Please note that this conference is being recorded. I'll hand the conference over to Mr. Biplap Debbarma from Antique Stock Limited . Thank you, and over to you, sir.
Thank you, Steven. Good afternoon, everyone, and welcome to the Q2 FY 2023 Earnings Call of Macrotech Developers chaired by Antique Stock Broking . Today we have with us the management of Macrotech Developers, represented by Mr. Abhishek Lodha, Managing Director and CEO, Mr. Shaishav Dharia, CEO, Townships and Rental Assets, Mr. Sushil Kumar Modi, CFO, and Mr. Anand Kumar, Head IR. Without further ado, let me hand over the call to Mr. Lodha. Over to you, sir.
Good afternoon, everybody. Thank you for joining us for our earnings. Best wishes of Indian New Year to you and your family. I will begin by highlighting three key updates. Number one, our U.K. investment cycle is now visibly reaching conclusion. We have repatriated back approximately INR 100 crores during this quarter, and we will receive an additional INR 1,000 crores in the course of calendar year 2023. We have also paid off the US dollar bond of $225 million to match the U.K. investment in two tranches in March and September 2022, and there is no further liability or risk to the Indian balance sheet from the U.K. investment.
Fluctuation in the sterling and the deterioration of the local economy, as well as certain other project related expenses, the amount likely to be remitted to India from the U.K. operations is going to be a total of INR 1,100 crores. INR 100 crores already received, about INR 1,000 crores to be received next year, against our earlier estimate of INR 1,500 crores. It is to be noted that the one-time non-cash provision of INR 1,177 crores that we have taken this quarter in our P&L is to reflect the difference between the value of the debt instrument we had used to finance the U.K investment and the value of the actual receipts.
Now that the repatriation has started back, it was appropriate for us to take into a view of what the final repatriation would be and therefore take this non-cash provision for the differential amount. Please note that the remittance amount of INR 1,100 crores, INR 1,000 crores already received and INR 100 crores to be received is completely independent of this, and that money will be received, as I mentioned, in the course of calendar 2023. Of course, the provision that we taken will also lead to a tax benefit of about INR 350 crores to us in due course. Therefore, effectively from the U.K. we'll receive back about INR 1,100 crores, and we'll get a tax benefit because of this provision/write-off of about INR 350 crores, totaling to a total cash benefit of INR 1,450-odd crores to Macrotech Developers Limited.
This will bring an end to our U.K. investment cycle and allow us to completely focus on only doing investments in India. Point number two, as we had promised earlier, from this quarter onwards we will report the embedded EBITDA from the presales done this quarter. The embedded EBITDA is calculated using the sales price of the sales done in the current quarter and the estimated life cycle cost of the relevant building or plant in which the sales are done. This will give you the clear visibility into the profitability and free cash flow generated from our quarterly sales. Since we have very little depreciation and amortization cost in our business, the EBITDA can be converted into profit before tax, PBT, by deducting the interest cost.
We update you on a quarterly basis on, and also as well as our total debt, as well as the cost of borrowing. For this quarter, we had an embedded EBITDA margin of approximately 33% on presales of INR 3,100 crores, implying an embedded EBITDA of approximately INR 1,050 crores. For H1 as a whole, the embedded EBITDA amount is approximately INR 2,040 crores. Third update, we had the strongest H1 in our history, INR 6,000 crores of sales and the strongest ever Q2, which is usually the weakest quarter, but that also had almost INR 3,150 crores. The start to the current quarter has been equally strong for a Q3. Two factors are supporting this momentum.
One is the consolidation leading to quality on the supply side, and the second is the strong demand driven by the availability of mortgages and the moderate price growth that is in the marketplace. The underlying momentum in the housing market is in spite of the inflationary pressures on the consumer and almost 150 basis points increase in mortgage rates from about 6.75% to just under 8.5% during H1. We believe that this is the evidence that the long-term upcycle in Indian housing is now well underway. To the broader economic context now, it was yet another quarter of volatility and uncertainty in the global economy and markets. Higher inflation readings forced the U.S. Fed to continue raising rates.
How much does higher interest rate have an impact on how deep or long the U.S. recession is going to be, we'll all have to wait and watch. Alongside this, there was turmoil in other economies as well, the U.K. most noticeably, and China continuing to have its own sets of challenges. This idea is not to share global expertise, but highlight one which is the impact on currency. INR has seen recent depreciation in this quarter, but it is not out of whack with what's happening with most other currencies. The RBI has used both its foreign reserves as well as to shore up the rupee. We think that the RBI is now approaching an end to its interest raising cycle, and we expect probably another 50 basis points or so of further rate increase from the RBI.
Mortgage rates, as I mentioned earlier, are up from just under 7% to almost 8.5% now, and we have not yet seen any significant impact on the housing sector. As I mentioned, we do expect mortgage rates to go up by approximately another 50 basis points. We remain comfortable with the demand in the housing sector not being impacted with even this further moderate increase in mortgage rates. We have also, as we have informed you in earlier calls, sheltered home buyers by capping their mortgage rates at 6.99% until June 2024. This scheme has had good take-up with almost 56% of our sales by volume and 40% of our sales by value taking advantage of this scheme.
