Macrotech Developers Ltd

NSE:LODHA

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Q2 FY '23 Earnings Conference Call of Macrotech Developers hosted by Antique Stock Broking. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Biplab Debbarma from Antique Stock Broking. Thank you, and over to you, sir.

[Biplab Debbarma]

Thank you, Stephen. Good afternoon, everyone, and welcome to the Q2 FY '23 Earnings Call of Macrotech Developers hosted 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.

[Abhishek Mangal Lodha, executive]

Good afternoon, everybody. Thank you for joining us for our earnings conference. Best wishes of the Indian New Year to you and your family. I will begin by highlighting 3 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 U.S. dollar bond of $225 million and the U.K. investment in 2 tranches in March and September 2022, and there is no further liability or risk to the Indian balance sheet from the U.K. investment.

Deterioration in the sterling and the deterioration of the local economy as well as certain other project-related expenses are not likely to be reflected to India from the U.K. operations is going to be a total of INR 1,100 crores, INR 100 crores already received and 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 onetime noncash provision of INR 1,177 crores that we have taken this quarter in our P&L is to reflect the difference between the accrual 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 the view of what the final repatriation would be and therefore, take this noncash provision for the differential amount. Please note that the remittance amount of INR 1,100 crores, INR 100 crores already received and INR 1,000 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 [indiscernible] will also lead to a tax benefit of about INR 350 crores to us in due course. So 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 Developer Limited. And 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 costs in our business, the EBITDA can be converted into profit before tax, PBT, by deducting the interest cost. So we'll 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 3,148 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 our strongest ever Q2, which is seasonally the weakest quarter, but that also had almost INR 3,150 crores. The start to the current quarter had been equally strong. i.e., Q3. Two factors are supporting this momentum. One is the consolidation, flight to quality on the supply side. And the second is the strong demand driven by the accessibility of mortgages and the moderate price growth there in the marketplace.

The underlying momentum in the housing market is in spite of the inflationary pressures on the consumer and almost 150 bps 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 for the U.S. were to continue raising rates. How much does higher interest rates have an impact or how deep or longer the U.S. recession is going to be, we'll all have to wait and watch. Alongside that there was turmoil into other economies as well, the U.K. most noticeably and China continuing to have its own set of challenges.

The idea is not to share global expertise, but highlight one, which is the impact on the currency. The INR has seen a depreciation of significant quantum in this quarter, but it is not out of whack with what's happening with most other currencies. The RBI has used both, its ForEx results as well as to shore up the rupee. And 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 in 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 base to go up by approximately another 50 basis points. And as we remain comfortable with the demand in the housing sector not being impacted, despite 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, admittedly just under 0.3% of the cost of goods sold. So the overall cost of this scheme is quite moderate, but it is giving the consumer a reassurance that they can buy the home that they have been dreaming of, will be 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. But for now, it does feel like the strength of the market is quite strong. Sentiment in our core areas of operations, i.e., 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 JDAs.

Thus, overall took things really out of the playbook to report for this quarter. As I have mentioned to be -- as I have mentioned in the past, we continue to remain convinced on the multiyear housing cycle and it decides 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. And while collections were a bit slow, it's only about to shift from 1 quarter to the next.

Similarly, revenue recognition and profitability as reported was impacted due to revenue recognition 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, I will give you a much clearer look into our business and its cash flow as well as underlying profitability. The business development opportunities continue to remain quite unavailable, and we have signed 4 further projects in this quarter, providing additional development value of approximately INR 3,100 crores. With every quarter and every opportunity that we evaluated and signed, we are laying the foundation for growth in the following years. There is 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, the cost for us continue to go down. Just to let you know, our absolute interest cost per quarter has fallen from over INR 550 crores in the last June '22 to just over INR 250 crores in the quarter ending September '22 -- sorry, June '21 and September '22. The momentum remains strong, and we are on the track for FY '23 and working closely to work our guidance of our net debt to approximately INR 6,000 crores. And 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 2022. And all the groundwork is being done and the trees 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 to 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 these project deliveries so that in due course, Bangalore can become another opportunity to scale up in a significant manner. Pune is now filling out.

In terms of the Pune market, we feel very strong about how we are placed in that marketplace. And we believe that sometime in the next 12 to 24 months, our sales will become amongst the top -- the largest in that market or if not the largest, definitely amongst the top 2.

