Lodha Developers Limited analyst Q&A

Thank you very much. We will now begin the question and answer session. And the first question is from the line of Kunal from Bank of America.

Great. My first question is on the enabling clause of raising capital. Abhishek, is it fair to characterize it as this capital could be needed in case you saw growth opportunities to exceed your 20% benchmark? And that's a fit to sustain or achieve part of that?

As I mentioned earlier, our internal cash flows and strength of the balance sheet are sufficient to support our planned growth of approximately 20% for several years. The enabling clause is just that, an enabling resolution in case we were to see organic or inorganic opportunities, which allow us to either raise our growth rate beyond tha t number or give us longer visibility and sustainability of growth, i.e., a project which may be longer in its gestation, but has the right ROEs. So that would be the core reasons if we were to raise the capital at all.

Understood. The next question is on the Palava Upper Thane land bank, given the slew of infrastructure upgrades you cited, I was just wonde ring if that sort of changes the monetization plan for it a little bit. Would you think that you might want to go for faster monetization of the land bank that you have there in terms of more proj ects or maybe even change it in favor of residential versus logistics, industrial parks?

Kunal, clearly, I think logistics and industrial parks is only a small part of our larger strategy in Palava and Upper Thane. It is largely a strategy whi ch is focused around residential and development like retail and office. We do believe t hat with these infrastructure upgrades now making locations much closer than they used to be in terms of traveling time, we will see a larger number of projects and different kinds of segments that we will be developing in these locations. So for example, Palava and Upper Thane have histor ically been mid-income housing whereas we think now that some elements of premium housing will start getting launched in these locations because the locations are now ready for t hat given their proximity that I said. 20 minutes to Airoli from Palava in 2024, less than 20 minutes to Thane from Upper Thane in 2025 once the Nashik Highway is complete. And I would say really, really amazing that 20 min utes to BKC by 2028, 2029. You can really see how fundamentally the geography of these locati ons is changing. And within that, the high quality of development, the high quality of mainten ance and upkeep and the strength of our brand will allow us to have a much broader set of segments, consumer segments wanting to buy and live at Palava and consequently scale up the pace of our development. You may have sort of read an interview in The Econo mic Times a few days ago, where we expect that over the next few years, the annual run rate for sales from Palava and Upper Thane could be reaching $1 billion of annual sales from a pproximately $300-ish million that we will be doing now. So it's clearly something that we exp ect a significant amount of growth to come --a significant amount through volume and some amount through price.

Right. And then the final one, I know you don't nec essarily give this number, but any color or way to think about what might be the investment com ponent of demand in your current sales? And what that number would have been in Mumbai, let's say, 7, 8 years back?

Kunal, as I mentioned in my opening remarks, our focus is on having sustainable. And when we say sustainable price growth, we mean price growth, which is below wage growth. I think we've said that for the last 3 years, and you've seen in the numbers that we've worked hard to make sure that, that's what happens. We actively do not like having investor or speculative interest in our developments. And as a consequence, we focus largely on end user s. Our sense now is that the end user percentage is in the high 80s to 90% of the units that we are selling, and therefore, people buying for either long-term investment or renting is low around a 10% mark.

The next question is from the line of Saurabh Kumar from JPMorgan.

Sir, 2 questions. One is on your operating cash flow, do you think the guidance for fiscal '24 will be met 1x net debt to operating cash flow? So that's the first one and what will underline that? The second is essentially on this price growth at Palava, so effectively, if the infrastructure comes in and you see Palava get better connected, let's s ay, to the City Centre. And then if we look at comparable locations, like Thane, Goregaon or even Airoli. The price differential to Palava will be like very high. So you think that infrastructure, we should be now better price growth coming through in Palava or you would still want to grow price at like 3%, 4%. So that's the second one. And one small one is essentially on construction co st. Can you just highlight what would your incremental construction cost let's say in Palava a nd, let's say, high-end development and in South Bombay? Thank you.