The total cost to us is about for the take-up this year for this quarter is actually just under 0.3% of the cost of goods sold. The overall cost of this scheme is quite moderate, but it is giving the consumer a reassurance that they can buy the homes that they have been dreaming of without getting impacted by the sudden volatility in mortgage rates. Of course, inflation does impact the wallet of the consumer and the sentiment of a potential home buyer, and we have to continue to exercise caution on that front. For now, it does feel like the strength of the market is quite strong.
Sentiment in our core areas of operations, namely Mumbai and Pune, continues to remain buoyant, as can be felt on the ground in this festive season, in terms of inquiries and sales. On the other hand, as financing environment tightens, it will provide us with further opportunities in terms of landowners coming to us more for JDs. Thus, overall, nothing really out of the ordinary to report for this quarter. As I have mentioned in the past, we continue to remain convinced on the multi-year housing cycle. Nothing wants to tell us anything otherwise. The presales of over INR 3,000 crores was our second best ever quarterly performance, and our best ever Q2, as I mentioned. While collections were a bit slow, it's only about a shift from one quarter to the next.
Similarly, revenue recognition and profitability as reported was impacted due to revenue optimization phenomenon, and we can, of course, provide further details if so required. However, we believe that looking at our presales and the EBITDA of those presales, which we are both reporting, will give you a much clearer look into our business and its cash flow as well as underlying profitability. Business development opportunities continue to remain quite readily available, and we have signed four further projects in this quarter, providing additional development value of approximately INR 3,100 crores. With every quarter and every opportunity that we evaluate and sign, we're building the foundation for growth in the following years, with nothing to suggest that our targets for this year will not be achieved, both in terms of presales and collections. Commodity pressures have already eased. Costs for us continue to go down.
Just to let you know, our absolute interest cost per quarter has fallen from over INR 550 crore in June 2021 to just over INR 250 crore in the quarter ending September 2022. The momentum remains strong, and we are on track for FY 2023 and working closely toward our guidance of our net debt to approximately INR 6,000 crore. Even if we fall short modestly, that will only be for about a quarter or so. In terms of our business progress beyond Mumbai and Pune, in Bangalore, we are on track for a launch in the first half of 2020. All the groundwork has been done and the seeds are being planted.
This is a test for us in a new market with minimal capital deployment returns on the same through the same asset-light model. We intend to use the next 12-24 months to become local in Bangalore and do a limited number of projects and really learn how the market operates and then scale up using the strength of project deliveries so that in due course, Bangalore can become another opportunity to scale up in a significant manner. Pune is now playing out. In terms of the Pune market, we feel very strong about how we are placed in that marketplace. We believe that sometime in the next 24 months, our sales will become among the top, the largest in that market, or if not the largest, definitely among the top. Coming to the operating as well as financial highlights of the quarter.
Despite this being a seasonally weaker quarter, we clocked our best ever Q2 sales, INR 5,148 crores growing by 57% year-on-year. Q2, of course, is weak due to the monsoon, plus the inauspicious period of Shradh or Pitru Paksha. The cherry on the cake is that it is the second instance when we have crossed INR 1,000 crore number in quarterly presales in the same calendar year. The earlier instance being Q4 of fiscal 2022. With this strong performance, we have achieved pre-sales of INR 6,004 crores in H1 of FY 2022. Our best ever first half in terms of pre-sales, and this is 52% of our guidance of INR 11,500 crores, and positions us very well to definitely deliver on our guidance and to the extent possible, surpass it.
As mentioned earlier, we will continue to provide you with the EBITDA margin on the pre-sales done for this quarter. This will help our stakeholders and financial community to get a sense on the profitability of our pre-sales. As mentioned earlier, for this quarter, the EBITDA margin is at 33%, and for the first half of the year, it is at 34%. This information will bring much needed transparency for stakeholders and provide understanding around not just the pre-sales, but also around the quality of the pre-sales in terms of profitability and cash flow.
This also helps take away from the focus on revenue recognition in our P&L, which is informed by the Ind AS and allows revenue to be recognized only upon the physical completion of the building, which is evidenced by the occupation certificate, and therefore can lag sales by, you know, almost three years. Moving on. We continue to match the pre-sales growth, and the same came in at INR 2,375 crores for the quarter, showing a growth of 24% year-on-year. We expect collections to keep growing in line with our overall collections target for the full year, being approximately INR 11,000 crores, of which we have collected just about INR 1,000 crores in the first half. As mentioned earlier, we've added four new JDA projects with a GDV of INR 3,100 crores across MMR and Pune.
With this, INR 9,300 crores of projects have been added for the first half, which is 62% of our guidance for the full year. As we keep launching new JDA projects in each quarter, it further enhances our brand and capabilities with the landowners looking to partner with a player like us, who will maximize the NPV of their land. We have a strong pipeline of business development opportunities, which makes us confident of achieving the business development targets that we have laid out. Our average cost of debt has further come down to approximately 9.9% as on 30 September 2022, showing a decline of 60 basis points in the first half of the fiscal, even as there was an increase of 190 basis points in the policy rate.
Recognizing the improved business fundamentals as well as the strength of our balance sheet, ICRA has assigned a credit rating to the company of A+ in the month of October, which is one notch above the above rating, which was A with a positive outlook. This should further enable us to improve our cost of funds in the times to come. Moving further, updating you with digital infrastructure business. During the quarter we have monetized our first joint venture by selling our stake in the ESR park for approximately INR 158 crores. This is consistent with our strategy of monetization after developing an asset either at the asset level or the platform level.
