Macrotech Developers Ltd

NSE:LODHA

Earnings Call Analysis

Macrotech Reports Strong Q1 FY25 with 76% Revenue Growth and 50% Sales Growth

Macrotech Developers reported a robust performance in Q1 FY25 with a significant 76% year-on-year increase in revenue, reaching INR 2,847 crores. Their adjusted EBITDA was approximately INR 959 crores, and the profit after tax (PAT) for the quarter stood at INR 476 crores, showing a remarkable tripling compared to the previous year. The company achieved over 20% growth in presales, totaling INR 4,030 crores, aligning with their full-year guidance. The promising performance includes consistent sales across mid-income, premium, and luxury segments, driven by strong demand and effective product diversification. The management expects continued growth as they transition to a percentage completion methodology for revenue recognition.

Strong Start to the Fiscal Year

Macrotech Developers reported an impressive start to Fiscal Year 2025, showcasing year-on-year growth and robust performance despite challenging conditions. The company recorded presales of INR 4,030 crores for the first quarter, reflecting a 20% growth year-on-year. This strong performance came despite the impacts of summer heat and national elections, which affected sales days and foot traffic.

Momentum in Pune and Diversification

A significant contributor to this growth was their success in Pune, where quarterly sales hit INR 10 billion, about 50% of their last fiscal year's total presales in the city. This accomplishment sets Macrotech up to potentially become one of the top two players in Pune over the coming years. The company's diversification strategy, spreading projects across multiple regions like Mumbai, Pune, and Bengaluru, has allowed it to maintain growth and predictability in an otherwise volatile market.

Financial Health and Conservative Leverage

Financially, Macrotech maintained a conservative leverage ratio with a net debt to equity of 0.24x, demonstrating strong cash flow management despite increased construction expenditures. The company also benefited from a decrease in its average cost of funds to 9.1%, a reduction by 30 basis points, and saw improvements in margins, recording an EBITDA margin of 33% against the annual guidance of 31%.

Expansion and Pipeline

Macrotech added three new projects during the quarter with a Gross Development Value (GDV) of about INR 11,000 crores, already hitting over 50% of their full-year target for new project additions. They aim to further expand their geographical footprint, with plans for continued growth in Pune and a pilot phase completing soon in Bengaluru. They are also evaluating potential new cities for future projects.

Steady Price Growth and Revenue Recognition

The company noted a price growth of about 2% for the quarter and maintains a full-year price growth guidance of 5% to 7%. Macrotech is also transitioning to a percentage completion method for revenue recognition, which is expected to provide more accurate reflections of their performance over time.

Focus on Premium Markets

Premium product offerings have shown strong demand as Macrotech continues to capitalize on infrastructure improvements in regions like Palava. They have launched high-quality products with significant price premiums, reflecting the company's strategy to blend mid-income and premium segments for sustained growth.

Positive External Recognition

The strength and consistency of Macrotech’s business have been recognized externally, as evidenced by a credit upgrade to AA- with a positive outlook by CRISIL. Additionally, the company made significant progress on its ESG initiatives and was recognized as the top real estate company in the 'Great Places to Work' rankings.

Future Outlook

Looking ahead, Macrotech remains confident in achieving its full-year guidance of INR 17,500 crores in presales, driven by a balanced approach of price growth, volume growth, and new project additions. As they ramp up construction investments, they anticipate stronger cash flow generation in the latter half of the year, aligning with their strategic goal of maintaining robust and predictable growth.

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to Macrotech Developers Q1 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anand Kumar, Head IR at Macrotech Developers. Thank you, and over to you, sir.

[Anand Kumar, executive]

Thank you. Good morning, everyone. Welcome to Macrotech's Q1 FY '25 Earnings Conference Call. We have with us, Mr. Abhishek Lodha, MD and CEO; Mr. Sushil Kumar Modi, CFO; and Mr. Prashant Bindal, Chief Sales Officer for the company. I would now like to invite Mr. Lodha to make his opening remarks. Over to you, Abhishek.

[Abhishek Mangal Lodha, executive]

Thank you, Anand. Good morning to everybody, and thank you for joining us today. I hope all of you are well. It's been a very interesting quarter in India. I would summarize -- I would start by commenting on how one looks at the overall macro outlook in India as well as across the globe and what it means for our business, and then get into the details about how the business is evolving and where we see things progressing in the course of the next few quarters.

I think this quarter, with the largest ever democratic exercise of the general elections in India now having been concluded, has been a reinforcement of the long-term vision and desire of the Indian population to progress on the path of economic development through a strong government. This, in effect, is a [ decision ] in the woke of continuity.

The government, in turn, after its election in June, has focused on continuing to deepen the strength of the Indian economy. The budget, which was presented last week, is another step in that direction with an increasing focus on job creation by the supporting of the MSMEs, which are the big backbone of the Indian economy, and to support skilling as well as job creation for the youth. Both these steps, we believe, are very positive and as they are implemented will support the broad basing of the economic growth story in India.

The government has also decided to further support consumption through a moderation of the tax rate for those earning up to INR 15 lakhs per annum. This, once again, is supportive of the lower mid-income and mid-income taxpayers and puts more money into their hands to meet their day-to-day expenses and enable an improvement in the quality of consumption.

