Macrotech Developers IPO opens for subscription: Should you subscribe?

Macrotech Developers, formerly known as Lodha Developers, is committed to substantially deleverage its balance sheet in ensuing quarters led by IPO proceeds (Rs 1,500 crore); recovery of investment from the UK projects (around Rs 1,600 crore) and improved collection, Reliance Securities said. Its plan to reduce net debt to Rs 12,700 crore in the coming quarters negates concern over high leveraging.

Further, "strong project portfolio and monetisation of huge land banks offer comfort. Moreover, its return ratio looks to be superior compared to peers. Hence, we recommend subscribe to the issue", the brokerage said.

Incorporated in 1995, Macrotech Developers is one of the largest real estate developers in India. It enjoys strong brand equity in the real estate industry, especially in the Mumbai Metropolitan Region (MMR) and Pune with its ongoing portfolio of affordable and mid-income housing projects.

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As of December 2020, the company had 91 completed projects comprising 77.2 million square feet (msf) of developable area, out of which 59.1 msf is in affordable and mid-income housing, 12.2 msf is premium and luxury housing, 5.2 msf office space and 0.7 msf retail space.

It has 36 on-going projects with a developable area of 23.6 msf and has 18 planned projects with a developable area of 45.1 msf.

It possesses land reserve of around 3,803 acres in the MMR with the potential to develop projects admeasuring around 322 msf of developable area.

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Macrotech has two investments in the United Kingdom, aggregating to GBP 208 million (net of provisions). "Both these projects are now complete and the net proceeds after repaying the borrowings are likely to be repatriated over time to the company," said Choice Broking, which assigned "subscribe for long term" rating to the issue.

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"The issue seems to be attractively priced. Moreover, the real estate sector is witnessing significant consolidation, especially after the NBFC crisis. Dominant players like Macrotech are likely to benefit in the medium to long term," the brokerage said.

However, the resurgence of the COVID-19 infection and discontinuation of stamp duty waiver on property registration would dent the sentiment in the near term, it said.

Macrotech's earnings performance has not been impressive mainly marred by the prolonged slowdown in the realty sector as well as COVID-19 led business disruptions, said Reliance Securities, adding its gross debt rose sharply in FY18 and FY19 led by a big increase in inventory.

While its income recorded a negative CAGR of 4 percent over FY18-FY20, net profit clocked 35 percent negative CAGR during the same period owing to the sharp rise in finance cost.

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For the nine months period ended December 2020, the business was hit by COVID-19 led lockdown, leading to a 68.6 percent YoY lower topline to Rs 2,915 crore. EBITDA and adjusted PAT margins expanded by 156bps and 18bps, respectively, to 19.3 percent and 6.6 percent during the same period.

However, the company's cash flow has been impressive, with cumulative operating cash flow and free cash flow of around Rs 5,400 crore and around Rs 5,200 crore, respectively, through FY18-9MFY21.

In 2019, Macrotech forayed into logistics and industrial parks and entered into a joint venture with ESR. It also developed commercial real estate, including as part of mixed-use developments.

It is a strong brand in affordable and mid-income housing projects but given weak revenue growth and leverage balance sheet, Angel Broking has assigned a 'neutral' rating to the IPO.

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