So Saurabh, on debt as being less than equal to 1x of operating cash flow, we do believe that we will meet that guidance by the end of the current f iscal. We expect our net debt number to be just around or slightly below the INR6,000 crores mark and that will be at or below our operating cash flow for the year. We're happy to take you through the details if you'd like to do that. In terms of price growth at Palava, it's a nuanced answer, but I'm sure you will bear with me for a couple of minutes. We look at price growth for the like product remaining below wage growth. I think that is, I would say, almost fundamental to us. However, the overall price growth at Palava and Upper Thane will be higher because new product categories are coming in. So if you take say a mid-income housing, we will w ant to keep price growth at below wage growth, so that is at this 5% 7%, 8% number. Howeve r, when you get in the upper end of the mid income, then you start getting in premium, et cetera, obviously, the prices of those products are higher. And consequently, the overall price growth for locations like Palava and Upper Thane will be higher. So I would say like-to-like below wage growth, but overall higher in a significant manner, alluding to some of the locations like Thane, Navi Mumbai, Airoli, Goregaon, et cetera, that you mentioned, and the pricing differential between those and Palava. And therefore, you can see why even if we were to take price growth, which is higher than wage growth, but still, we will be very, very attractive compared to these locations from a pricing perspective, and that's the reason why we think tha t volume growth will be a meaningful contribution to our overall growth plans over the next few years at these 2 township locations. In terms of construction cost and those -- I'm not quite sure what metric you'd like me to mention. But yes, I think, typically, our mid-income housing construction costs are on a per square feet of saleable area, tend to be between INR3,000 to IN R3,500 a square foot. You tend to be in premium housing about 20% to 25% higher than that. And of course, luxury housing is double of that.

Okay. Got it. And broadly in Palava, we should see price appreciation more than construction costs, so your gross margin should keep increasing.

Significantly, right. I think Saurabh, I think the margin widening as both the pricing as well as the volumes pick up in Palava, and the consequent v alue creation of, like I said, a land bank, which is by far the most valuable of any developer in the country, you definitely start seeing that happen. I'm not saying that this will happen or pla y out fully in just FY '25, but if you take a 3- to 5-year view, absolutely.

Okay. And what's the FSI, you can do in Palava max, I mean, what you permitted FAR?

The permitted FAR at Palava is we're taking, I would say, the conservative viewpoint is at 1.7.

1.7. Okay.

The next question is from the line of Puneet Gulati from HSBC. Please go ahead.

Puneet, it's an important question. I wish we could forecast that with the accuracy that you'd want us to. But yes, we will start launching the upper end of the mid-income segment as well as the premium segment in fiscal '25 itself. I think the journey is not a 1-year journey. I thi nk it's a 3- to 5-year journey before all of the engines fire, some fire as soon as they are launche d, some take a little bit longer for people to see the proof of the pudding. But if I say we use this term inside the company t unnel to tunnel. So the first tunnel, which is going to get completed is the Airoli-Katai tunnel. And the other tunnel, which is going to get completed is the BKC bullet train tunnel. And from tunnel to tunnel, which is from 2024 to 2028, you will see a complete, I would say, reset of this location.

Okay. Understood. And just on your presales number of INR34.1 billion, would it be possible to break down between how much of it is attributabl e to the projects which were launched and the sustenance sales?

Puneet, let me just come back to that. I think we s hould be able to either give it to you in this call or come back to you offline and give it to you, but we definitely can give you that number.

Great. And lastly, on Bangalore, thanks much for th e color that you gave. If you can add incremental color on the kind of pricing premium th at you've been able to command in the location that you launched compared to the peers, that will be very helpful.

Sure. I'll request Mr. Joshi since he was closest t o the ground to give answer to that question in terms of what premium, we were able to do at the fi rst launch of Lodha Mirabelle compared to the existing projects in the vicinity.

Great.

Mr. Joshi, would you like to comment, please?

Yes. So we launched Lodha Mirabelle at an average al l inclusive price of about close to INR11,000. As some of you might know, this is a bro wnfield project where the previous developer had completed about 6 towers. The last sel ling price in about 2 years back, for close to about INR6,500. The neighbouring market is in the range of about INR8,000 to INR9,000. So that's the kind of price premium we were able t o get because of the location, the strength of brand Lodha and the experience that we delivered at the Club House, which we modified and we're delivering a great experience to the customer s within the project and our prospective customers. All put together, I think we were able t o get the kind of price premium about 20%, 25%.

Understood. And is that something that you expect for the next Bangalore project as well?

The next question is from the line of Abhinav Sinha from Jefferies. Please go ahead.

This is Abhinav here. A few questions. So on the en abling resolution a bit again, can you give us some granularity on the sort of opportunities we have? Are they largely for buyouts in Mumbai or there is something else in the mixture there?

Hi, Abhinav. The opportunity is obviously are confidential, but I can start giving you some flavor of those. There are opportunities which are mostly, I would say, capital light in Mumbai, except for, of course, very specific locations like you're aware of the Juhu Centaur transaction, in which we are the preferred bidder and the process has advanced quite a bit. There are other opportunities for outright acquisi tion in Pune where the market is now something that we are quite comfortable and believe that ther e is much more scaling up to do that. And as Mr. Joshi mentioned, while we have about INR3,000 crores of GDV in Bangalore, probably this year itself, we would be able to get to close to INR1,000 crores of sales in Bangalore. And then our target over 3 to 4 years is to have an annual run rate of INR3,000 crores of annual sales from Bangalore. So there would be a mix of JDA as well as own in Bangalore. Across all the 3 cities that we are operating in. And as we have said in the past, we want to keep that healthy mix of JDA versus outright balancing the total profitability as well as the ROEs.