There has been a lot of talk about the changes in the structure of the long-term capital gains. From the perspective of the real estate industry, and more particularly, the primary sales of real estate, we think that this change is a significant net positive.

This -- in terms of new homebuyers, it reduces the long-term capital and tax rate and bring it down to 12.5% in line with other financial instruments and makes real estate a competitive option for people to look at, from a perspective of diversifying their investments and maximizing their returns. In terms of those who already own homes and will be looking at exiting these homes, there will be potentially a higher rate of long-term capital gains on account of the removable -- on account of the removal of the indexation benefit. And that in turn means that those who are seeking to minimize their tax outflows will reinvest a larger proportion of their gains in mind and their further homes or new homes, which is exempt -- which investment is exempt from long-term capital gains.

Therefore, from both the perspective of those who are buying homes, new as well as those who are reselling their existing home and buying further property. In terms of the family real estate market, this change in long-term capital gains not only makes the economy more efficient, but is also net positive for the primary real estate developers. We also believe that the lower rate of tax in general is positive because it reduces the transaction cost and encourages better ebb and flow, a better rate of transactions in the market, which leads to further value discovery in the market.

So all in all, we believe that this change is a positive, though there will be certain transitory pain of those -- of adjusting to this new regime. We have further improved by the fact that the budget has really reduced the interest subsidy for first-time homebuyers or the lower income sections of society. We believe that it is extremely important that people get on to the home buying ladder as soon as possible.

With the significant increase in rental across the country, it is seen now that while rentals might look attractive in the short term, in the medium term, rentals are likely to create wealth for the [indiscernible] and therefore, buying a home as soon as possible is the best possible option, not just from the perspective of creating wealth, but also giving stability and respectability to the family. The reintroduction of the credit-linked subsidy scheme is therefore a significant positive.

Furthermore, as globally, inflation is now coming more and more under control, and we've already seen rate cuts by some of the leading central banks, particularly in Europe, and now we are also expecting the Federal Reserve in the U.S. to cut rates later in the year. This, in turn, will also mean that there will be -- there is likely to be a moderation in interest rates in India, which will also be supportive of the entry-level homebuyers, who have been hit hard by the increase in interest rates in the aftermath of the inflation spike post-COVID.

So all in all, we believe that there is going to be, over the next 12 months, support to entry-level housing, i.e., homes between those which are priced between INR 30 lakhs and INR 75 lakhs. And this will bring the demand in that segment on par with the demand in the rest of the housing market, which has continued to remain quite robust.

Today, we have with us our Chief Sales Officer, Mr. Prashant Bindal, who will speak further on that topic. Speaking now for -- moving further away from the macro and getting more into how we see our business evolving. We believe that our performance this quarter is in line with our model of having sustainable, predictable growth on the back of a granular, well-diversified base of projects.

We continue to act on our guidance around predictable growth, predictable price size and continued business development while keeping leverage very conservative, well below our shipping of 0.5x debt to equity. I'm pleased to inform you that we delivered a net [indiscernible] for Q1 presales performance with Q1 presales of about INR 4,030 crores, which is 20% Y-on-Y growth. This is in spite of the fact that this quarter was hit by the general elections, which had an impact on the number of available days for selling, as well as the focus of population, plus the fact that the summer this year was quite severe, with severe temperatures in many parts of the country, which also affected our footfalls to an extent.

In spite of that, we delivered our best ever Q1 performance, which speaks volumes about the underlying nature of our business and the predictability, which we believe is quite rare in a real estate business. The [indiscernible] performance was supported in a significant manner by our performance in Pune, where we had sales of about INR 10 billion in Q1, which is about 50% of our presales in all of last fiscal year, and this sets us up well to become amongst the top 1 or 2 players in Pune over the next couple of years.

Our embedded EBITDA margin for the quarter was at about 33%, which is higher than our guidance for the full year at about 31%. And this was in spite of the fact that 43% of the presales for this quarter came from our JDA projects, which tend to have a higher -- a lower EBITDA margin, though they have higher ROE.

As I mentioned earlier, we delivered a predictable price growth in line with our overall guidance of having price growth below age group. We are guiding to about 5% to 7% year-on-year price growth for the full year. And in the first quarter, the price growth was about 2%. As you are aware, our revenue recognition is based on project completion for the sales, which were done prior to March 31, 2023. And thereafter, we have started moving towards the percentage completion method largely of revenue recognition.

For this quarter, our PAT is well over INR 800 crores, which is at about 21% of the presales done for the quarter. In terms of business development, we added 3 new projects this year -- this quarter with a GDV of about INR 11,000 crores. Therefore, that is about 50% or more than 50% of our full year guidance that has already been delivered in the Q1 itself.

The sustained pace of business development, which we have seen right from our IPO over the last 3 years, shows the attractiveness of brand LODHA, both for the joint development as well as for the outside model, as well as the significant pipeline of business development opportunities that we see in Mumbai, Pune as well as Bengaluru, 3 markets that we are currently operating in.

In spite of the significant level of business development, plus a significant ramp-up in construction spend in this quarter, our net debt stood at INR 4,300 crores, which is 0.24x of equity. This is really an exemplification of the fact that our business delivered strong underlying cash flow. As we continue to ramp up our investment in construction, we will see in the second half of the year, a significant acceleration in the free cash flow generation and operating cash flow generation for the company. This is -- this consistent performance, robustness in the business fundamentals and strong balance sheet have resulted in a credit upgrade to AA- with a positive outlook by CRISIL, which once again showcases how our performance is being used by external shareholders.