Our platform with Bain Capital and Ivanhoé Cambridge has commenced activity on developing the four land parcels, as well as scouting for new land to put in the platform, is also progressing well, and there should be announcement in terms of the growth of that platform over the course of the next six months. Just to recap in terms of this platform, the platform has been established with a view to create a pan-Indian presence in the digital infrastructure space that includes logistics and light industrial parks, as well as in-city fulfillment centers. The platform will entail $600 million of equity contribution divided equally between the three partners. The platform can then lever it up modestly and jointly invest over $1 billion and create approximately 30 million sq ft of operating assets to serve India's digital economy.
Lodha's share of equity contribution will largely be in the form of assets that we will inject into the platform. In addition to the signing of the 1 million+ sq ft box with Skechers in Q1, we have now signed up Schlumberger in our park in Palava. Advanced negotiations with various end users in a diverse set of industries like FMCG, 3PL ecosystems, 3PL logistics, cold chain, et cetera, is currently ongoing. A number of closures are likely to take place over the next 6-12 months. This is likely to generate a large number of jobs, thus boosting the economic activity in and around Palava and kickstarting a virtuous cycle and augmenting our residential business as well.
Let me now update on a topic which is close to our ethos of do good, do well, that is sustainability. On this front, we have continued to make significant progress. This can be seen through the rating given to us by GRESB, which is one of the most globally renowned real estate focused sustainability benchmark providers. In the residential category, we received a score of 95 out of 100 in our very first attempt, in 2022, which gave us a five-star rating. This score is also amongst the top three in Asia. Let me now, we have also established the Lodha Net Zero Urban Accelerator in collaboration with the Rocky Mountain Institute of USA. The accelerator has already identified 5 focus areas where they have started work on, being building design, efficient equipment, embodied carbon, clean energy, and green mobility.
Palava will serve as a city scale living laboratory to solve these challenges and pioneer innovations on the path to net zero. After finding solutions, these would be rolled out through multiple projects, not only transforming the way construction is done, but also improving the lives of so many people who would be living inside developments. The information and knowledge generated in the accelerator will be freely shared with the entire industry so that the transition in India towards net zero in the building space can be expedited. We have also become a part of the Build Ahead Coalition launched by Xynteo, an industry first alliance consisting of forward-leaning businesses such as JSW, Godrej Construction, Shell India, et cetera, committed to scale decarbonization efforts across the Indian construction value chain. With this partnership, we aim to accelerate the use of low carbon building materials in the construction process.
On the governance front, the company has strengthened its board by inducting Ms. Harita Gupta as an independent director. Ms. Harita Gupta has over three decades of global experience in digital and IT services. She has held leadership positions at globally renowned companies like Microsoft and NIIT, among others. She's currently leading APAC and global head and enterprise business at Sutherland Global Services, being a digital innovation-focused organization. We will benefit immensely from her guidance and experience as we step into our next phase of growth. As discussed earlier, to further enhance our disclosures, we are committing to provide the embedded EBITDA margins for the pre-sales of each quarter. This is one more step to enable stakeholders to better understand our business and the quality of pre-sales.
We have, from time to time, made an effort to introduce the depth of our management team to you to showcase the details of the different parts of our business. Today, we are going to have with us Shaishav Dharia, who is the CEO of our townships business as well as heads our, represents the company on the board of the digital infrastructure tools that we have with Bain Capital and Ivanhoé Cambridge. The model of townships that we have built is, in our opinion, unique, in India. We are proud of the fact that we are able to bring the highest standards of living to lower middle class families of India's large metros.
Not only do we enable them to live in great environments, we also create comprehensive work, play, live and learn environments, including healthcare, education, workspaces, sports, and so on, which provides people with a quality of life which is extremely rare in our country. As a part of further using our scale and our township model to create positive impact for society, we are now working with a variety of corporate partners on an initiative to increase the female workforce participation rate, which is much lower than in several other economies. We are trying to create a model wherein women can get high paying jobs within a short walk or short drive from their home, which enables them to not only take care of their primary responsibilities of managing home, but also work in a manner which is physically and mentally reasonable for them.
Before I hand over to Shaishav and Sushil, the one last point I would like to make is that the accounting for our sector has made it difficult to understand the profitability, and therefore, for the first time in this sector, we are providing the visibility on the embedded EBITDA margin of these sales. We hope that with this initiative, our other peers in the industry will also follow suit, and that will allow this industry to be better understood by all those who are stakeholders of this industry. I'll now hand over the call to Shaishav and Sushil before we get to questions.
Hi, Shaishav. You may like to kind of give a bit of a glimpse around our township business in particular and let us know, what kind of activity on the ground you are seeing. Please.
Sure. Thank you, Sushil and Abhishek. Good afternoon, everyone. Am I audible?
Yes, you can be a little bit louder.
Yes, please go ahead.
Hi. As I, you know, our township business today has basically achieved about INR 9,930 crores of pre-sales in FY 2022 and expecting about a 20% growth this year. We've already reached about INR 130 crores in the first half of this year. We're on track to achieve our targets. We expect this business to continue to see high teen growth for the next few years and can get even stronger as some of the infrastructure that is being developed across MMR starts getting completed. We are very fortunate that Palava, which is our largest township and more of a city, has become the blueprint of how we see and develop new townships and replicate a similar success.
