Global investors have increased their equity exposure in the real estate sector due to increased confidence in India driven by certain government initiatives, reform-led improved transparency, and accountability in the real estate sector.

Even though the global economy faced headwinds, India remained resilient. This is evident, as there was an infusion of $5.8 billion from institutional investors in the property sector. The investment involved 53 deals in 2023, a 14% increase compared to 2022.

With 63% of all investments made in 2023, foreign institutional investors made up the largest contributors. Additionally, domestic investors saw a notable increase in market share, rising to 37% from an average of 19% over the preceding five years.

So, today we are going to look at one of the largest real estate developers, Macrotech Developers Limited. The share (NSE: LODHA) has given a return of 122 percent over the past year. So let’s understand the business of the company and whether there is an investment opportunity in the future.

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Company Overview

Since 1986, the Lodha Group has been a part of the real estate industry. Furthermore, Abhishek M. Lodha, the managing director and CEO, is leading the business. After beginning business in Mumbai and creating affordable housing developments in the city’s suburbs, Lodha expanded into other markets and areas in Pune and the MMR.

The core business of the company involves residential real estate development, with a focus on creating premium and luxury developments across different price points. The company forayed into the development of digital infrastructure parks in 2019 and has also entered into a joint venture with funds managed by Bain Capital, Ivanhoe Cambridge, and global investment firms to develop a pan-India green digital infrastructure platform.

Macrotech Developers – Business Segments

Residential Portfolio

  • Affordable and mid-income housing projects. The brands include “Lodha,” “CASA by Lodha,” and “Crown – Lodha Quality Homes” for affordable and mid-income housing projects.
  • Premium and luxury housing projects. The brands include “Lodha” and “Lodha Luxury” for premium and luxury housing projects.

Logistics and Industrial Park Portfolio 

  • The logistics and industrial park portfolio includes the development of a logistics and industrial park of over 800 acres of land near Palava, which is strategically located near the Jawaharlal Nehru Port, the proposed international airport in Navi Mumbai, and the industrial hub of Taloja.
  • The product offerings under this category include built-to-suit structures, standard structures, and land parcels for our logistics and industrial clients.

commercial portfolio

  • Office projects. The brands include “I think,” “Lodha Excelus,” and “Lodha Supremus” for the office spaces.
  • Retail projects. The retail projects focus on high-street retail with shopping and entertainment options for the local community.

LODHA’s Competitive Edge

Firstly, the company has a huge presence in the Mumbai Metropolitan Region (MMR). As the market with the greatest share of supply and absorption, average base selling price, and appeal to a broad range of income and demographic groups among the Top Seven Indian markets, the MMR is regarded as the most desirable real estate market.

MMR has a significant depth of demand for real estate developments across different price points. The other point to note is the high barriers to entry in this region due to limited land availability, high prices of land, and knowledge of the regulatory and approval processes required for developing a project

As a result of the LODHA’s strong brand, existing land reserves, industry knowledge, and regulatory environment know-how in the MMR, the company has a leadership position in the South Central Mumbai, Thane, and the Extended Eastern Suburbs micro-markets of the MMR.

The second is their brand’s reputation. This provides them with the advantage of enabling them to sell throughout the construction phase of the projects. The company typically aims to sell over 80% of the saleable area of a project during the construction phase. 

By leveraging the brand value and focusing on selling a sizeable percentage of units within one year from the launch of a project as well as before the receipt of the occupation certificate (“OC”), the company can generate operating cash flows during the construction phase. Such sales help reduce the need for construction finance and enable us to achieve optimal returns on our projects.

The third is their ability to command premium pricing for their products. By leveraging its brand presence, customer confidence, track record of successfully delivering projects, and superior construction quality, the company can increase sales volume along with premium pricing.

Macrotech Developers – Future Plans

Benefits from Industry Tailwind

First, let’s understand where the company stands in the industry. In 2021, the total primary (new build) sales in Inida’s top 7 cities were about 300,000 units. In the year 2022, it grew by about 20% to 360,000. If we put 15% CAGR in housing production for this decade, then annual housing production would touch around 1 million units per annum. Thus, total production for this decade would be 9 million units

It is also estimated that the total number of households in India will grow from 77 million in 2021 to 175 million in 2030. Which means an incremental demand of 100 million units. So, the company has a huge runway in the industry given their leadership position. Moreover, as the country progresses from a low-income to a middle-income economy, India will be witnessing a ‘once in a lifetime opportunity’ to grow its ownership rate of quality housing.

Market share improvement outside MMR

MDL has partnered with companies in Bengaluru and Pune to pursue growth outside of MMR. Its market share in MMR was approximately 9% in FY22; when combined with Bengaluru and Pune, it is projected to have a 15% market share across all three markets. 

There is a great opportunity to grow market share in both Bengaluru and Pune with MDL’s entry into the Bengaluru market. In five years, the company hopes to capture 10% of the Bengaluru market. It expects a share addition of about 2

Macrotech Developers -financial

The company has substantially reduced its debt since the IPO in 2021 and remained committed to the path of creating a strong balance sheet. 

FY23FY22FY21
Net Debt/Equity0.560.763.14
Net Debt (₹ Bn)70.793.0160.8

From FY21 to FY23, the company reduced its net debt by around 56 percent. The Net Debt to Equity decreased by 82 percent in the same period. Moreover, the company has created a debt ceiling goal of lowering 1x of operating cash flow (OCF) or 0.5x of equity.

The company’s management anticipates that in the coming years, Palava City, an integrated smart township spanning nearly 5,000 acres close to Mumbai, will grow and bring in ₹8000 crore in revenue annually.

So, do you think the Lodha will capture the growth of the real estate market in the future? Let us know in the comments below.

Written by Nalin Suriya S.

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