In line with the same, our average cost of funds for the quarter came down to about 9.1%, down by almost 30 basis points for the year. We continue to focus not just on the business performance, but in line with our philosophy of Do Good, Do Well. We continue to make significant progress on the -- on our ESG initiatives too. This year, we had the second batch of the Lodha Genius Programme, through a partnership with the Ashoka University. And the second cohort, they welcome almost 200 students from 26 states out of a pool of over 3,000 applicants. The program was highly -- was very sought after and well received. And we had top of line faculty, not just from India, but across the world, coming in and guiding these bright minds in developing their skills, particularly in the STEM area, but also in calculating a spirit of national and societal service in them.

During the quarter, we were also recognized as the top #1 real estate company by Great Places to Work. We were ranked #64 amongst 2,000 companies across all sectors in the country and the only real estate company amongst the top 100. We believe that the later part of the year, the next 3 quarters, present a great opportunity for our business to continue to scale up in line with our [indiscernible] our previous guidance. We have a very robust pipeline of business development opportunities. We have a strong pipeline of new launches in the second half of the year.

As I mentioned earlier, with the ramp-up of construction spend, we will also see an acceleration in operating cash flow generation in line with our guidance of operating cash flow of approximately [ INR 65 billion ] for the full year.

We are also approaching the end of our pilot phase in Bengaluru. As you maybe -- remember, we had said that in the pilot phase, we will focus on developing our local operating team, understanding local nuances and making sure that our execution is in line with our brand promise of delivering the world's finest developments. With the 2 -- launches of the 2 projects last year, last fiscal year in Bengaluru, most of them are very well received, and we are very comfortable with the sales -- the on-ground sales situation and setup that we have in Bengaluru.

On the construction side, we are also making good progress. And we expect in the next 1 or 2 quarters to be able to conclude that our pilot phase in Bengaluru has now been successfully concluded.

As we conclude our pilot phase in Bengaluru, we will also -- we have also started studying which new city will be considered by us for the next piloting and entry. We are currently considering a couple of cities and expect to make a decision on the next city that we will do our pilot in, in the later half of this current fiscal year.

Now I'd also like to highlight about our extended Eastern suburbs, the township projects of Palava and Upper Thane, as you may be aware, there is a significant amount of infrastructure [indiscernible] blocks, which is now approaching completion [indiscernible] we expect the [indiscernible] 3 way to be operational in the second half of this fiscal year. And next year, we expect the Navi Mumbai Airport starting to become operational and be fully operational in 2026.

And thereafter, in the later part of the decade, we will have the bullet train, which connects BKC to Hyderabad, and the first up after BKC will be at Palava. With this, we aim to develop the premium housing market in Palava in addition to the current focus on mid-income housing. And that strategy has now consciously been implemented over the second half of the last fiscal year and in this quarter.

In this transition, we are focusing on certain types of product and are reducing our focus on certain other types of products and we expect that for the full year, we will deliver about 20% growth in Palava and Upper Thane, in line with our medium-term guidance of growing sales in Palava and Upper Thane from INR 2,300 crores for fiscal '24 to INR 8,000 crores by the end of the decade, which is a CAGR of about 20%.

We believe that Palava and Upper Thane provide an amazing opportunity to create a new urban center for the Mumbai region and for the larger and a standard of how urbanization should be done in India and become an example for the entire country.

We are pleased to inform you that HDFC Bank, India's largest private bank, has recently opened its residential training center. It's an iconic building, where they have a capacity to train about 300 employees at the time. That center was recently inaugurated by the Managing Director of HDFC Bank. And we are very pleased that they have made such a large and substantial investment in Palava and made a building of truly global standards. We also have the Jupiter Hospital Group, now constructing its largest facility in the country in Palava, which is a 400-bed facility, and there is also a second hospital under construction.

So overall, the level of activity in Palava and Upper Thane is gradually and significantly increasing. The warehousing and industrial parts are also shaping up, and we expect that this part of the business will contribute significantly to value creation in the course of the coming years and will deliver strong sales and underlying EBITDA performance.

To conclude my comments, I will now just highlight the key aspects of the P&L. As I mentioned earlier, we are now having revenue recognition on a project completion methodology for sales done up to March 31, '23. And thereafter, for sales and after that date, we are following the percentage completion methodology of revenue that we mentioned. Based on this methodology, our revenue for the quarter came in at about INR 2,847 crores, which is 76% Y-on-Y growth.

Our adjusted EBITDA was about INR 959 crores, and our PAT for the quarter was about INR 476 crores, tripling on a like-to-like basis over the previous period. Of course, as I highlighted in the past, the P&L for this year as well as the next 2 years is not a very accurate reflection of our underlying performance, but we'll become much more closer to our underlying performance as we fully migrate to the percentage completion methodology of revenue recognition.

In the interim period, we would request everybody to focus on our presales and the embedded EBITDA of those presales as a better proxy of our performance and an indication of what is happening in the market.

With these remarks, I now hand over to our Chief Sales Officer, Mr. Prashant Bindal, who is joining us on this call to speak about our sales momentum and the on-ground demand conditions. Over to you, Prashant. Thank you.