The way I see it, building on what Abhishek said, we have basically mastered, I think, four areas, and that has allowed us to create a moat that cannot be replicated by other developers or other projects in creating successful townships. The first one I feel is our ability to deliver high-quality homes along with world-class amenities at an affordable price point. We've been doing this over the last 10 years and each of our townships, high-quality education is very important. For example, in Palava today we have five schools, and I would say it's among the best education districts in the country now. We have six core facilities, infrastructure within the township, which is fully reliable around water, power, sustainability, healthcare in the form of clinics, and now multiple hospitals with a tie-up through AIIMS as well as Jupiter Hospital. World-class parks and amenities.
All of which is within walking distance. All of this put together ensures that what we've created as a product for our customers is truly world-class and able to deliver the price point. Second, for the last 10 years, the ability to have mastered how to deliver homes continuously and consistently at scale. Today, we have demonstrated and are easily capable of delivering 7,000-10,000 homes every year within our township business. To do this at scale and consistently is something which very few have ever shown the capability. The third important point is sometimes it's easier to develop and build physical assets. It's more difficult to govern and build communities. This is the softer side of what we've been able to achieve. For all our customers, majority of them, this is a new way of living.
The governance model, along with a very strong focus on building communities across the entire segment, is what really differentiates the townships. Today, that's why we have over 150,000 people already living in Palava and 15,000 people living in our Upper Thane township, which is a more recent township. The fourth is the ability to innovate and bring in different products. We had the Casa homes, then we introduced Crown, affordable homes. Equally, our focus is now on growing the aspirational home business, which are ranging from INR 1 crore-INR 2 crore. Budget homes and villas that we have done very successfully in Upper Thane and now bringing to Palava. Small offices and retail through our Signet brand.
What this does is that we are able to capture the market and the ecosystem that our townships provide through all of these five product categories and build a more consistent business model. These four elements are basically what we have developed and mastered over the last 10 years. Now we are seeing finally a very important lever, which is an external one to us, the upgradation of road and rail infrastructure from our townships to business hubs. What is a very high quality measure, I think, in a Mumbai context is a 30-minute driving distance or a 10-15-minute ride to a train station. Because of the infrastructure upgrades that have started a few years back, which are now coming to a completion, we will see significant benefit. I will just take a few of them as an example.
For our Palava City, the major infrastructure upgrade, which is complete in the next six months, is the elevated road to the business hubs of Ghansoli and Airoli in less than 15 minutes driving distance. These are predictable times. This becomes a big game changer for a very large segment which wants access to high-quality homes that are well-connected. For our Upper Thane township, the bridge to Thane station will be open by March 2023, which will reduce travel time to less than 10 minutes. In the future, we will also get a metro station within Palava, 3 stops. This suddenly will create a disproportionate jump in our business because we will now, in addition to having everything internally, also provide great connectivity. Equally important is our own job creation, as Abhishek referenced, within our township business.
One example being the green digital infrastructure, a large development we are doing at Palava Logistics and Industrial Park. A lot of work is already under development, and over the next two years, this will all become operational, creating 5,000-plus jobs and growing continuously, along with the emphasis we have put on economic empowerment or job creation for women right close to our townships, which allows them to manage both their home life as well as have a work career. I think this growing strength around infrastructure as well as job creation within our townships is going to create further disproportionate jump in our business. In a summary, the township business has been in a virtuous cycle of world-class product, community, infrastructure, and now great connectivity, external connectivity.
With this, we can continue to grow the business with a moderate price increase year-over-year, large volumes, and almost become like an FMCG business. Let me stop there and hand it over to Sushil Kumar Modi.
Thanks, Shaishav, for this update and the ground reality checks for the stakeholders at large. Biplap, would you like to take it up in terms of queries that various folks would have?
Yes, sir. We'll open it up for the Q&A session. Ladies and gentlemen, we will now open the question and answer session. Anyone who wishes to ask a question may press star then one on your telephone. If you wish to remove yourself from the question queue, you may press star and two. Please mute requested queues when asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Kunal from Bank of America. Please go ahead.
I was hoping to get some more color on the footfalls and conversions you would have seen during the festive season, and if there was anything there that could give us an unchanged pre-sale guidance for the rest of the year.
Hi, Kunal. Important question. What we've seen is that, unlike in previous years, the strength of the sales interest continued even through the second quarter, and the same trend has held up also in October. We are continuing to see similar conversion rates in the 8%-10% range. We're seeing very good quality footfall. I think the strength of the market can be only assessed from the fact that even in months like August and September, which are traditionally very slow months, we ended up, on average, doing INR 1,000 crore run of sales, which is how we got to INR 3,150 crore for the quarter.
which is just showing that, yes, the demand is strong, but not only is it strong, it's also, you know, consistent and the throughput is coming through in a much more, you know, predictable manner now.
Yeah. Gotcha. Thanks. The next one was on the monetization of the ESR JV. I just wanted to check, what is the broad realized rate per acre of land parcel that you referred here? And is that a good representative of, you know, how we could value the remaining land?