That's helpful. Sir, on pricing, now even for some of your projects like in South Bombay, and at the higher end, we are generally seeing pricing in Mumbai to be rising much faster than the average that we are seeing. So any thoughts on that? Or is that what is also you are also observing right now?

I think Abhinav, the price growth anecdotes versus the numbers, the story, I would say, is in the numbers. I think anecdotally, yes. Sometimes we als o witnessed that the way we calculate obviously, price growth is for the like project, so which was operating and selling in the previous fiscal, and what is the actual price growth in that project for the current fiscal on a YTD basis. Therefore, for 9 months, we have 4%. Annualized rate that is closer to about 6%. So that is really all our projects which were operating in the last f iscal and what the price growth in those has been for this fiscal.

Okay. And lastly, on the fourth quarter now to meet our guidance, we're looking at a INR4,200 crores plus sort of a number. So what are the key launches? And how are you looking to -- how confident are you for achieving this high number?

Abhinav, the fact is that we've done consistently a bout INR3,300 crores, INR3,500 crores over the last 3 quarters, and therefore, see no significant challenge in achieving our full year guidance of INR14,500 crores. We do have launches. We do hav e some land sale transactions. So it's going to be a mix of all of those. In terms of new launches, we have in almost 6 different markets, a total of about 11 launches. So of course, that helps. But I think our sustenance business, and I'll go b ack to the point that Puneet had raised earlier. Last quarter, our total sales, about 25% were from new launches and 75% were from sustenance. So last quarter, of course, we had a few launches, but not as many as those we have this quarter. So just the upside from some of the new launches as well as the land sales, et cetera, should be healthy enough for us to meet our guidance.

Thank you. The next question is from the line of Pra veen Choudhary from Morgan Stanley. Please go ahead.

This is Praveen Choudhary. I have two simple questi ons. The first one is you've been very successful in Pune and now in Bangalore. I'm wondering, could you talk about next city that you want to go in or it's too early? And then the secon d question I have is about pricing where you got a few more questions. But when I look at the JLL data for last quarter, t hat's December quarter, they were saying that Bangalore pricing was up 13%, year-over-year. I kno w you mentioned that ASP rising above wage is an issue. I'm just wondering are you concer ned about that in Bangalore? You're also hearing similar stories in Gurgaon. Or you don't think that matters because you mentioned about your specific projects you raised very slowly.

In terms of the 3 cities, our approach to most of our business, including geographical expansion is a step-by-step conservative approach. We are ple ased that Bangalore has started off well. In the next 3 months, we hope to have our second launch. And as that happens, we'll start reviewing whether we start taking baby steps into a fourth city of operations. So probably something that we will think about and evaluate over the next 3 to 6 months, but don't have a definitive answer at this stage. In terms of pricing growth, I would reiterate that for the long-term sustainability of the cycle, and this is not a cycle which should be seen throug h the lens of what happens in a quarter or even what happens in a fiscal year. The opportunity for us is to have this cycle run for 15-plus years. And in that context, it is absolutely impera tive that price growth remains below wage growth. I think how some of the data on price growth is ca lculated, of course, you all are best place to look at. But we say that if you take away mix chang es, when you look at like-to-like product, segmentally like-to-like products, so mid-income to mid-income, premium to premium, luxury to luxury. It's absolutely imperative for the long- term sustainability of the business of the industry that price growth remains at the most and in our preference below wage growth because that's what India's opportunity is. It's a volume o pportunity, and it only comes through when affordability remains intact.

Hello?

Can you hear me?

Hello?

Yes. So Praveen just to close out my comment, I wou ld say that in any market where there is excessive price growth after adjusting for this aspect of like-to-like versus mix change, it would be a matter of concern because like I mentioned, the opportunity of scale up is a very long-term 15-year cycle they're only in year 4 and price grow th remaining at or below wage growth is an essential condition for the sustainability of the cycle.

Very clear, Abhishek, and we have been very consistent on this point. And I don't have the data excluding the mix change, but I just wanted to get a feeling on the ground, maybe Rajendra can talk about it that at this point in time, at least, we are not concerned about pricing in Bangalore.

Hello?

Yes, please go ahead.

Yes. So I think what has happened in Bangalore, I'd like to reiterate, and I did mention that. The price growth in the market was extremely muted abou t 2 to 3 years back. In fact, for the year, before 2020, the prices used to be almost flat. So the growth in price in Bangalore has to be seen in that context. According to me and many experts in the market, it is a reset that is happening in the Bangalore market, which is where we are seeing the kind of price growth that we are see ing in Bangalore. I hope that answers the question.

Yes. And again congratulations for having a very clear target, hitting them and being consistent in your messaging. Congratulations.