[Prashant Bindal, executive]

Thank you, Abhishek. As Abhishek mentioned, on the ground, we are witnessing a very continued strength in the housing demand from the end users. And within that, the demand from the quality product from branded developers is even stronger. And this is across the geographies and across the segments.

And as Abhishek pointed out, our biggest strength of Macrotech Developers, these are predictability and our consistency. We promised 20% growth for the full year in our full year guidance and our quarter 1, we delivered INR 4,030 crores, which was in excess of 20% growth. And also a second consecutive quarter of more than INR 4,000 crores. So that shows both the consistency as well as the predictability that we were talking about.

And the strength in the business is coming to large, uniformed across the mid-income premium as well as the luxury segment. And within all these segments, we see a very consistent continuous premiumization trend that is happening. For example, even in aspirational segment, the consumers are moving from 2 BHK to 3 BHK and in the premium segment from 3 BHK to 4 BHK. And Lodha, by virtue of being present across all segments, coupled with a very strong brand pull, is a big beneficiary of that industry dynamic.

As you are very well aware that we are very granular in approach when it comes to presales and do not excessively depend on any particular segment, be it location or an even launch or any geography.

Our presales have come mainly through nearly 40 different projects spread across micro markets and segments. And this gives us enough data in terms of what kind of people are coming, how many consumers are coming, what kind of conversion is happening to give us a very -- a consistent, a very basis to give the confidence on the strength of the demand and how we operate across all these segments.

The competition in our market remains benign and rational as it is largely led by consumer affinity towards the stronger interested brands. There is a great desire of consumers to buy a Lodha property. And what we have -- and we have seen that across the new geographies that we have come in, whether it be in Pune or Bengaluru, or even in Bombay -- in MMR as we go across other geographies.

The consolidation in the industry is another very important trend. By some estimates in the market of MMR, the contribution of the branded player, the large player is still 25% to 30%. And in our view, this number could easily reach to 40% to 45% by the end of the decade. As the weaker players with no brands, they keep exiting the space. This will keep the industry structure good for the branded developers like us and very good for the consumers because the consumer expectation is a great quality product and product on time. And for that, you need resources, you need expertise, you need the operational strength. And I think as Lodha as a developer, we provide everything on that regard.

Another highlight of this quarter for us has been that we crossed INR 1,000 crores of presales from Pune, where we only started expanding less than only 3 years back. Abhishek pointed out the pilot project -- pilot that we're doing in Bengaluru. We started this pilot of expanding in Pune in -- about 2 years back. And within 2 years, from less than INR 250 crore sales in FY '21, we have achieved INR 1,000 crores business in a single quarter, and that shows how our sales machinery works in the expansion stage.

We clearly see ourselves of achieving over INR 3,000 crores of sales from Pune this year and become among the top 3 players in the city. And potentially, we hope to be the largest in the coming 2 to 3 years in Pune. We have significantly scaled up our sales team in Pune as well as boosted our network channel partners in the city. We have more than 500 channel partners that we have engaged in Pune, just give an idea, we have nearly 4,500 channel partners that we engage in the MMR and we have already leased 500 channel partners in Pune. So Pune has just provided us the template to grow in the newer cities and which we hope to replicate in Bengaluru over the next few years.

We clearly see that 25% of our presales is now being contributed to the new geographies, excluding -- that is excluding MMR, and that makes us even a more diversified and a more consistent and a predictable player.

So as you know, we have guided to grow our presales by 20% for the full year and achieve INR 17,500 crores. We can look at our growth mainly coming from 3 different elements: 6% to 7% coming from pricing, 3% to 4% to be delivered by volume growth at the same location and 10% to 15% to be delivered by adding of new locations.

So in this way, we need to add 4 or more -- 5 more projects on the base of the 40 projects that we have -- we have had last year. So by the end year, by this year, you will see that by the end of the year, we have about 45 projects in the system and few launches coming up mainly in the second half, and that gives us -- which gives us about 50% to 60% of the sales.

So this gives us the confidence that whatever guidance that we have given for INR 17,500 crores, we are fairly confident that by the end of the year, we should be there. Thank you.

[Anand Kumar, executive]

You can now open the Q&A queue.

[Operator]

[Operator Instructions] The first question is from the line of Kunal Tayal from Bank of America.

[Kunal Tayal, analyst]

Sure. My first question is on the diversification strategy. If I could ask, what have been your sort of key observations from the Bengaluru pilots? And does it lead you to a conclusion that geographical diversification is absolutely worth it? And what are some of the typical risks that need to be actively managed as part of the strategy?

[Abhishek Mangal Lodha, executive]

Kunal, great question. Our learnings from the Bengaluru pilot is that investing in building, the local operating team, having a strong leadership and inculcating the same culture that we have centrally are all very important parts of the long-term sustainability from an internal perspective.

From a more market perspective, we believe that the consolidation in the industry and the desire for a higher quality of life are integral to the Indian consumer, given the state of urban infrastructure, where you live makes a big difference to how you live. And therefore, given Lodha's track record in not only creating the world's -- some of the world's finest developments, but also managing them well and actively to hospitality standards, are significantly sought after my consumers. And therefore, our brand has a significant pool factor even in markets where we have earlier not operated in.