Coming to the operating as well as financial highlights of the quarter. Despite this being the seasonally weakest quarter, we clocked our best ever Q2 sales, around INR 148 crores, growing by 57% year-on-year. The Q2, of course, is weak due to the monsoon plus the inauspicious period of Shraadh or Pitru Paksha. The cherry of the cake -- on the cake is that it is a second instance when we have [indiscernible] crore number in quarterly presales in the same calendar year, the earlier instance being Q4 of fiscal '22.

With this strong performance, we have achieved presales of INR 6,004 crores in H1 of FY '22, our best ever first half in terms of presales, 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 to surpass it.

We are -- as mentioned earlier, we are -- we will continue to provide you with the embedded EBITDA margin on the presales done for this quarter. This will help our stakeholders and financial community to get a sense on the profitability of presales. As I mentioned earlier, for this quarter, the embedded EBITDA margin is at 33%. And for the first half of the year, it is at 34%. Yes, this will -- this information will bring much greater transparency for stakeholders and provide understanding around not just the presales, but also around the quality of the presales 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 India standard 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 almost 3 years.

Moving on. We continued to track the presales 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 11,500 crores, of which we have collected just under INR 6,004 crores in the first half.

As mentioned earlier, we've added 4 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 in 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 brands and capabilities with brand owners looking to partner with a player like us who can 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 [indiscernible].

Our average cost of debt has further come down to approximately 9.9% as on 30th 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 1 notch 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 and 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 Ivanhoe Cambridge has commenced activity on developing the first land parcel, as well as counting 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 6 months.

Just to recap in terms of this platform, the platform has been established with a view to create a pan-India 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 3 partners. The platform can then lever it up modestly and jointly invest over $1 billion and create approximately 30 million square feet 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-plus square feet box with Sketchers 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 FMCGs, EV, ecosystem, 3PL logistics, cold chain, et cetera, is currently ongoing. A number of closures are likely to take place over the next 6 to 12 months. This is likely to generate a large number of jobs, thus boosting the economic activity in and around Palava, and kick starting a virtuous cycle and augmenting our residential business as well.

Let me now update 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 5-star rating. This score is also amongst the top 3 in Asia.

Early 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 passive 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, this 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 staying in such developments. The information and knowledge generated in the accelerator that will be freely shared with the entire industry so that the transition in India towards Net Zero isn't just the building space, it can be expedited.

We have also become a part of the build head coalition launched by Zinio, an industry-first alliance consisting of forward-leaning businesses such as [indiscernible] construction, Shell India, et cetera, committed to scale decarbonization effort 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 Miss Harita as an independent director. Ms. Harita Gupta has over 3 decades of global experience in digital and IT services. She has had leadership positions at globally renowned companies like Microsoft and NIIT, amongst others. She is presently leading APAC and Global Head and Enterprise business at Sutherland Global Services being a digital innovation focused organization. We will benefit immensely from our guidance and experience as we step into our next phase of growth.

As discussed earlier, to further enhance our disclosure, we are committing to provide the embedded EBITDA margins for the presales of each quarter. This is one more step to enable stakeholders to better understand our business and the quality of presales. We have, from time to time, made an effort to introduce the depth of our management team to you and 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 head -- represents the company on the Board of the digital infrastructure that we have with Bain Capital and Ivanhoe 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 the lower middle-class families of India's large metros. And not only do we enable them to live in great environment, but we also create comprehensive work, play, live and learn environment, including health care, education, workspaces, sports and so on, which provides people with the quality of life, which is extremely rare in our country.

And as a part of further -- using our scale in our Township model to create positive impact for society, we are now working with a variety of corporate partners to -- 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 [indiscernible] jobs. Within a short walk or short drive from their homes, which enables them to not only take care of their primary responsibilities of managing household, but also work in a manner which is physically and mentally reasonable for them.

And 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 the 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 now hand over the call to Shaishav and Sushil before we get to questions.

[Sushil Modi, executive]

Shaishav, you may like to kind of give a bit of a around our Townships business in particular, that -- what kind of activity on the ground that you are seeing, please.

[Shaishav Dharia, executive]

Sure. Thank you, Sushil and Abhishek. Good afternoon, everyone. Am I audible?

[Operator]

[Operator Instructions]

[Sushil Modi, executive]

Yes, go ahead.