The next question is from the line of Mohit Agrawal from IIFL.

Most of my questions are answered. Just 1 question on your annuity and the office and the retail portfolio, so what is the vision here? Say, by FY ' 30, what is the kind of rental income that you are targeting from office and retail? And what kind of investments do you plan to make from here on?

Thank you, Mohit, for that important question. As w e've articulated in previous discussions as well as engagement with our investors, our strategy on rental income is to grow it, but do it in a manner which is not ROE dilutive. And therefore, we look at a mix of 3 strategies, which is our facilities management business along with its digit al app, which is very low investment and therefore, high ROE. Our warehousing business, warehousing and industri al park business, which is moderate ROE in the mid-teens. And then selectively, some office and retail, which we hold for duration, till we believe that the market is paying full price. Tha t's our sort of way of looking at the streams from these businesses. We expect that by the end of the decade, that is b y March 31, we expect rental income to be close to INR15 billion on an annualized basis from these 3 asset classes. And like I mentioned to you, we overall expect a blended ROE sort of in the mid- to high teens from these assets, and therefore, you can sort of do an assessment of the level of investment, which will go in over the next few years to build out this base.

Okay. Abhishek, is it possible to give a breakdown of this INR15 billion into warehousing, office retail and the facility management numbers?

Of course, something which is 7-odd years out, very difficult to be precise with it. But if I can give you a broader sense of it, we expect about 25% from facilities management. We expect about 30% from the warehousing and industrial and the balance from office and retail.

Okay. Understood. And just 1 last clarification in your sales mix this quarter. There's been a dip in the South and Central sales. So is it just a quarter 3? Or do you think there is good momentum going forward?

See, I think, Mohit, it's important to know that di fferent segments will react very differently to seasonality. So this year South Central had 2 aberr ations, 1 Shradhh came in this quarter. And those 15 days South Central has absolutely virtually no transactions. And then the second half of December is also for S outh Central, the poorest part of the quarter- - it is quite poor because almost everybody travels. So if you almost take out 1 month out of the transacting potential time frame for South Central, you recognize that there's just seasonality, nothing beyond that.

So fourth quarter, this should be back, right?

Yes. I mean, I think overall, you look at any YTD -- I would request you to look at assessment and we'll give this data every quarter, of course. So look at the trailing 12 months when you're looking at the strength or status of any market bec ause that takes most of the seasonality out of the picture.

Sure. That helps.

The next question is from the line of Kunal Lakhan from CLSA.

So on your pro forma P&L, if you can share the -- I just wanted to understand the 30% is the embedded EBITDA margin. What would be the breakup of the margin for JDA and own projects?

We're just looking at the data. Give us a minute pl ease. While we dig that out in case you have any other questions, please let us know.

Yes. So my second question was on our collections run rate. If you look at -- if you exclude the U.K. repatriation, our collections to the sales run rate is somewhere around 67% for the 9 months. And if you look at the same run rate in FY '23, it was around 81%. So anything to read there? Or is it on account of higher sales from JDAs?

I don't think the JDA sales have anything to do wit h that ratio. The cash will flow through our P&L and our accounting. I think the run rate is par tly a question of buildup of sales having happened over the last 12, 18 months. And therefore, it takes a little bit of time for the cash flows to come through, but nothing really to read into it . Historically, if you look at the last 8 years, our collections to sales ratio is at approximately 99% to 100%. And we pay very, very close attention to that ratio.

So there will be a mean reversal kind of.

Yes, of course. Absolutely. Absolutely.

Sure. And my last question was on -- you said that your value unlocking or rather appreciation at Palava would happen between, say, 2026 to 2028. Would that make you slow down on land sales until then? Or would you continue to monetize land?

I think given the quantum of land that we have, we expect a modest amount of land sales, both for industrial warehousing as well as for the gover nment infrastructure projects given that the government is building infrastructure in that area to continue to happen. So we don't expect the total realization. The quant um of land may start getting moderated as we keep more and more land towards our higher value-ad ded uses. But given the appreciation in land's underlying value and pricing, we expect the realization from that to continue.

Okay. So in terms of value, it will remain like steady, but in terms of area it may come off?

Yes.

Sure. Those were my questions, if you can...

Yes. So coming back to the margin point, the embedded EBITDA of our JDAs is at around 20%, and the JDAs are contributing just over 40% of our presales.

Got it. Okay. Great.

That was the last question, I would like to hand the conference over to Mr. Anand Kumar: from Macrotech Developers for closing comments.

Thank you, everyone, for joining the call. All insi ghtful questions. In case you have any more queries, do reach out to me. I'm always available for you. Thank you.

On behalf of Antique Stock Broking, that concludes this conference. Thank you for joining us. You may now disconnect your lines.