Macrotech Developers rolls out HUL, DMart-inspired ‘supermarket strategy’ to meet realty demand

1. Macrotech Developers rolls out HUL, DMart-inspired ‘supermarket strategy’ to meet realty demand

2. Talk about an apple-to-ostrich comparison — that’s how far real estate is from the FMCG firm Hindustan Unilever (HUL) or retail chain DMart. For one, real estate is all about working-capital management and mid-teen returns ratio, while the others function on negative working capital and generate rich returns, sometimes exceeding 100%. But Sushil Modi, chief financial officer of Macrotech Developers (popularly known as Lodha Group), sees his business no differently. In a two-hour-long conversation, Modi tells ET Prime about Lodha’s “supermarket strategy”. He says his company is creating a product (housing unit in this case) under the brand name Lodha, which is tailored to meet the demand of customers 6/12/23, 8:41 AM macrotech: Macrotech Developers rolls out HUL, DMart-inspired ‘supermarket strategy’ to meet realty demand - The Econom… https://economictimes.indiatimes.com/prime/money-and-markets/macrotech-developers-rolls-out-hul-dmart-inspired-supermarket-strategy-to-mee… 2/5 in a catchment area of around 5kms. Within the company’s select micro markets in Mumbai, Lodha has properties under most categories — affordable, mid-segment, premium, and luxury. Ranging from INR25 lakh to over INR3 crore, Lodha has properties covering all price points just like a supermarket. And much like a retail store, keeping the cash counters ringing through marketing, product design or attractive product pricing is of the essence. Once the project is launched, the sales team takes over with the goal of selling 40% of the inventory in Year 1, followed by 20% every year for the next three years. “Eighty percent of housing demand is non-mobile,” says Modi. “Everyone wants to buy an apartment but generally within the vicinity of three-five kilometres because consumers have their friend circle or relatives or schools for the kids in that vicinity. So, the customer wants to upgrade to a good house with a better brand but in the same vicinity,” he says of the company’s core market, Mumbai. “There is demand, consumers are just waiting in these pockets for a branded player

3. An FMCG-like model? The 40% sales in the first year also provide the capital needed for the construction of the project and to pay for land acquisition costs. With the land and construction cost paid off, the business is akin to any FMCG business which operates with a negative working capital, says Modi. In an ideal world or with effective enforcement of RERA regulations, by Year 4 the project is ready, and all the units are sold. Developers are happy, customers are happy, banks are happy and so are investors because the shorter the project timeline is, the better the returns on capital. Of course, that’s an ideal world. Anyone who has bought a house in Mumbai will tell you it is more a story of tears, sweat, and blood than happily ever after. Many investors, including the late Rakesh Jhunjhunwala, have held a grudge against the realty stocks for the lack of returns these businesses generated. Often, especially pre-RERA, developers would reinvest booking amounts from one project to buy land for new projects. This merry-go-round of capital would continue till housing demand lasted but at the first sign of waning demand, companies would face working capital troubles, projects would fall off deadlines and capital would be locked in for a long duration. As a result, the consumer would be left without a house, investors without returns and banks with haircuts and NPAs. For the last five years or so, stricter regulations due to RERA and lack of easy access to capital have led to some positive changes. For one, branded builders are gaining market share over local developers. These developers, mostly listed and a few unlisted, have better access to capital while local developers are starved. Consumers also feel more secure dealing with a branded player, perception being that these reputed businesses have a lesser chance of defaulting on deadlines. Two, the management of real estate companies, especially the listed ones, is becoming acutely aware of the need to improve return ratios to attract more capital. Matrix structure But for this virtuous cycle to play out, sales are the most important tool in the shed. From Mahindra Lifespaces to Godrej Properties to Macrotech, all aim at faster project launches and even faster selling. Macrotech Developers is among the companies known for its ability to churn out quick property sales and why wouldn’t it be. Sample this, Prashant Bindal, chief sales officer at Macrotech Developers, does not have a real estate background. His previous stints were with FMCG major Coca-Cola India and MNC Walmart. Bindal has been with Macrotech for more than seven years. Besides Modi, who comes from an infrastructure and finance background, most in the top leadership come from non-real estate background. That isn’t the only thing Macrotech is doing differently. Modi explains that the company follows a matrix structure where every major micro-market has its own separate management team comprising a CEO and COO, marketing, and design personnel

4. Investors buying supermarket strategy According to data by Trendlyne, Macrotech Developers has a price-to-book of 4.4x, the highest among the top 10 listed real estate players, but its sales-to-working capital is less than 1. Most other big players like Godrej Properties and DLF have similar PB multiples and have sales to working capital lower than 1. The only exception to these are the southern real estate companies—Sobha, Prestige Estates and Brigade Enterprises. But given the sustained demand for housing postpandemic, it seems the market is valuing large-cap real estate companies which are showing aggressive growth in sales volumes over the southern players. However, despite the best of efforts to push sales, real estate as a product isn’t as easy to sell as a shampoo bottle. It is a capital-heavy asset and often involves buyers taking a two-decade-long mortgage. The average EMI for buying a house in Mumbai can take up a little over 50% of the average person’s household income. This makes the real estate sector more susceptible to fluctuations in GDP growth as purchase decisions can be deferred or dismissed when the broader economy weakens. But Macrotech isn’t building up its sales and execution engine for a pessimistic scenario. “We believe that the housing market in India is all set up for a long-term (10 to 15 years) upcycle, which will lead to a significant increase in volumes and also benefit the large developers who will be able to have the capacity to scale up to serve the increase in the volume that we envisage in the years to come,” Macrotech’s managing director and CEO Abhishek Lodha told shareholders at the annual general meeting in August last year. In the current financial year, the company is promising investors of achieving an ROE of 20% and pre-sales of INR14,500 crore (20%) as per the pro-forma profit and loss statement. It should be noted that due to changes in accounting standards in 2015, real estate companies follow a delayed revenue recognition model. • By the end of the decade, Lodha wants to have 20% market share in Mumbai and 15% market share in Pune and Bengaluru.