[Shaishav Dharia, executive]

So as I -- so our Township business today, as basically, we achieved about INR 1,940 crores of presales in FY '22 and expecting about a 20% growth this year. We've already reached about INR 1,130 crores in the first half of this year. So 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, it starts getting completed. We are very fortunate that Alana, which is our largest township and more of a city, has become a blueprint of how we see to develop new townships and replicate the similar success.

The way I see it building on what Abhishek said, we have basically mastered, I think, 4 areas, and that has allowed us to create a moat that cannot be replicated by other developers or other projects in creating successful townships. So the first one that 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 5 schools. And I would think, it's amongst the best education districts in the country now.

We have fantastic sports facilities infrastructure within the township, which is fully reliable around water, power, sustainability, health care in the form of clinics and now multiple hospitals with a tie-up through AIMS as well as Jupiter Hospital, world-class parks and amenities. So this is -- 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 the ability to deliver a price point.

The second. Over the last 10 years, the ability to have master how to deliver homes continuously and consistently at scale. Today, we are -- we have demonstrated and are easily capable of delivering 7,000 to 10,000 homes every year just 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. Our governance model, along with a very strong focus on building communities across the entire segment is what really differentiates our townships. And 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 our more recent township.

The fourth is the ability to innovate and bring in different products. So we had the CASA homes, then we brought in the Crown Affordable Homes. But equally, our focus is now on growing the Aspirational Home business, which are ranging from INR 1 crores to INR 2 crores. Plotted homes and villas that we have done very successfully at 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 5 product categories and build a more consistent business model.

These 4 elements are basically what we have developed and mastered over the last 10 years. But 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 number, 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 many -- 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 will complete in the next 6 months is the elevated road to the business hubs of Ghansoli and Idoli in less than 30 minutes driving distance. These are predictable times and that will become a big game changer to a very large segment, which wants access to high-quality homes, but now well connected.

For our Upper Thane township, the bridge to Dombivli station will be opened 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, will 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 and the large development we are doing at Palava Logistics and Industrial Park. A lot of the work is already under development. And over the next 2 years, this will all become operational, creating 5,000-plus jobs and growing continuously, along with the emphasis we have put on economic empowerment and job creation for women right close to our townships, which allows them to manage both, their home life as well as have an economic -- as well as have a work career.

I think, this growing strength around infrastructure as well as job creation within -- close to our townships is going to create further disproportionate jump in our business. So in a summary, the township business has been in a virtuous cycle of world-class product, community, infrastructure and now great connectivity, external connectivity. And 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.

[Sushil Modi, executive]

Thanks, Shaishav, for this update and the ground reality checks for the stakeholders at large. Biplab, would you like to take it up in terms of queries that various folks would have?

[Operator]

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

[Kunal Tayal, analyst]

Abhishek, 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 would have driven an unchanged sales guidance for the rest of the year?

[Abhishek Mangal Lodha, executive]

Kunal, important question. So 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. So we are continuing to see similar conversion rates in the 8% to 10% range. We're seeing very good quality footfalls. And we -- I think, the strength of the market can 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 crores 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 consistent and the throughput is coming through in a much more predictable manner now.

[Kunal Tayal, analyst]

Yes. Got that. 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 would have fetched here? And is that a good representative of how we could value the remaining land bank?

[Abhishek Mangal Lodha, executive]

So 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 at which we sell land will vary to an extent based on the users because data centers, for example, can sell for even INR 20 crore, INR 25 crore an acre. And it will sell on the -- and it will also depend on the extent of the landholding.

So 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. The average, the north of that.

[Kunal Tayal, analyst]

Understood. And last one from me for Sushil. Sushil, if you just look at your CFO target for H2 as well as the debt reduction target. It seems to leave about INR 800 crores that can be incurred towards interest expense and investments. So broadly, does it mean that you're looking at less outflow on the investment side in H2?

[Sushil Modi, executive]

Yes, potentially, you are right. But, Kunal, keep that in mind that our operating cash flow for the second half generally is far stronger than the first half. And hence forth -- so these debt reduction targets has got -- is going to be more and more visible from the quarters that we really speak of for us Q3, Q4. But nonetheless, I think we reasonably kind of seen the visibility of getting us anywhere in the band of INR 6,000 net debt, INR 6,000 handle, some number around that by the end of it.

[Operator]

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

[Pritesh Sheth, analyst]

First is on your micro market sales that you have reported. So I can see a drop in sales in your affordable markets like [indiscernible] and Thane affordable mid income. So anything to read into in terms of interest rate that was impacting the trajectory of these micro markets because they have gone down by at least like 30%, 40% if we compare quarter-on-quarter. And on an average, what the run rate has been for the last 3 to 4 quarters? So your comments on that.