Having said that, we believe that the slow and steady strategy is the right strategy for us. We do not want to go into too many markets. We are very comfortable, as we've discussed earlier, that the 3 markets that we're operating in right now, which is Mumbai and Pune and potentially scaling up in Bengaluru, once we conclude the pilot -- conclusion on the pilot later this year, will be a significant support to our goal of long-term -- premium term growth of 20% in pricing.

We will, of course, look at more pilots in the coming years, but we do not see that we need to be in many, many cities to deliver on our growth plans.

[Kunal Tayal, analyst]

Got it. And then just a quick follow-up on the rest of FY '25. How are you thinking about business development for the remainder of 9 months? I know you said in your opening comments that the pipeline is generally strong. And then just on the matter of detail part of it, are you breaking out how much could land sales contribute to the annual target?

[Abhishek Mangal Lodha, executive]

Once again, great question. But in terms of business development, yes, the pipeline is quite robust. Last year, we had over delivered on our business development goals and we continue to maintain our guidance for this year. The pipeline is actually quite strong. So there's no reason why we shouldn't be able to or even somewhat exceed our guidance.

In terms of our overall sales mix, we don't break it out by segment. As we said, those will keep varying from quarter-to-quarter and year-to-year. Overall, in terms of what we provide guidance on is our overall sales, presales and the embedded EBITDA of those presales.

[Operator]

The next question is from the line of Puneet from HSBC.

[Puneet Gulati, analyst]

My first question is if you can talk a bit about the business development that we did in this quarter. Was it more of the nature of JV, JDA's own land? How do you intend to approach this getting into the rest of fiscal '25? And how are you thinking about the redevelopment opportunity in Mumbai and your role there?

[Abhishek Mangal Lodha, executive]

Thank you for that question. In terms of business development, we continue to look at good joint development as well as outside opportunities. We are focused on making sure that we deliver on our ROE targets while ensuring that our leverage remains very conservative. And within those 2 constraints, we look at both of those strategies. And it varies from quarter to quarter because we can see how culminate -- sometimes things will culminate in 1 quarter, sometimes, they will go over to the next quarter. So I don't think the quarterly number on the breakup between the 2 is important.

But over the medium term, we'd like to have our sales come at approximately 60% from the online and 40% from the joint development land, and we think that we will be able to deliver that for this year and also going further.

[Puneet Gulati, analyst]

And the INR 18 billion that you spent on the growth and development, would it be fair to say that, that is attributable to INR 111 million of GDV? Or would you need to pay more for that as well?

[Abhishek Mangal Lodha, executive]

Sorry, I couldn't understand your question clearly. Could you please repeat that?

[Puneet Gulati, analyst]

Sorry. So in your cash flow statement, there is an INR 18 billion of investment with respect to these investments -- these GDV, does it relate to the INR 111 billion of GDV that you added? Or do you need to pay more beyond this INR 18 billion for the GDV that you added to your books?

[Abhishek Mangal Lodha, executive]

The INR 18 billion is not entirely attributable only to the .

[Technical Difficulty]

[Operator]

Ladies and gentlemen, the management line has been disconnected. Please hold while we reconnect the management line. Ladies and gentlemen, we have reconnected the management line. Over to you, sir.

[Abhishek Mangal Lodha, executive]

Sorry about that. So I was saying that the INR 18 billion is not entirely attributable only to the INR 111 billion of GDV added for business development. It is largely attributable to that. But obviously, we also have payouts done to our joint development partners from projects, which we have taken earlier and other related expenses. So it's not a one-to-one correlation.

And for the projects that we've added this quarter, we will, of course, have further spend also [indiscernible] has already been done.

[Puneet Gulati, analyst]

Understood. And can you also comment a bit upon what you are seeing in terms of pricing growth in Mumbai market? I know you've been very calibrated about how you want to take that price increase. But are you seeing any signs of exhaustion? Or in your projects, at least you've been able to take those regulated price increase frequently?

[Abhishek Mangal Lodha, executive]

I'm sure you were [indiscernible], our price rate for the first quarter was at about 2%, and we do impact the steady price growth phenomenon allows you to keep compounding that price rather than do a spike key price growth and then not be able to do much for some time thereafter.

We see that, that price growth momentum at a reasonable pace is still very much there. Because at these price growth levels, you get affordability growing year-on-year. So there is no pushback on that. So at this stage, we see that our ability to deliver on this price growth level sort of in the high single -- mid- to high single digits continues to remain there.

[Operator]

The next question is from the line of Abhinav Sinha from Jefferies India.

[Abhinav Sinha, analyst]

Good to see the progress on the sales target. Abhishek, I just wanted to ask on Palava. I think in the downshift last quarter, I think you had given a 30% sales growth target, but now you are talking about 20% for the current year. So is something changed there?

[Abhishek Mangal Lodha, executive]

I think a good question. I think we are -- the opening of the Airoli-Katai tunnel looks like it will happen only in Q3 or perhaps even at the start of Q4. We were earlier expecting it to be in the first half of the year. So to that extent, there will be a slight impact.

But in line with -- as you would have noticed, our overall 20% CAGR is what we will underlying need to deliver in order to get to INR 8,000 crores of sales by the end of the decade. And that continues to persist. Sometimes we will have this sort of a quarter of variance on certain external factors. But overall, there is no change in the trajectory.

And actually, we are quite pleased with, over the last 6 to 9 months, as we brought in some of our premium products that have been received quite well in those locations. And therefore, we believe that our strategy of adding premium to the mix in addition to mid-income housing will help deliver on this 20% steady compounding at Palava.