We have monetized the ESR land at about INR 4 crore an acre. As I may have mentioned to a similar query in the past, the range in which we sell land will vary to an extent based on the user, because data centers, for example, can sell for even INR 20-INR 25 crore an acre. It'll also depend on the extent of the landholding. Warehousing land of large scale, this was a 90-acre JV with ESR, is probably the lowest value per acre. This has gone at about INR 4 crore per acre, where the average is north of that.
Understood. Last one from me for Sushil. Sushil, if we just look at your CFO target for H2 as well as the debt reduction target, you know, it seems to be about INR 800 crore that can be put towards interest expense and investments. Broadly, does it mean that you're looking at less outflow on the investment side in H2?
Sure. Potentially, you know, you are right, but nonetheless, keep that in mind that our operating cash flow trajectory for the second half generally is, you know, always far stronger than the first half. Henceforth, this debt reduction target is just what is going to be more and more visible from the quarters that we will speak of from Q3 in the AR report. Nonetheless, I think we reasonably kind of, you know, see the visibility of getting our net debt anywhere in the band of INR 6,000 net debt, INR 6,000-INR 7,000, you know, some number around that by the end of it.
Got that. Thank you so much.
Thank you. The next question is from the line of Pritesh Sheth from Motilal Oswal. Please go ahead.
Hi. Thanks for taking my question. First is on you know your micro-market sales that you have reported. We can see a drop in sales in your affordable markets like Extended Eastern Suburbs and Thane affordable mid-income. You know is there anything to read into in terms of you know interest rate that was impacting the trajectory of these micro-markets because they've gone down by at least like 10%-70% quarter-on-quarter and on average what the interest has been for the last 3-4 quarters. Your comments on that.
The Extended Eastern Suburbs historically tend to be the one which is more subjected by the monsoons, because these are the individuals who tend to, you know, run public transportation as well as the auto rickshaw or taxi services most for their commuting. Typically, if you look at it while you are comparing the Q1 versus the Q2 numbers, of course, Q1 also has certain launches in the Extended Eastern Suburbs. Even adjusted for launches, Q2 will typically be weak on account of seasonality, most of it in that segment. We don't really read anything into it. On the contrary, as Shaishav Dharia mentioned, we are well on track to deliver sort of mid-teen growth in townships business for this fiscal compared to the numbers for last fiscal of some 27%.
Sure. In terms of collections as well, just broadly your comment on that. Are you seeing, you know, any trend in terms of people delaying or customers delaying payments because they are adjusting to their budgets? Or any restriction you are catching up there or collections are remaining in tandem with what it is supposed to be?
No, Pritesh Sheth, we have not seen any increase in delayed payments. We measure delayed payments as greater than 30 days delayed, and we've actually seen a fall in the absolute value of the larger base of units from which, of course, collections are coming through as each quarter we sell more units. At this stage, we don't see the Indian consumer in any manner, or at least our consumer in any manner, being, you know, trying to delay their payments. It's just the normal scope of our sales registrations, and then cash flow coming in the unique quarterly or sometimes the fiscal quarter period is in Q2, sometimes it is in Q3. That's the period people don't like, for example, registering their documents. They don't want to make major payments.
These are all, you know, sort of, very syncretic factors. We believe that the collection machine is pretty strongly in place. First half, we've collected just under INR 5,000 crores, and we have an internal target of about INR 11,000 crores of overall collections for the full year.
Sure. Got it. Lastly on your debt, your target remains the same for below INR 6,000 crore. You'll have to literally reduce that by INR 3,000 crore in second half. Is it all going to be coming from operating cash flows or are you also building in the repatriation money helping it reducing the debt? I mean, initially I don't think that was built into our expectation, but now the target, is it including the repatriation money?
We are targeting to be around INR 6,000 crores by the end of the fiscal. You know, yeah, if you're a few hundred crores over it'll be for a maximum of quarter. It will be somewhere in the around the INR 6,000 crore handle. We have some asset sales. We are disposing a mall in Palava. That is definitely a part of the number that we are looking at. We also have a few other, you know, leased spaces which are part of our normal divestment, which will also happen in the second half of the year. We do not have a, you know, a detailed breakup on when the money will come back from the U.K. Quarterly, though we know that INR 1,000 crores will come back in the calendar year next year.
Yes, we have assumed that about INR 2 crore-INR 3 crore out of those INR 1,000 crore will come back in the first quarter of calendar 2023.
Got it. Thanks. That's it from my side. All the best.
Thank you.
Next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Yes, thanks and good afternoon, everyone. Abhishek, a great commentary on Township, so thanks for that. Just if you look out in the mid to long term, are there any risks that you see to Palava development, something like, you know, airport coming in, taking away, you know, development away from you? Any other thoughts if you can share with us?
Sure. Thanks. Actually the airport development will be a positive because, you know, the new airport will be about 30 minutes from Palava. In terms of connectivity it becomes even better, for companies which are operating there as well as those who are living in Palava, so that's actually a positive. I think, you know, we've been able to, for the last 10 years, as I mentioned, develop this moat, which is now very difficult to replicate by somebody else or, and more importantly, to have this kind of scale is very difficult again, probably in the history of MMR. I would say that, you know, natural, you know, black swan events that can impact any business always exists, but we've reached a stage where I do not see any major any normal course of event causing major disruptions.
Okay, great. If I have to take liberty to just put some number around, you talked about sustainable volume and price increase. I mean, what 2-3 million sq ft per annum, 5%-7% price increase and, you know, per annum for extended period of time. Do these numbers look achievable or higher or lower in your thoughts?