[Abhishek Mangal Lodha, executive]

The extended Eastern suburbs especially tend to be the one which is most affected by the monsoons because these are the individuals who tend to hone public transportation as well as the auto rickshaw or taxi services most for their commuting. So typically, if you look at it, while you are comparing the Q1 versus the Q2 numbers, of course Q1 also had certain launches in the extended Eastern suburbs. But even adjusted for launches, Q2 will typically be weak on account of seasonality most affecting that segment.

But we don't really read anything into it. On the contrary, as Sushil mentioned, we are well on track to deliver sort of mid-teens [indiscernible] townships business for this fiscal compared to the numbers for last fiscal of a fairly significantly basis.

[Pritesh Sheth, analyst]

Sure, sure. And in terms of collections as well, just broadly your comment on that? So are you seeing any trend in terms of people delaying -- or customers delaying payments because they are adjusting to their budgets or any specific trend you are catching up there? Or collections are pretty much in tandem with what it is supposed to be?

[Abhishek Mangal Lodha, executive]

No. Collections, we not seen any increase in delayed payments. We measure delayed payments is greater than 30 days delayed, and we've actually seen a fall in that absolute value in the larger base of units from which, of course, collections are coming through as each quarter we sell more units. So at this stage, we don't see the Indian consumer in any manner or at least our consumer in any manner affect by trying to delay -- or trying to delay their payments. It's just the normal throughput of our sales registrations and then cash flow coming in any quarter, sometimes the Pitru Paksha period is in Q2, sometimes it is in Q3. So that 15-day people don't like for example, registering their documents. They don't want to make major payments. These are all sort of very idiosyncratic factored.

But we believe that the collection machine is pretty strongly in place. First half, we've collected just under INR 5,000 crores, and we are guiding -- and we have an internal target of about INR 11,000 crores of overall collections for the full year.

[Pritesh Sheth, analyst]

Sure. Got it. And lastly, on your debt. Your target remains the same for below INR 6,000 crores. So you'll have to literally reduce that by INR 3,000 crores in second half. Is it all going to be coming from operating cash flows? Or are you also building in the U.K. repatriation money, helping at reducing the debt? I mean, initially, I don't think that was built into our expectation. But now that target, is it including the repatriation money?

[Abhishek Mangal Lodha, executive]

We are targeting to be around INR 6,000 crores by the end of the -- if you're a few hundred crores over it, it will be for a maximum of a quarter, but it will be somewhere in the -- around the INR 6,000 crore handle. We have some asset sales. We are disposing them all in Palava. That is definitely a part of the numbers that we are looking at. We also have a few other sort of lease spaces which are part of our normal divestment, which will also happen in the second half of the year.

And I do not have a detailed breakup on us 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. So yes, we have assumed that about INR 250 crores out of those INR 1,000 crores will come back in the first quarter of calendar '23.

[Operator]

The next question is from the line of Sameer Baisiwala from Morgan Stanley.

[Sameer Baisiwala, analyst]

Shaishav, a great commentary on township. So thanks for that. Just if you look out mid- to long term, are there any risks that you see to Palava and development, something like airport coming in, taking away development, away from you? Or any other thoughts if you can share with us?

[Shaishav Dharia, executive]

Sure. Thanks. Actually, the airport development will be a positive because the new airport will be about 30 minutes from Palava City. So in terms of connectivity, it becomes even better for companies that are operating there as well as folks who are living in Palava. So that's actually a positive.

I think we've been able to, over the last 10 years, as I mentioned, developed this moat which is now very difficult to replicate by somebody else. And more importantly, to have this kind of scale is very difficult, again, probably in the history of MMR. So I would say that natural 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 events causing major disruptions.

[Sameer Baisiwala, analyst]

Okay. Great. And if I have to think -- if I have to just put some number around -- you talked about sustainable volume and price increase. I mean, about 2 million to 3 million square feet per annum, 5% to 7% price increase per annum for an extended period of time. Do these numbers look achievable or higher or lower? Your thoughts.

[Shaishav Dharia, executive]

Let me take the price growth. I think the 5% to 7% which is just below, let's say, inflation, is a healthy price increase and sustainable because affordability will always remain good with that particular aspect. So that I think is, yes, very much possible and within our target.

