Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Macrotech Developers Limited (MDL) to ‘CRISIL A+/Stable’ from ‘CRISIL A/Stable’ while reaffirming the short-term rating at ‘CRISIL A1‘. CRISIL Ratings has also withdrawn its rating on bank loan facilities of Rs 2349.87 crore at the company’s request as these facilities have been fully and / or partially paid off. The withdrawal is in-line with CRISIL Ratings’ policy on withdrawal of bank loan ratings.

 

The rating action reflects improvement in the company’s financial risk profile driven by continued focus on deleveraging while maintaining strong operating performance. Gross debt reduced substantially to Rs 9,050 crore as on March 31, 2023 against Rs 11,540 crore as on March 31, 2022, and is expected to further reduce to Rs 8,000 crore by March 2024. Although debt was higher than CRISIL Ratings expectation, it was on account of lower inflows from sale of operational commercial real estate assets, which are now expected to be retained and support diversification of revenue stream. Further, the outflows towards business development were also higher with company adding gross development value (GDV) of Rs 20,000 crore during the fiscal against ~Rs 15,000 crore expected earlier. The company continues with its plan regarding reduction of debt level with net debt level-to-equity ratio expected at 0.5 time or net debt-to-operating cash flow expected at 1 time, whichever is lower, by March 2024.

 

The operating performance also witnessed healthy improvement with company recording sales of 94 lakh square feet (sq. ft) for fiscal 2023 valued at Rs 12,060 crore, an improvement of 17.5% and 33.6% respectively, over fiscal 2022. Healthy sale trajectory coupled with timely construction progress resulted in collection of Rs 9,710 crore and cash flow generated from operations of Rs 5,110 crore (excluding cash inflows of UK business) for fiscal 2023. This is expected to remain strong going forward as well, supported by healthy launch pipeline, strong operating margin in ongoing projects and good proportion of ready-to-move inventory (RTMI).

 

The ratings continue to reflect MDL’s established brand and strong market position in the real estate segment in Mumbai Metropolitan Region (MMR) and comfortable cash flow position and financial flexibility. These strengths are partially offset by adequate though improving financial risk profile because of historical debt-funded land acquisitions and susceptibility to cyclicality and regulatory risks in the real estate sector

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of MDL and its subsidiaries, joint ventures (JVs), and associates (based on the consolidated financials of MDL). This is because these entities, collectively referred to as MDL, have common promoters and are in the same business.

 

CRISIL Ratings has moderately consolidated Lodha Developers UK (LDUK) and other UK entities with MDL. This is because the company reduced its stake in UK entities to 51% from 75% on March 25, 2020, and there was a change in management rights over relevant activities. LDUK and its subsidiaries have been consolidated as joint ventures, rather than subsidiaries (in line with Ind AS treatment). Additionally, debt raised at UK entities is non-recourse to MDL and operations at these entities are expected to be completed over the next 8-12 months. Inventory finance of GBP 225 million (outstanding as at 30 June 2023 – GBP 60 million) has not been consolidated with debt of MDL.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Established brand and strong market position in the real estate segment in MMR

Lodha group has a presence of over four decades in the real estate sector and is known for large developments, quality construction and good salability. As of June 2023, the group has developed and delivered over 950 lakh sq. ft, mostly in the residential segment, and has around 1,100 lakh sq. ft of projects under construction or planned in the development business. Market position is further underpinned by the large, low-cost, land bank of around 4,300 acres across MMR, which supports profitability of projects. Strong operating efficiencies aided by internal construction capabilities further reduce cost and manage construction pace. The group continues to leverage their leadership position to become a partner of choice for landowners through JV or Joint Development Agreement (JDA) Projects. The group has already signed 5 projects comprising of 71 Lakh sq. ft. with Rs. 12,000 crore Gross Development value (GDV) (vs 17,500 crore full year guidance) in Q1 fiscal 2024. There is a launch pipeline of 22 projects comprising of 94 Lakh sq. ft. having estimated GDV of Rs. 12,500 crore for rest of fiscal 2024, having launched 18 Lakh sq. ft. with estimated GDV of Rs. 1,500 crore.