[Abhinav Sinha, analyst]

Okay. And sir, the premium product that we have brought in versus the one that we are also talking about, can you sort of give some details of where they are and what's the pricing looking like?

[Abhishek Mangal Lodha, executive]

So the premium product that we are launching in Palava now is pricing at about INR 15,000 to INR 16,000 per square feet of carpet area, which is 50-plus percent premium to the pricing for the mid-income product.

We've launched one product in -- what was known as Phase 1 of Palava overlooking the golf course. The next product that we are intending to launch in that segment will be overlooking the -- a large riverfront park, which will happen in the second half of the year.

So we are looking at locations which are premium locations within Palava and Upper Thane. We have great natural ecosystem in addition to the overall digital infrastructure that we've created. And we are seeing good traction. Earlier, we had launched [indiscernible], which are blocked lands, which were sold by us. And then we helped the buyers construct the villas, and that has also done very, very well.

So we see that if we bring in a steady stream of high-quality product, differentiated product in terms of its amenities and sizing as well as location, there is already good demand for it. And in the second half of the year, we will -- as the Airoli-Katai tunnel opens up, we expect that demand to fructify into stronger sales.

[Abhinav Sinha, analyst]

Great. Sir, secondly, on the retail, you've detailed the pipeline this time in presentation on Slide 20. So, a, can you describe what is -- where is the high street retail located? And, b, any timeline for this?

[Abhishek Mangal Lodha, executive]

Abhinav, you have picked up an important point of our strategy around annuity income. As you know, we are targeting an annuity income of about INR 5 billion per annum by fiscal '26 so that we can cover all our interest costs from annuity income.

The high street retail locations, which are shown on Slide 20, are under construction right now and will be ready in fiscal '26 and partly before that and partly maybe in fiscal '27, but with a sort of average of fiscal '26. So all of this is already under construction across the various [indiscernible] that we have. We take parts of those locations and convert and which are sort of having good prominent road frontage and are doing high street retail development there.

[Abhinav Sinha, analyst]

Right. And maybe one question for Mr. Bindal as well. So Prashant sir, good to have you back on the call. Just wanted to ask if you can help us with the recent trends on footfalls and the conversions at the site?

[Prashant Bindal, executive]

See, in quarter 1, we had almost 24,000 walk-in happening. But the most interesting part was that our conversion was almost 8.2%. If you compare it with over the quarter-to-quarter, just to give you an idea, last year, the same quarter, the conversion was about 7.3%. Now 7.3% to 8.2% may look innocuous, but it's a 12% swing. And that has played a very, very important role in our overall growth of about 50%.

So what we are clearly seeing is that the -- and this swing has been -- this conversion has been a consistent growth. Imagine it grew from 7.3% in -- 7.2% in quarter 1 last year to 7.4%, 7.6%, 7.8%, and now has finally crossed the 8% mark. I think this is a very, very healthy trend. And this kind of conversion, if we believe, although the 10% is the holy grail, hopefully, if we continue with this trend in next 18 to 24 months, we hope to be as close to 10% mark.

But the first goal is if we can take it from 8% to 9%, I think that itself will be a very healthy trend. So that's a very positive sense. And because we keep on analyzing the consumer behavior, the shift of the -- within the premium segment, that's what I mentioned in my call also that moving from 2 BHK to 3 BHK, 3 BHK to 4 BHK because that is the consumer trend is very clearly showing.

So if you're able to understand the consumer behavior very quickly and in terms of diversification of the geographies also, perhaps, we go into very detail into the consumer behavior of what's required in terms of, say for example, just to give you an idea in Bengaluru -- in Bombay, the size of the kitchen was very important. In Bengaluru, the size of the living room becomes very important because in Bengaluru and in Pune, most of the consumers are working couple. And so these kind of details when we get into and prepare our design accordingly and source accordingly, that plays a very important role in the overall conversion and walk-in.

[Operator]

The next question is from the line of Kunal Lakhan from CLSA.

[Kunal Lakhan, analyst]

My first question was on the Palava premiumization strategy. Just trying to understand the thought process there. Because we do feel that the falling interest rates or declining interest rates would benefit mid-income category. And also this in conjunction with, say, the government announcement of spending about INR 2.2 trillion towards urban households. And I mean, I'm assuming that the CLSS scheme, when -- until the time of operation would have betted some -- a place like Palava.

Just trying to understand, just moving away from, say, mid income to getting a little more premium, it sounds a little counterintuitive.

[Abhishek Mangal Lodha, executive]

Yes, I think if the strategy was to move away from mid-income towards premium, it would definitely be, I would say, not only counterintuitive, but also would not make as much sense.

Our strategy is slightly different, and I'll try to articulate it a little bit better. Our strategy is to add premium product in addition to mid-income segment. It is not replacing our mid-income segment. It is additive. It is taking advantage of the improvement in infrastructure in the [Technical Difficulty]

[Operator]

Sorry to interrupt, ladies and gentlemen, we have lost the management line. Please hold while we reconnect the management. Ladies and gentlemen, we have reconnect the management line. Over to you, sir.