Second, I would think, as a business of township, much more than 2 million to 3 million is what we shall achieve, especially given the growth or the developments on the external infrastructure side, that will connect us better to the business hubs, both with road and rail. So I would think, we have the potential to do more than that.

[Sameer Baisiwala, analyst]

Okay. Just to be sure, 2 million to 3 million is excluding DI, is just the residential part, right?

[Shaishav Dharia, executive]

Correct.

[Sameer Baisiwala, analyst]

Okay. So you can do better than that, but it would get the benefit of the commercial and the DI development over there? That's the point you're making, yes?

[Shaishav Dharia, executive]

Correct.

[Sameer Baisiwala, analyst]

Okay. Great. And second question I have is on One Lodha Place. [indiscernible] that it's coming to completion. What percentage is leased out? And how do you plan to realize the capital value here?

[Shaishav Dharia, executive]

We've just started the leasing process for the building. The building -- the lower 1/3 of the building was under the spot sale model, and that is almost [indiscernible]% sold. We intend to lease the building out over the next 18 months. And then post stabilization, we, in all likelihood, will dispose of our interest in the building. The total grows from -- the recurring rent from the building will be in excess of INR 200 crores per annum. And therefore, you can see that a significant -- I would say, a significant onetime income will accrue to the company when we divest this asset most likely sometime in calendar 2025.

[Sameer Baisiwala, analyst]

Okay. Great. And Abhishek, a great initiative on embedded EBITDA. So that will definitely help us a lot. If I understood you correct, you were saying that this is calculated using the launch price, but the cost is over the cycle of the project. So it has -- it builds a certain inflation over there?

[Abhishek Mangal Lodha, executive]

Yes. The cost side is taken for the life cycle of that building. And the price is the actual price realization for the quarter. So it's not necessarily the launch price. It is launched -- in 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 life cycle of the building.

[Operator]

[Operator Instructions] The next question is from the line of Parvez Qazi from Edelweiss Securities.

[Parvez Qazi, analyst]

My first question is about the pricing outlook. I mean, given an increase in mortgage rates, what kind of pricing increase can we take from our customers keeping affordability in mind?

[Abhishek Mangal Lodha, executive]

Parvez, very important question and one which we think about long and deep about. I believe, generally that the total cost growth which is a function of the 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% to 6%, given that wage growth would be in the range of 8% to 9% this year. Given our initiative around interest costs being capped at 7% till middle 2024, our consumers are not seeing any significant impact on account of the increase in mortgage rates. And as I mentioned earlier, the cost to us so far has been averaging about 0.25% of the value of done in any given quarter. Therefore, we continue to guide to the same number of 5% to 6% price growth for the full year for fiscal '23.

[Parvez Qazi, analyst]

Sure. And with regards to soft Central Mumbai projects, how do we see sales velocity there? And in general, what has been the sales momentum seen in that micro market?

[Abhishek Mangal Lodha, executive]

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 [indiscernible] and just under INR 2,000 crores of sales for the half year. So South Central Mumbai continues to see a good strength. And we are seeing growth over comparable periods last year, a strong growth over comparable periods last year.

I think, our variety in South Mumbai across different price points, starting from as low as INR 2.5 crores and all the to the top end of the market, but with a great concentration of between INR 2.5 crores to INR 7 crores, INR 8 crores. And we are having product a different points of the life cycle, we have ready products. We have advanced under the construction product. We have -- we just launched, for example, Lodha Bellevue, opposite VIVAREA at Jacobs Circle or [indiscernible] it is colloquially called, gives us an ability to serve that market quite well, and we are seeing good traction.

[Operator]

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

[Abhinav Sinha, analyst]

Just a follow-up on the embedded EBITDA part. So just to be clear, this is your share, or this is the project total embedded EBITDA that we are looking at here?

[Abhishek Mangal Lodha, executive]

This is the total for us, those numbers are the same. Because for us, the -- our EBITDA is the same as the project's EBITDA because any payment made to the landowner is treated as land cost in our accounting. So there is no share of EBITDA, which goes to the landowner in most of our joint development. So the actual EBITDA, which would accrue to us.

[Sushil Modi, executive]

On the sales that we announced. So the sales -- if the sales is 100, that means -- be it coming from the joint development or be it coming from our own land, the EBITDA margin is the blended that we have indicated applies on that 100.

[Abhinav Sinha, analyst]

Okay. And in case of our own land, how are we treating the land cost here because you have some very legacy sort of projects also, right?

[Sushil Modi, executive]

Obviously, Abhinav, those are -- those will carry the historical cost, right? And cost of acquisition along with -- to the extent that if any interest has been incurred during the construction period, and has got capitalized to extent, that interest will be -- also be getting capitalized, but we are giving you an EBITDA number. So thereby meaning, any finance cost incurred would not be there. But in any case, as you -- as we move along, you will [indiscernible] finance cost effectively. We'll completely get kind of out of the picture when it comes to anything that is including in the cost of projects because our finance, the debt itself is getting down to the INR 6,000 crores handle and thereby -- or below whereby you can have the finance cost separately taken the -- below the line from the EBITDA downward.

[Abhinav Sinha, analyst]

Okay. And just for my clarification also, and maybe we are talking about FY '24 now. It seems in another 3-odd quarters, you should be done with reducing your net debt. So what's the utilization of cash there? Will you say, abandon the JDA/JV model and go back to buying land? Or there's something else on your mind?

[Abhishek Mangal Lodha, executive]

Firstly, we would like to say that the target of approximately INR 6,000 crores of debt is 1 milestone we are seeking to achieve. We will, of course, review the macroeconomic situation. And if the situation works and 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, whatever is the growth capital available will be significant, and we will continue to use the growth capital in a prudent manner 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, it will continue to remain focused towards JDAs. And in the medium term, it will settle down approximately 40% of sales value coming from joint development and 60% coming from outright owned land, such that, that mix allows us to generate the 20% that we are targeting.

[Operator]

The next question is from the line of Saurabh from JPMorgan.

[Saurabh Kumar, analyst]

I just had two questions. One is this 33% margin you have given. This is a margin at the project level or is it your share?

[Abhishek Mangal Lodha, executive]

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 marginal to us.

[Saurabh Kumar, analyst]

Okay. So 33% is the EBITDA that you -- and this is the gross margin, right, on the EBITDA?

[Abhishek Mangal Lodha, executive]

It is the EBITDA, means the only debt out of this is whatever very miniscule depreciation or amortization we may have and then only the interest cost and taxes.

[Saurabh Kumar, analyst]

Okay. Okay. Got it. And -- because normally -- I'm just asking you because normally, we have seen the JDA margins are much lower with the industry. They are about 20%, 25% handle, best case. So what would explain that you were getting these kind of margins on an incremental basis, sir?

[Sushil Modi, executive]

No, Saurabh, you are right. So to the extent, the composition of the JDA will always have the lower margin. But from an EBITDA standpoint, if you recall, what we have indicated on any JDA that we do, we target depending on the graph, anywhere between 15% to 20% handle of PBT. And thereby, by default in staking 10% as an overhead, effectively from an EBITDA standpoint, there also, it will -- it becomes 25% to 30% in ARPU.

So basically, the 15% to 20% of an EBITDA margin on the JDA project. But in this quarter, the contribution of the JDA is not that significant and [indiscernible] what you are seeing is coming out of the -- our own projects. As time goes and thereby the JDA composition improves, potentially this margin as a [indiscernible] potentially will have a downward trajectory.

[Shaishav Dharia, executive]

If I may just comment in addition to what Sushil has just said, we estimate -- obviously, it will vary project to project, but the own land have margins in the mid- to high 20s, and the JDAs have PBT margins in the high teens. So there is definitely a delta between the two. And therefore, the blend, of course, depending on how much JDAs are contributing to sales in any given quarter.

[Saurabh Kumar, analyst]

Okay, I got you. The second is, I just want to understand this impairment you've done in U.K. better. So your cash flow received has not changed. So what has changed for this INR 1,100 crore impairment to happen? Can you just throw a better light on this?

[Abhishek Mangal Lodha, executive]

Saurabh, of course, Sushil will be able to explain better, but I'll take a little bit of an attempt and then Sushil can add. The -- we had made the investments in the U.K. by means of a debt instrument, and the debt was accruing interest at high interest rate of 12% to 14%. So that is what the balance sheet was carrying in terms of what would be turned from the U.K.

Now in terms of that -- now in 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% to 14% handle, but that rate of return on our investment is going to be more in the single-digit handle. And 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 principle, of course, is all being returned, and it is being returned with a return, but the return is not high as the debt instrument was assuming.