 

The group also has invested in two real estate projects in London, namely Lincoln Square in the West End and No. 1 Grosvenor Square in Mayfair. Both these projects are now complete, and the net proceeds after repaying the indebtedness has started to be repatriated to the company. Balance proceeds from sale of inventory in UK will be used to repay inventory finance and surplus thereafter will be repatriated to India. Company has repatriated Rs. 550 crore in fiscal 2023 & is expected to be repatriated another Rs. 550 crore in fiscal 2024. Consequently, the group will continue to focus on operations in India and will not venture into international markets in future. Any material delays in receipt of balance funds from UK entities or expansion outside India will remain key rating monitorable.

 

Comfortable cash flow position and financial flexibility

Financial risk profile of the company has improved driven by continued focus on deleveraging while maintaining strong operating performance. Gross debt reduced substantially to Rs 9,050 crore as on March 31, 2023 against Rs 11,540 crore as on March 31, 2022, and is expected to further reduce to Rs 8,000 crore by March 2024. Although debt was higher than CRISIL Ratings expectation, it was on account of lower inflows from sale of operational commercial real estate assets, which are now expected to be retained and support diversification of revenue stream. Further, the outflows towards business development were also higher with company adding gross development value (GDV) of Rs 20,000 crore during the fiscal against ~Rs 15,000 crore expected earlier. The company continues with its plan regarding reduction of debt level with net debt level-to-equity ratio expected at 0.5 time or net debt-to-operating cash flow expected at 1 time, whichever is lower, by March 2024. Debt profile of the group has also improved with ~12% of total debt is now backed by lease rentals discounting (LRD). The same is expected to improve further going forward. As per management articulation, deleveraging will remain the primary focus, even if the company needs to forego some growth opportunities to achieve the same and comfort has been derived from strong management articulation.

 

CRISIL Ratings expects the group to generate operating cash surplus (including cash inflows from sale of land parcels and Annuity Income) of over Rs 5,000 crore per annum in the two fiscals through March 2025. This will be supported by expected continuation of momentum witnessed in sales and collections in FY 24 given the strong launch pipeline and availability of ready-to-move-in (RTMI) inventory of ~Rs 6,560 crores (as on March 31, 2023), which is expected to contribute to sales and collections, however without corresponding increase in outflows. Furthermore, while annual debt service obligation is significant, financial flexibility is supplemented by the group's demonstrated refinancing ability, access to unutilised bank lines of over Rs 1,600 crore, cash and bank balances of Rs 1,550 crores (as on June 2023), ability to raise funds through issue of equity and land parcel of ~4,300 acres in township projects.

 

CRISIL Ratings does not expect any significant land purchases by Lodha group in the near term, given their focus on deleveraging, preference of JDA route for expansion wherein upfront investment is low and sufficient land bank available for planned projects. Traction in sales of RTMI inventory will remain a key rating monitorable.

 

Weaknesses:

Moderate though improving capital structure

The group had undertaken debt-funded land purchases and growth historically, with a portion of debt being used for purchase of land. The same was also increased due to ongoing construction and outflows to UK entities to support operations. Nevertheless, land acquisition spends significantly fell since fiscal 2021 and group’s focus on deleveraging. Consequently, gross debt has reduced to Rs. 8,860 crore as on June 30, 2023 as compare to Rs. 11,540 crore as on March 31, 2022. The group is expected to focus on reducing net debt to 0.5x of equity or 1x Net Debt to Operating Cash flows whichever is lower by March 2024. Any deviation from the debt reduction trajectory will be a key monitorable.

 

Average cost of debt as on June 30, 2023, was 9.65%. The group has achieved a 85-basis point reduction since FY22 supported by refinancing and pre-payment of high-cost debts. Cost of debt for fresh borrowings by the group is around 9% and they intend to reduce overall cost of debt in the near term.