[Abhishek Mangal Lodha, executive]

Sorry about that distraction. So as I was mentioning, our strategy is to add premium product to our existing mid-income strategy. We do believe that our entry-level mid-income product are compact 2 BHK, and our 2 BHK product will benefit significantly from the reintroduction of the CLSS scheme, as well as form the reduction in interest rates, which we think are likely over the next 6 to 12 months.

Having said that, the premium strategy is really a play on the infrastructure that we created and the quality of life that we created in Palava and benefits from the infrastructure of connectivity, which is coming through at that location, which I can say, similar to the evolution of Gurgaon for the NCR, which earlier started off as a lower net income and then a mid-income location and over time has become a premium location, driven by the same factors of good connectivity, job creation as well as high quality of life.

So we see that we will be playing both in the mid-income segment as well as the premium segment. If the question specifically is to our strategy to moderate our presence in the Crown segment, that really has to do with the fact that we believe that our entry-level product is best served by taking advantage of the compact 2 BHK and higher rather than having the very small 1 BHK product. And that is a conscious call in terms of the kind of mix of consumers that we expect would be best to be living in Palava.

[Kunal Lakhan, analyst]

Sure. My second question was on our cash flows this quarter. Your cash flow from operations was slightly lower this quarter. If you can give some drivers behind that? And how should we look at this number going ahead, considering our guidance of INR 6,500 crores for the year?

[Abhishek Mangal Lodha, executive]

Yes. I think that's a pertinent observation. The cash flow for the quarter is driven with lower or is lower than the average that you could see out of the INR 65 billion on a quarterly basis on account of the fact that we should try to -- we have ramped up construction spend significantly. And generally, the first quarter of the year, it should be slightly lower on collection because there's a summer vacations and people travel a bit. So all of those factors come into account.

Even generally, if you take a look at historical periods, our operating cash flow tends to be significantly loaded towards the second half of the year, and we expect the same trend to continue for this year. So the first half of the year will be lower on operating cash flow and the second half of the year will be higher on operating cash flow, but we remain on track for the guidance of about INR 65 billion of operating cash flow that we paid at the start of the fiscal.

[Kunal Lakhan, analyst]

Sure, sure. And one kind of a historical question. Like in the past, we -- I mean, just highlighting the illustration that you've given in your presentation about like the LTCG impact. We have seen that in the past, like if the pricing growth has been kind of tepid, the new regime would be adverse for -- in terms of taxation for customers. And with the 6% to 7% kind of a pricing growth that we expect annually, would this regime be beneficial overall for the Mumbai market? Or this would impact demand in some way?

[Abhishek Mangal Lodha, executive]

We, of course, take into account the fact that the removal of the indexation benefit means that the nature of taxation has changed. We also believe that consumers, when they are buying homes, are looking at home that end users who are looking to buy for the long term and are not really present to [indiscernible] of tax consideration.

Having said that, the fact that the tax rate is now in line with all other financial assets makes real estate, I would say, as an attractive asset. The total return, as you would see from Slide 4, generated from real estate is close to 9%, 10% on a post-tax basis, which is much higher than any other asset class, which has fixed income or low capital risk characteristics.

So all in all, we believe that the new regime, as I mentioned in my remarks, is beneficial for primary sellers on account of the fact that it is the sort of rate of taxation, even the indexation benefits have gone away. Plus the fact that those who are reselling homes will reinvest a higher proportion of those of their accrued gains to minimize their tax liability.

So generally, we see no adverse impact from these long-term capital gains. There will be some winners and some losers. But on an overall net basis, it's a net positive in our view.

[Kunal Lakhan, analyst]

Understood. Just a follow-up on that. How many of our customers are like -- are generally upgrading or like selling their existing homes and then buying into our projects? Any percentage would we have?

[Abhishek Mangal Lodha, executive]

No, we don't really have a number in terms of whether they are buying, whether -- we know who are -- what percentage are first-time homebuyers. But whether they are selling their existing home or whether they're keeping their existing home and buying a home with us is not a data point that we have.

[Operator]

The next question is from the line of Pritesh Sheth from Motilal Oswal.

[Pritesh Sheth, analyst]

So firstly, a great job on expanding share in micro markets like Western suburbs, Eastern suburbs, Pune, Bengaluru. Just a question related to our legacy strong markets like Southern, Central and Thane and even Palava, we have any way discussed details. But for these 2 markets, the growth last year was around 10%, 12% right? Do you think now the markets are kind of saturating in terms of contribution and for the market share gain would be possible in these micro markets considering our position there. Or you still think that there is -- there are certain pockets in which we don't have projects and we can grow further and continue the market share to contribute 20% growth from these markets as well.

[Abhishek Mangal Lodha, executive]

Pritesh, Thank you for that insightful question. In terms of South Central Mumbai, as you know, it's in a very large geographical market, and there are pockets where we have historically been present and continue to remain present that are new pockets where we are gaining presence or adding projects, and there are, of course, some pockets where we are completing projects and therefore, we'll have less suppressing for the short term while we look at replenishing the line.

But overall, at the level of the market, we do believe there are opportunities to grow and expand, and the market will provide a decent level of growth going forward. Obviously, some of the newer markets provide a much higher level of growth or the markets where we've had lesser presence or are underpenetrated, provide a much higher level of growth, but we do expect that South Central Mumbai will continue to remain a growth -- positive growth market for us on the back of the market expanding, our brand position in the market, plus the opportunity to add some new locations.