Let me take the price growth. I think 5%-7%, which is just below, let's say inflation, is a healthy price increase and sustainable because affordability will always remain good with that similar aspect. That I think is, yes, very much possible and within our target. Second, I would think as a business of township, much more than INR 2 million-INR 3 million is what we should achieve, especially given the growth of the developments on the external infrastructure side, which will connect us better to the business hubs, both with road and rail. I would think we have the potential to do more than that.
Okay. Just to be sure, INR 2-3 million is excluding DI. It's just the residential part, right?
Correct.
Okay. If you do better than that, it would get the benefit of the commercial in the DI development over the next couple of years. Okay.
Correct.
Okay, great. Second question I have is on One Lodha Place. Abhishek, project is coming to completion. What percentage is leased out? How do you plan to realize the current value here?
We started the leasing process for the building. The lower one third of the building is under the for-sale model, and that is almost 50% sold. We intend to lease the building out over the next 18 months. Then, post utilization, we in all likelihood will dispose of our interest in the building. The total recurring rent from the building will be in excess of INR 200 crores per annum. Therefore you can see that a significant one-time income will accrue to the company when we divest this asset most likely sometime in calendar 2025.
Okay, great. It's a great initiative on embedded EBITDA. That will definitely help us a lot. If I understood you correctly, you were saying that this is calculated using the launch price. The cost is over the cycle of the project, so it builds in certain inflation over there.
Yes. The cost side is taken for the life cycle of that building, and the price is the actual price realization for the quarter. It's not necessarily the launch price. If it is launched that quarter, it will be the launch price. But whatever is the actual realization in a given quarter and the estimated life cycle cost, including the inflation that one would expect in the building.
Okay, got it. Thank you so much.
Thank you.
Thank you. A reminder to the participants, anyone who wishes to ask a question, press star and one at this time. The next question is from the line of Parvez Qazi from Edelweiss Securities. Please go ahead.
Good afternoon, sir, and thanks for taking my question. My first question is, given the increase in mortgage rates, what kind of pricing increase can we take from our customers keeping affordability in mind?
Hi, Parvez. A very important question and one which we think about long and hard, believe generally that the total cost growth, which is a function of price growth plus any increase or change in the cost of mortgages should be below wage growth so that affordability keeps getting better. We had guided at the start of the year that price growth should be in the range of 5%-6%, given that wage growth would be in the range 9% this year. Given our initiative around interest costs being capped at 7% till mid-2024, insulates our consumers from any significant impact on account of the increase in mortgage rates.
As I mentioned earlier, the cost to us so far has been averaging about 0.25% of the GDV in any given quarter. Therefore, we continue to guide to the same number of 5%-6% price growth for the full year for fiscal 2023.
Sure. With regards to our South Central Mumbai projects, how do we see sales velocity there? You know, in general, what has been the sales momentum change in that micro market? Thank you.
As you would have looked at in terms of the sales done during the quarter, South Central Mumbai was a very strong contributor, bringing in about INR 1,100 crores of sales in this and just under INR 2,000 crores of sales for the half year. South Central Mumbai continues to see good strength. We are seeing strong growth over comparable period last year. I think our variety in South Central across different price points starting from as low as INR 2.5 crores and all the way to the top end of the market. With a great concentration between INR 2.5 crores to INR 7 crores-INR 8 crores. You know, us having product at different points of the life cycle. We have ready product.
We have advanced under construction product. We've just launched, for example, Lodha Bellevue opposite Vivirea at Jacob Circle or Saat Rasta , as it is colloquially called, gives us the ability to serve that market quite well, and we are seeing good traction.
Thank you. That's it from my side. All the best for the future.
Thank you.
Thank you. The next question is from the line of Abhinav Sinha from Jefferies. Please go ahead.
Hi. Just a follow-up on the embedded EBITDA part. Just to be clear, this is your share or this is the project total embedded EBITDA that we are looking at here?
For us, those numbers are the same. Because for us, our EBITDA is the same as the total EBITDA because any payment made to the landowner is treated as land cost in our accounting. There is no share of EBITDA which goes to the landowner in most of our joint developments. The actual EBITDA which would accrue to us.
On the sales that he announced. The sales is, if the sales is 100, that means, you know, be it coming from the joint development or be it coming from our own land, the EBITDA margin is a blend rate that we have indicated applies on the 100.
Okay. In case of our own land, how are we treating the land cost here? Because you have some very legacy sort of projects also in your life.
Obviously, I mean, those we carry the historical cost, right? The cost of acquisition along with, you know, to the extent that if any interest has been incurred during the construction period and has got capitalized, to the extent that interest will also be getting capitalized. We are giving you an EBITDA number. So any finance cost incurred would not be there. In any case, as we move along, you will notice finance cost effectively will completely take out of the picture when it comes to anything accruing in the cost of project because the debt itself is going down to the INR 6,000 crore level, say, or below whereby you can have the finance separately taken below the line from
Okay. Just one more clarification also, and maybe, you know, we are talking about FY 2024 now. You know, it seems in another three or four quarters you should be done with reducing your net debt. What's the utilization of cash there? Will you know, stick to land bank, JDA model and buying land or, you know, just what's in your mind?