 

Susceptibility to cyclicality and regulatory risks in the real estate sector

Cyclicality in the real estate sector could lead to fluctuations in cash inflow because of variations in realisations and saleability. In contrast, cash outflows related to completion of projects and debt repayment, are relatively fixed. For MDL, there has been a strong uptick in performance in FY23, with sales and collections breaching Rs 12000 crores and Rs 9700 crores respectively in FY23. CRISIL Ratings expects sale value to further ramp up to over Rs 13,000 crores by fiscal 2024.

 

The real estate segment is further characterised by multiplicity of property laws and non-standardised government regulations across states, and thus operations are exposed to regulatory risk.

Liquidity: Strong

The group’s liquidity should remain strong, supported by healthy saleability and collections in the ongoing projects as well as in new launches. External borrowing has been used to fund ~26% (outstanding debt to total assets) of project cost and capital expenditure as of March 2023. Debt repayment is expected to be around Rs 1,403 crore in fiscal 2024, and the group has adequate financial flexibility to manage the upcoming repayments. The group has unsold ready to move in inventory of around Rs 6,560 crore in completed, ongoing and planned projects, along with pending collections of ~Rs 8.600 crores from sold inventory. Company is also targeting to build annuity income from office and retail assets, warehousing and industrial parks and facility management business which will bring robustness in the cashflows. The group also has fully paid-up land bank of around 4,300 acres against which additional debt can be raised, if required. Furthermore, undrawn bank lines of around ~Rs 1,600 crore, ability to refinance existing debt at lower cost, ability to raise funds through issue of equity and cash and equivalents of ~Rs 1550 crore, support liquidity.

 

Environment, Social and Governance (ESG) profile

CRISIL Ratings believes MDL’s ESG profile supports its already strong credit risk profile.

 

The real estate sector has a significant impact on the environment owing to high emissions, waste generation and impact on land and biodiversity. The impact on social factors consists of labour-intensive operations and safety issues on account of construction related activities.

 

MDL has an ongoing focus on strengthening the various aspects of its ESG profile.

 

Key ESG highlights:

• MDL plans to be a Net Zero Company by operations (Scope1, 2) within FY24; Align Scope 3 emissions reduction roadmap with 1.5 ℃ ambition
• Renewable Energy: Transitioning 100% of energy used on construction sites and assets from renewable sources through on-site generation and off-site energy purchase
• Water & Waste Management: 100% waste water at all projects are getting treated through STPs; 100% wet garbage at MDL’s projects is getting composted through organic waste composters or biomethanation plants
• Green Mobility: MDL to provide EV charging infrastructure – 97 chargers installed across sites.
• Gender diversity shows an improving trend, Company have also set target to achieve 44% of gender diversity by 2027
• MDL’s governance structure is characterized by 55% Independent Directors and two women directors; ESG Committee at the board headed by an Independent Director
• There is growing importance of ESG among investors and lenders. MDL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high foreign portfolio investor shareholding (~20%) and access to capital markets.

Outlook: Stable

CRISIL Ratings believes that the Macrotech Developers will continue to benefit from its established position in the MMR real estate market and expected improvement in performance. The financial risk profile is expected to continue improving given focus on deleveraging.

Rating Sensitivity factors

Upward factors

• Strengthening of the financial risk profile with gross debt to operating cash flow remaining below 1.2 times on a sustained basis
• Sustained improvement in business risk profile backed by healthy sales and collections

 

Downward factors

• Weakening of the financial risk profile with gross debt to operating cash flow remaining above 1.7 times on a sustained basis
• Sizeable outflows towards business development and commercial projects leading to higher than expected debt
• Material weakening in business risk profile triggered by slackened saleability of projects or substantial delays in project execution

About the Company

MDL is one of the largest real estate developers in India. Established since 1980s, it has developed properties over 95 msf mostly in MMR market. It has sold more than Rs 62,400 crores in eight years through fiscal 2023. Founded by Mr. Mangal Prabhat Lodha in 1980s, MDL is now managed by his son, Abhishek Lodha (MD & CEO).

 

For the quarter ended June 30, 2023, profit after tax (PAT) was Rs 179.2 crore on operating income of Rs 1617.4 crore, against Rs 271.3 crore and Rs 2675.8 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable