharashtra that it tends to come in the same year each time. So for 4 years, nothing happens, and then 1 year, it happens twice. So you see an exaggerated impact, but it's okay.

Our next question is from the line of Puneet Gulati from HSBC.

Congrats on good performance. My first question is, you talked about Bangalore moving from pilot stage to main stage. What does it really mean? I mean how would your capital commitments and pace of execution change? What should we think of in terms of future launches and sales guidance?

Thank you for that question. So in terms of moving from pilot phase to growth phase, as you know, we expect to move from our present market share of between 2% to 3% of sales in Bangalore for last fiscal when we did about INR 14 billion of sales, to move to more to 15% of the Bangalore market by the end of the decade. So what that implies is we're hoping to gain about 2 percentage points of share on average each year. So we would expect probably this year to be higher than last year in terms of presales. So we would want to be somewhat higher, but it's come in the middle of the year. So we won't get the full 2% impact. So hopefully, we closed this year, let's say, so mewhere around INR 18 billion to INR 20 billion of presales, and from their onwards, one hopes to add about 1.5% to 2% of market share each year in Bangalore from fiscal '26 onwards.

Understood. So that means your business development activity and all would kind of double from what you did last time?

The previous FY '23, for example.

Yes, yes. FY '23, we only had 2 projects which we don't did as pilots. So obviously, for FY '23 and FY '24 were very muted from a business development perspective. But what I would say is that overall, the way to look at our business development is our stated business development targets, which tend to be in line with the projected sales for the next fiscal. And then to look at our net debt guidance, which is to remain well below 0.5x net debt to equity. So for us, those would be probably easier ways to understand what our business development will look like.

Understood. And secondly, on your data center business, I also see there is a huge balance investment you planned out for almost INR 24 billio n. So, what all do you intend to do in data center, just provide the buildings or actually provide the data center services as well with MEP, etc?

So, as it stands right now, the information that you see on our digital infrastructure only relates to our warehousing and industrial parks. Right now, there is no rental model of data center built into it. So that is something that will come up in the next fiscal onwards. We are just learning the data center business currently. The first park is going to start construction maybe in 6 to 9 months' time, and we'll learn. So that will come later along the way. Right now, this is all warehousing and industrial. We have 2 parks in Mumbai, 1 in Chennai and 1 which we are hoping to close in the NCR in this quarter. So that's really the investment. We've also bought out the stake of CDPQ in the business, and therefore, our economic interest has grown from 1/3 to 2/3.

So I'm referring to Slide 19, where you talked about INR 24.17 billion balance investment in digital infrastructure. So that's...

Yes. So that is the industrial and warehousing part of our digital infrastructure initiative because right now, we are not doing any data centers for rent. The transaction we've done is where we've sold land to a global hyperscale player to build their own data center. They will be building their own data center. We might help them with the building.

Understood. And thirdly, if you can comment on your experience in approvals in Mumbai, Pune and Bangalore, any slowness you are seeing or any change in the stance there?

No, I think it's all predictable. I think for us, approvals in Bangalore take longer because we are new there. So any new player in the market probably has to add 3 to 6 months beyond what a conventional local player would need, but other than that, I think approvals are pretty standard.

Our next question is from the line of Abhinav Sinha from Jefferies India.

I'm sorry, could you repeat that?

So on data center, you said that the sale of land here could be a sustainable business model. So what is the opportunity we are looking at?

So the opportunity is quite significant over the next decade. The demand is growing in India or in a location like Mumbai, in particular, at probably 40%, 50% annually. We can have a significant share in th is now having got established as a location, which has the right infrastructure, it has the right connectivity, all the strict requirements that hyperscalers or cloud companies require. So we can clearly see this as a very predictive, as a recurring model, both on the land side and potentially in the future on building and leasing out these data center buildings.

And Shaishav, will the realizations be higher for this land which you sell to data center versus the normal digital infra stock warehousing bit?

Absolutely, right? I think because the criteria for approving a location for data center is so high, we've been working on this for 5 years, and this one diligence transaction took 15 months. So it's not that anyone who has land or some access means they can become a data center. So consequently and also scalabi lity, as I said, right? Before, people were setting up a data center park of 50 megawatts. Now they look at 200 megawatts. So you need scalable land. So consequently, the realization will only keep increasing. And as we said, the next transaction that we are again in discussion now is looking at INR 20 crores per acre. So, INR 2.5 crores becoming INR 12 crores becoming INR 20 crores, clearly, data center has far greater value. But we look at it as an ecosystem. Everything is not only about one asset class. There are different lands with different purposes and a different objective function. So we look to maximize on all the economic creators.