See, firstly, we would like to say that the target of approximately INR 6,000 crores of debt is one milestone we are seeking to achieve. We will of course review the macroeconomic situation and if it warrants an even lower level of debt, we will definitely even use our cash flows towards that. We haven't made any decision because we are of course watching the externally evolving situation closely. Having said that, however, the growth capital available will be used and we will continue to use the growth capital in projects in order to generate the ROEs that we are targeting of approximately 20%. In order to generate those ROEs, we will have a blend of joint development and ownership in our sales mix. We expect that for the next 12-18 months we will continue to remain focused towards JDAs.
In the medium term, it will settle down to approximately 40% of sales value coming from joint development and 60% coming from outright own land such that mix allows us to generate the 20% that we are targeting.
Thank you for that.
Thank you. The next question is from the line of Saurabh from JPMorgan. Please go ahead.
Hi. I just have two questions. One is this margin you have given, this is margin at the project level or is it, you know, your share?
Hi, Saurabh. This is the net margin to us. This is our margin after all expenses including overhead costs as well as whatever goes to the landowner. This is margin to us.
Okay. 23% is the EBITDA. This is the gross margin, right? On the EBITDA.
This is the EBITDA. Means the only cost out of it is, you know, whatever CapEx, depreciation, amortization we may have and then only the interest costs and taxes.
Okay. Great. Because normally, I'm just asking because normally we've seen, you know, the JDA margins are much lower in the best case. Could you explain that you are using this kind of margin for an incremental business?
Saurabh, you are right. To explain, you know, the composition of the JDA will always have the lower margin. From an EBITDA standpoint, as if you recall what we have indicated on any JDA that we do, we target anywhere between 15%-20% handle of EBITDA. Thereby by default taking 10% as an overhead, while effectively from an EBITDA standpoint, there also it becomes 25%-30% kind of, so basically the 15%-20% is the EBITDA margin on the JDA project. As in this quarter, the contribution of the JDA is not that significant. Henceforth what you are seeing is more, you know, coming out of our own projects.
As time goes and thereby the JDA composition improves, you know, potentially this margin as a business potentially will have a downward trajectory.
If I may just come in addition to what Sushil has just said. You know, we estimate it will vary project to project. Own land have the margins in the low- to high 20s% and the JDAs have EBITDA margins in the high teens%. There's definitely a delta between the two. Therefore the blend of course will depend on how much JDAs are contributing to sales in any given quarter.
I got you. Thanks. Now the second is I just want to understand this impairment you've done in U.K. better. Your cash flow receipt has not been proportional to this INR 1,100 crore impairment to happen. Can you just throw some a bit of light on this?
Saurabh, of course Sushil will be able to explain better, but I'll take a little bit of a of an attempt and then Sushil can add. We had made the investments in the U.K. by means of a debt instrument. That debt was accruing interest at an interest rate of 12%-14%. That is what the balance sheet was carrying in terms of what would be earned from the U.K. Now in terms of that, this quarter the net receipts from the U.K. have started coming back and we know with a fair degree of certainty what the final amount that is going to come back is. That rate of return is not going to be in the 12%-14% handle.
That rate of return on our investment is going to be more in the, you know, in the single digit handle. Therefore, the delta between the two is that impairment that we are taking, which is really just an impairment in terms of the return. The principal of course is all being returned and it is being returned with the return, but the return is not as high as the debt instrument was assuming.
Net, net Saurabh, actually, you know, while from a cash flow standpoint, we always kind of guided you on a conservative basis that we would be, you know, targeting seeing a repatriation of around INR 1,500-odd crore handle number. Internally, we were still optimistic looking at how things perform. Potentially there was a scenario that we were painting whereby we can have an impact which is even higher. Knowing how things have evolved and how what you may have seen in terms of economy, I know we. Obviously equally kind of deflation in our own inventory, having received expedited sales, you know, thereby to concentrate more and more on Indian side.
That, you know, some of those optimism which we had internally perhaps is no more relevant. In any case, to all the stakeholders, we always guided conservatively to be the handle of INR 1,500 crore. If you really see on the whole, while the form of this INR 1,500 crore now changes whereby the effective provision becomes more INR 1,100 crore, INR 100 crore already received in this quarter and INR 1,000 crore expected next calendar year. On this provision, we will have the tax break and a tax benefit, which will also be in the handle of around INR 350, INR 400 crores. Net-net effective result from a cash flow standpoint, a positive side for the business, for the company would continue to be in the handle of INR 1,500 crore in line with what we have guided.
Okay. I think I'll let you answer. Just one last question, Abhishek. What would be your end-of-March debt guidance at March 2024? There was this expectation of net debt 0. I mean, where do you think you'll end by March 2024? That's my last question.
Saurabh, at this stage we don't have a March 2024 guidance to provide. We'll of course do it when we share the entire guidance for the year 2024. That's what I mentioned in response to an earlier question. This is the first milestone of getting to approximately INR 6,000 crores of debt by March 2023. We are working aggressively towards getting there, even if we miss it by a little bit, it'll be maximum for a quarter, but we'll get there, you know, quite soon. Then of course, you know, whether to continue to further reduce debt will depend on the external environment. We are quite open-minded about making sure that the company at no time has any risk when it comes to leverage.
While INR 6,000 crore given the scale of our business is not significantly leveraged, but still if we believe that it's better to be lower, we will go lower.
