Macrotech Developers
Verdict: Macro Debt seeking Desperate Listing
Rs. 2,500 cr IPO: 100% fresh issue for Rs. 1,500 cr debt repayment, Rs. 375 land buy
IPO Dates: Wed 7th April to Fri 9th April 2021
Price Band: Rs.483 – 486 per share
Post issue market cap: Rs. 21,740 cr
Listing Date: 22nd April 2021
3rd Attempt at IPO
Company first applied for Rs. 2,800 cr IPO in 2009 and subsequently in 2018 for Rs. 5,500 cr IPO. Despite SEBI approval, neither issues were launched. It is now trying luck for the third time, with a lower size and different company name (from erstwhile Lodha).
Mumbai based Affordable & Mid-Income Housing Realtor
29 mn sq ft in ongoing projects, primarily in affordable and mid-income housing segment, with a large unsold residential inventory of 14.8 mn sq ft.
- Even completed projects have large unsold inventory of 5.5 mn sq ft, representing 11-32% of saleable area in South Central Mumbai (a market where it is #1 realty developer) and flagship township Palava, increasing financial strain on high cost of holding.
- Falling Realisation: Average per sq ft realisation dropped 33% in Upper Thane in 3 years from approximately Rs. 7,300/sq ft in FY18 to about Rs. 4,900 in 9MFY21, while average realisation in Palava too down 10% in 3 years to Rs. 5,540/sq ft, given sub-prime location, a vital parameter for real estate sector.
- Lack of Corporate Governance: Subsidiary Roselabs penalised by SEBI for alleged violation in securities market, while 2 other subsidiaries suspended from trading for non-compliance with listing requirement
- Loss making UK Operations: FY20 and 9mFY21 losses may continue as covid slowed down sales in both completed projects
- Others: Legal claims under litigation worth Rs. 7,000-8,000 cr poses a high risk
Negative Revenue CAGR between FY18-20
Even if 9MFY21 financials are ignored as one-off, company’s FY20 sales fell 8% YoY after 12% drop in FY19, when peers have been growing. FY20 consolidated PAT fell 55% YoY to Rs. 745 cr from Rs. 1,644 cr YoY. Despite large presence in affordable segment where construction and land costs are lower, consolidated EBITDA margin of 27% below peer range of 30-49% for top listed developers like DLF, Godrej, Oberoi, Prestige. Its average realization of Rs.10,500/sq ft is also lower than other pure-play Mumbai developer Oberoi’s Rs. 17,500/sq ft.
Highest Leverage with Rs. 18,600 cr Gross Debt
Even post repayment of Rs. 1,500 cr debt from fresh issue proceeds, net debt equity ratio (DER) of 2.2:1 will be extremely risky, as against 0.1-0.6 for DLF, Godrej, Oberoi and about 1.5 for mid-size realtors Prestige, Sobha, Brigade. Related party repayment and UK cash flows are independent to IPO. Dec 2020 credit rating of BBB- is lower than company’s own FY19 rating highlighting stress during covid, when interest cost 40% YoY to Rs. 811 cr in 9MFY21, doubling since FY18’s Rs. 400 cr interest cost. Deterioration in financials when key MMR market recorded multi-year high sales, post stamp duty cuts and decade-low home loan rates is quite astonishing.
Weak Outlook
Macrotech’s 58% borrowings are on floating rate i.e. with rise in interest rates, cost of borrowing will rise. India’s largest home loan banker SBI has already upped home loan rates by 25bps to 6.95% wef 1-4-21, indicating bottoming out of interest rates. With inflation pressure mounting, rates heading north is a question of when and not if. This along with past 4 of 6 IPOs listing at discount and week end lockdowns in Mumbai, making sale closures difficult keep near term prospects weak.
Conclusion:
Weak Financials with High Leverage do not provide comfort. Hence we recommend ‘avoid’. Better to play booming real estate theme through home loan financiers, for which one may refer to our recommendations given exclusively to our members.
Grey Market Premium (GMP) of Macrotech Developers: Grey Market Premium of Macrotech Developers (Lodha) is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.
Disclosure: No Interest.