Abhishek, just a question on the strong sort of sales we have seen in South Central and Western geography. So which projects are moving? And is the upper end i.e., the absolute top end doing far better than the other segments?

We are seeing sales across, I would say, all parts of our premium as well as luxury business. Luxury sales are doing well, yes, but they continue to remain a modest part of our overall sales. So we are not a company where 50% or, even for that matter, 30% of sales are coming from the luxury category. The premium segment is doing well. The for-sale o ffices are doing well. So we are seeing, across the board, this strength in sales from in the premium as well as the luxury category.

Our next question is from the line of Kunal Tayal from Bank of America.

Abhishek, I wanted to follow up with 1 or 2 more questions on the data center business. Firstly, I think at a big-picture level, of course, I und erstand that both power and location, which has access to sea cables, is very important here. But other than that, if you could just highlight a few factors that worked in your favor towards clinching this particular deal? And the associated question is, it's great to h ear that you're now looking at the capital values going up from INR 12.5 crores towards INR 20 crores. Should we think of this as now that you have the first data center and probably a line of sight to more, it aids in more accretion of certain kind of infrastructure or other sort of pluses to that land parcel that were not visible to prospective buyers earlier?

Yes. So I'll request Shaishav to answer the firs t part of the question, wh ich is a little bit more around the competitive advantages that we have in Palava for data centers. And then I'll come to the second part of your question. So I'll just hand it over to Shaishav for the first part.

If you look at the data center business, I think Mumbai is always going to remain as the most attractive location because of its location, access to the deep sea cables etc. But Mumbai also has the challenge of trying to find land, which is scalable, has the right power infrastructure, the cable networks to ensure that the latency parameters are met and the right water supply, along with basically locations that can also help data center companies be sustainable. The industry attracts a lot of ne gative thought. Palava, because of its strategic location in terms of where it is relative to the deep sea cables, the road infrastructure, the power supply network out there, what we've done around water and recycling. And lastly, it being co-located with other infrastructure helps a lot. So the plan we were talking to has been looking for this large land and primarily catering to the future of AI. AI demand is going to make the requirements go up by 3x to 5x compared to what was happening before. So they've been looking for 3 years in Mumbai, could never find scalable land. And then we've been in touch with them for a while. They came to us, did all the technical due diligence, did all their testing and found it to be as good a location in Mumbai as anything else. So this is now the competitive advantage of gett ing approved as a location, which meets all the technical parameters, has the scal ability and, more importantly, th e ecosystem for this setup to happen linked to the larger other economic activ ities. So that's why it's become a competitive advantage. And lastly, because of our own capability in construction and development, they want to look at us as the -- as an option for developing their bu ilding itself because they feel we can do it far faster than them doing it on their own. So the ability to be a land provider with infrastructure, with master planning and the developer, all of this becomes now trul y Palava's competitive advantage. I'll let Abhishek answer the next one.

So Kunal, in terms of what this does from a business and value accretion or unlock perspective, the first thing to note is this is not a replacement for any existing use of land. This is a fast tracking of the use of land, right? What revenue we will make or what margins we'll make from the residential we will make. What we'll make from the office and retail, we will make. What we'll make from the industrial, we will make. And we will probably slow down on warehousing because no longer are the value supporting warehousing. But this is a completely new category, which even 12 months ago, while Shaishav and team have been working on it, 12 months ago, there was very little light at the end of the tunnel. And now we have a transaction at INR12 crore an acre. And as you know, the first transaction to establish a location is always at a discount, which is the reason why the true value discovery of maybe close to INR 20 crores an acre is likely to happen, we hope, over the next 2 to 3 quarters. We think that the data center bus iness, given the overall scale up in AI, if NVIDIA can be valued at what it is valued at, clearly, the world believes that AI is going to scale up in a very, very large way. And I would say that in a very small manner, the data center part of Palava is really a proxy to the AI scale-up and the data scale-up in India. So we see this as a completely new category. Not only does it sort of help monetize the land faster at very good values, but it is all incremental. Overall, I think realization from residential and realization from data centers, not immediately, but I think over the next 2 to 3 years, might start converging.