Okay, understood. Just one final question. I'm sorry to prolong this information. Can you just provide what percentage of your borrowers would be taking a mortgage within a bank? What percentage of customers will be taking a mortgage maybe after booking the flat three or five months out?
Around 60%, 60, 65.
Yeah. I don't, Saurabh, right now have an exact number, but what I remember from memory is I think it is in the mid-60s%. The number of customers as a percentage of total buyers who take mortgages.
Okay. Gotcha. Thank you.
To be precise, it's around 68% at this point.
My guess is sure.
Thank you.
The next question is from the line of Kunal Lakhan from CLSA. Please go ahead.
Yeah. Hi. Thanks for taking my question. Firstly, on the spend on new projects that we've spent close to about INR 1,300 crore plus in the first half, how should we look at this in the second half considering like we've already achieved GDVs worth, I mean, INR 9,300 crore versus INR 10,000 crore. How should we expect to spend in the second half?
Kunal, that number will moderate because obviously if we've already done 60% of our target in the first half, in the second half that number will be lower.
Sure. Okay. My second question was on Abhishek. You mentioned that, you know, you expect demand to remain healthy even after another 50 basis points increase in mortgage rates. According to you, at what, you know, mortgage rates you think demand or affordability will get impacted?
I think, Kunal, it's, of course, a question which we can only guesstimate. We had earlier said that up to 9% demand remains unaffected and therefore another 50 basis points from wherever we are right now, 8.25 is a good guide thing. I'll provide another way of thinking about this. I don't think it is too much about mortgage rates. Of course, if mortgage rates are at 12% it will matter. But it's not so much about mortgage rates as it is a job security and job creation. As long as there is job security and job creation, even if mortgage rates are moderately higher than 9%, I don't think will impact on demand. It really is about that job security and job creation question.
Sure. Thanks a lot, and all the best.
Thank you.
The next question is from line of Kushagra from Old Bridge Capital. Please go ahead.
Yeah. Hi. Thanks for the opportunity. A few questions. One, can you give us cash outflows which you're expecting on construction, SG&A and those land and JD investments over the next two years? Not probably the second half, but FY 2024, 2025. Broadly, color would be helpful.
Hi. A good question, but not something we have prepared for. I don't want to answer something of that nature off the cuff. Let us sort of revert to you on that offline.
No worries. Second question is on your JVs, JDs basically. Till now, whatever JDs you have signed, what would be the cash outflow towards, you know, the landowner share in each project, which probably you would have given. If it would have been your own project, it would have been, you know, you would have given as your land purchase acquisition cost. What that amount would be out of INR 17,000 crore-INR 18,000 crore of JDs which you've signed till now?
We have signed approximately INR 24,000 crores of JDs in five quarters. You know, estimating what the landowner share is going to be is obviously a little bit of you know, guesstimate, right? Having said that, what we would be expected to-
We request all the participants to please stay on the line while we reconnect the management. Ladies and gentlemen, the line for the management is reconnected. Thank you, and over to you, sir.
Sorry, we were answering what percentage would be expected as outflows to the landowners. It would be in the range, in our expectation, around the 20%-25% of those revenues. If the revenues are about 25,000 crores, it will range between INR 5,000-INR 7,000 crores of outflows.
Got it. Just one last question on this wage inflation. At one point, you know, you sort of mentioned that wage inflation will continue to sort of tick up, resulting in profitability. At the same time, you know, wages, which is almost one third of your cost, there seems to be, you know, lower than inflationary numbers than the other components. Just taking your thoughts on how you're thinking about this dichotomy between wage inflation at the lower end of the pyramid and wage inflation, which is more of the broader affordability factor. Like, will this percolate in your wage costs as well? Are you doing anything over there in your pricing strategies?
It's a very thoughtful question. Obviously, you know, wages are determined by the trade-off of supply and demand. As we know, India is abundantly supplied with basically skilled labor at the bottom of the pyramid. If you look back at the data series over many years, the wage growth for those at the bottom of the pyramid tends to be disconnected from the wage growth at the middle and the top of the pyramid, purely, you know, based on the level of skill and the supply and demand level. I don't really see this as an anomaly. This is historical. We do build in construction cost inflation into our models, which is a blend of the material as well as the labor cost inflation.
We happily found the way we model it is quite reasonable and accurate. So far we haven't been surprised negatively. The inflation in, you know, the middle and the bottom, and the upper end of the pyramid of more skilled labor of more skilled people who ultimately end up being home buyers. To be a home owner, annual household income at a minimum has to be between INR 6-INR 10 lakhs. That's a very different situation from a construction worker whose monthly wages would range between INR 15-INR 25 thousand a month. Therefore, you know, very different parts of the pyramid.
Okay. Sure. Got it. That's helpful. Thanks a lot and all the best, guys.
Thank you.
Thank you. Ladies and gentlemen, this is the last question. This concludes the last question. Conference over to the management for any closing comments. Over to you, sir.
Thank you, everyone. Feel free to reach out to me or Sushil. As we have highlighted, we are in a very exciting time period where, you know, the sector continues to perform very well. If you have any further questions, please feel free to reach out to me. Thank you.
Thank you. Ladies and gentlemen, on behalf of IIFL Securities, this concludes the conference. Thank you all for joining us, and you can now disconnect your lines.