In terms of the Thane market, once again, it's a market which is wide, it's broad. It's, a market where there is a high degree of competitive intensity. We have largely been present historically in the Northern part of the Thane market, which is the north of the [indiscernible] and have had not -- no or very little presence in the Southern part of the Thane market. And we do see some opportunity as we add projects in the Southern market -- we added -- Southern part of the Thane market, we added the [indiscernible] projects last year to gain some growth there. So Thane as a market, once again, we see that we are not fully penetrated and there will be some growth coming from that.

[Pritesh Sheth, analyst]

Sure, that's helpful. And in terms of Pune, we had a strong quarter. Would you consider it as just one-off because we had a great launch there? Or we can actually look at this INR 4,000 crores kind of a run rate on an annualized basis this year itself?

[Abhishek Mangal Lodha, executive]

Pritesh, as we've said in many different contexts, we don't read so much into 1 quarter. As it's a diversified granular business, we can't take the number for 1 quarter and extrapolate it -- for the full year. Having said that, we expect meaningful growth in Pune this year. We did just INR 2,000 crores of sales last year. And we do expect that, that number will get closer to INR 3,000 crores for the full year. So our expectation is closer to INR 3,000 crores, not INR 4,000 crores for Pune for this fiscal.

[Pritesh Sheth, analyst]

Sure. Sure. That's helpful. And one last on the embedded EBITDA margin performance. So this year, I mean, this quarter was 33%. Last quarter, which was 31%, right? While our guidance for full year FY '25 is still 30%. So again, it was just more to do with the mix of sales during the quarter, which led to this higher embedded EBITDA margins? Or we should see the improvement going ahead and eventually it would read out in your guidance as well?

[Abhishek Mangal Lodha, executive]

This is, of course, as I said, reading too much into 1 quarter would not be prudent. But yes, there is some upward positive bias towards on the embedded EBITDA margin. We want to sort of see how that pans out over the next quarter or so before we sort of start seeing how that would reflect in our long-term guidance.

But yes, I think while the mix of sales has a contribution to make, but even if we add this about 7%, 6%, 7% price growth, we see that EBITDA margins move up modestly. And we do think that in the course of the decade, we can move from the low 30s towards the mid-30s in terms of our underlying EBITDA margins.

[Operator]

The next question is from the line of Parikshit Kandpal from HDFC Securities.

[Parikshit Kandpal, analyst]

Abhishek, earlier in the call, you spoke about adding new locations, evaluating a couple of new locations. So I just wanted to understand which part of India you're looking at? And what kind of potential sales you're looking to do from these locations in the next 3 to 5 years?

[Abhishek Mangal Lodha, executive]

In terms of our evaluation, as I mentioned in my remarks, we are approaching the end of our pilot base in Bengaluru, and we are hopeful that in the course of this fiscal year, we'll be able to confirm that our pilot has successfully concluded, and we are now at a stage where we feel comfortable in the Bengaluru market to expand our presence there.

In line with that, we are also studying any new markets, new cities that we can start a pilot process because that process for us is a 6- to 12-month study process and then a 3- to 4-year pilot process. So it's a very long process that follow before we make substantial commitments in any city.

Having said that, we are currently exploring a couple of cities and hope that in the course of this year, we'll be able to conclude on which, if any, of those cities we want to start our pilot in. Over the next 3 years, we don't expect this new city to contribute any significant amount in terms of our overall presales. Pilot sales, by definition, is an exploratory phase. And therefore, we don't expect any substantial contribution from the new cities. For the next 3 years, you should focus on Mumbai, Pune and Bengaluru as the drivers of our performance and growth.

[Parikshit Kandpal, analyst]

Okay. Second question is on capital allocation. So given that we have an [indiscernible] JDA outside, which we have laid out. But in case if we get a large opportunity, where a big check has to be written, so say, INR 2,000 crore or INR 3,000 crores check or maybe a 10-year kind of a project. So how flexible or open we are? So to what [indiscernible] do you think can go in large writing -- large checks, given you have a strong balance sheet now?

[Abhishek Mangal Lodha, executive]

No, while we have consciously worked towards a strong balance sheet, we are also very prudent in terms of our capital allocation and risk appetite. As I mentioned and Prashant also mentioned, our focus is on diversified granular growth rather than just having some one chunky growth, and we like to cap any single location exposure to about 5% of our network in general. In exceptional cases, it may be slightly higher, maybe 6%, 7%, but we are really not in a position where we want to go out and allocate huge amounts of capital to single locations.

[Parikshit Kandpal, analyst]

Single location, or you mean a single project? I mean could it be a single land [indiscernible]?

[Abhishek Mangal Lodha, executive]

When it's a single location, I'm sorry, I should have said single project.

[Operator]

Ladies and gentlemen, that was the last question for today. We have reached the end of the question-and-answer session. I would now like to hand the conference over to Mr. Anand Kumar for closing comments.

[Anand Kumar, executive]

Thank you, everyone, for joining the call today. I hope we have been able to answer all your questions. If you have any further questions or would like to have any additional information, we would be happy to be of assistance. Feel free to reach out to the IR team for the same. And on behalf of Macrotech, I once again thank you for taking time to join us today. Thank you.

[Operator]

Thank you. On behalf of Macrotech Developers, that concludes this conference. Thank you for joining us. You may now disconnect your lines.