I understand. Okay. Good to know. And just one quick follow-up on the residential side of the business, Abhishek, if you could sort of share your views on what trends you are seeing around land prices in Mumbai. And is any of that sort of posing any bit of challenge to a 6% to 7% pricing escalation for yourself or still all within comfortable levels?

Kunal, I think if you look at the pricing growth and if you look at the margins, I think that will answer the question for you. The fact that our BD is running well ahead of any plan, more than 75% done in 2 quarters, the fact that margins are expanding and the fact that we have still held firm on our stated strategy around price growth will tell you as a combination that the calculus is working quite decently. We are not seeing land prices doing anything funny. We obviously don't compete at the very small projects. We don't want to operate in thos e projects, which are less than INR 100 million of GDV. So that's where probably you get some heating up and you have all this sort of intensively competitive redevelopment, which we have consciously stayed out of. But when it is projects of any s cale, I think the market is pretty efficient right now in terms of what margin it is leaving on the table, keeping in line the fact that price growth is a reasonable and one which improves affordability rather than highly speculative double-digit price growth.

Our next question is from the line of Praveen Choudhary from Morgan Stanley.

Abhishek, congratulations on your announcement of the foundation. That's very generous. I have 2 questions. The first one is on Page 19 of the presentation, where you mentioned FY '31, you're hoping to get INR 12 billion of rental income. Would you be able to provide some kind of guidance by slightly near term, let's say, FY '27 of the same rental income? The second question is related to data centers, which obviously is very exciting for everybody. We just want to understand your long-term strategy here. It seems like initially you will sell land and then you will build the bare shell and rent it. Would you go all the way in terms of becoming data center technologically more advanced, building colocations so that you can capture a higher percentage of the value chain in this one? Or you just want to be the landlord and let someone else take care of technical part of it? And connected to that one, you mentioned you have 4,500 acres in Palava. What part of that land are you earmarking for data centers over time?

Yes. Thank you, Praveen, and thank you for your compliments on the foundation. We think that as businesses, it's very important for us to know that we exist in a nation and a society. And we are duty bound to use our success to make our society better off. So we hope that we can do our bit in this manner. Coming to the questions that you had. In terms of our projection of income for fiscal '27, we have given a projection for fiscal '26, where we hope to end at a run rate of about INR 5 billion. So that will not be the full year number, but the run rate at the end of the year should be at around INR 5 billion. And therefore, for fiscal '27, you will have that INR 5 billion plus something more. So you can say close to IN R 6 billion for fiscal '27. Alth ough I don't have an accurate current projection for fiscal '27, I have one for fiscal '26. In terms of the data center business, we cu rrently foresee ourselves as the infrastructure providers. We provide the land. We provide the approvals. We help with the construction. Over time, we migrate into owning th e bare shell and renting it out to the players. We haven't quite frankly understood the value chain beyond that or understood whether it makes sense for us to play in it or not. Historically, we've been quite conservative in focusing on what we do well. We know that the built infrastructure, we have a clear and signif icant competitive advantage. So we feel very comfortable playing there. Anything beyond that is generally not our piece of cake, but as we learn this business, we will evaluate. In terms of our 4,500 acres of land at Palava, 2 points I'd like to make. One, we do replenish a big chunk of the land that we use in a year. So it's not that the 4,500 acres is some fixed number, and it will keep diminishing as we use it up. So to that limited extent, it is an annuity. It's a perpetual income stream. The second point is that we haven't specifically earmarked any space that will only be used for data centers because all our land is multi use. We don't have to use it for data center. We don't have to use it for residential. We can use it as is best suited to the needs of the development of Palava City. So I think we expect that around 50 acres of land per annum should be used towards data center. But who knows? Over time, that could even further move around.

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Mr. Anand Kumar, Head of Investor Relations, for closing comments.

Thank you, everyone, for joining the call today. I hope we have been able to answer all your questions. If you have any further questions or would like any information, we'd be happy to be of assistance. Feel free to contact with the IR team or me. On behalf of management, I once again thank you for taking time to join us today and wish you a very Happy Diwali. Thank you.

On behalf of Macrotech Developers Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.