[Sushil Modi, executive]

So Saurabh, actually while from a cash flow standpoint, we always kind of guided you on a conservative basis that we would be targeting a [indiscernible] or repatriation of around INR 1,500-odd crore handle numbers. But in our -- but internally, we were still optimistic, looking at how things perform. And potentially there was a scenario that we were painting where we can have a reparation even higher.

But knowing where -- how things have evolved and how -- what U.K. is seeing in terms of economy. We -- and obviously, equally, the kind of depletion in our own inventory, having received expedited sales, thereby to contribute more and more on India side. So that -- some of those optimism which we had internally perhaps is no more relevant. But in any case, to all the stakeholders, we always guided conservatively to be the handle of INR 1,500 crores.

And if you really see on the whole, while the form of this INR 1,500 crores now changes, whereby the [indiscernible] becomes more INR 1,100 crore, INR 100 crore already received in this quarter and INR 1,000 crores expected next calendar year. But on this provision, we will have the tax break and a tax benefit, which will also be in the handle of around INR 350 crore, INR 400 crores.

So net-net, effective results 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 crores, in line with what we have guided.

[Saurabh Kumar, analyst]

Okay. I think, I'll take this offline, sir. And just one last question, Abhishek, or Sushil, what will be your end now March debt guidance and March '24? There was this expectation of net debt 0. I mean, where do you think you end by March '24? That will be my last question.

[Sushil Modi, executive]

So at this stage, we don't have a March '24 guidance to provide. We'll, of course, do it when we share the entire guidance for the fiscal year '24 and 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 '23. We are working aggressively towards getting there. Even if we miss it by a little bit, it will be maximum for a quarter, but we'll get there quite soon. And then, of course, 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.

So while INR 6,000 crores, given the scale of our business is not significant leverage, but even if we want to -- if we believe that it's better to be lower, we will go lower.

[Saurabh Kumar, analyst]

Okay. Understood. And just one final question. I'm sorry to prolong this with your permission. Can you just provide what percentage of your borrowers would be taking a mortgage? So this is my final question. What percentage of customers will be taking a mortgage, maybe after booking the flat 3 years, 5 months out?

[Abhishek Mangal Lodha, executive]

Yes, I don't sort of right now have an exact number. But what I remember from memory is that it is in the mid-60s, the number as a percentage of the total buyers would take mortgages.

[Sushil Modi, executive]

Just to be precise, it is around 68% at this point.

[Operator]

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

[Kunal Lakhan, analyst]

Firstly, on the spend on new projects that we've spent close to about INR 1,300 crores plus, in the first half. How should we look at this in the second half, considering like we have already achieved JDAs worth -- I mean, INR 9,300 crores versus INR 15,000 crores guided? So how should we look at the spend in the second half?

[Abhishek Mangal Lodha, executive]

Kunal, that number will moderate because obviously, if we've already done 16-plus percent of our target in the first half, then the second half, that number will be lower.

[Kunal Lakhan, analyst]

Sure. Okay. And my second question was on Abhishek, you mentioned that you expect demand to remain healthy even after 150 bps increase in mortgage rates. According to you, at what mortgage rates you think the demand or affordability will get impacted?

[Abhishek Mangal Lodha, executive]

I think, Kunal, it's, of course, a question which we can only guess or estimate. We had earlier said that up to 9% demands remains unaffected and therefore, another 50 basis points from wherever we are right now, [ 825 ] is within that thing.

But to provide another way of thinking about this, I don't think it is too much about mortgage rates. Of course, if mortgage rates at 12%, it will matter. But it's not so much about mortgage rates as it is job security and job creation. As long as there is job security and job creation, even if mortgage rates were modestly higher than 9%, I don't think will impact on demand. It really is about job security and job creation question.

[Operator]

The next question is from the line of Kushagra from Old Bridge Capital.

[Kushagra Bhattar, analyst]

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 2 years, not probably the second half, but FY '24, '25, broadly, broad color would be as well?

[Abhishek Mangal Lodha, executive]

Good question, but not something we have prepared for. I don't want to answer something of that nature off the cuff. So let us sort of revert to you on that offline.

[Kushagra Bhattar, analyst]

Sure. No worries. And second question is on your JVs -- JDs basically. So till now whatever JDs you have signed, what would be the cash outflow towards the land owner share in the project, which probably you would have given if it would have been your own project, you would have been -- you would have given as your land purchase acquisition cost. So what that amount would be out of INR 17,000 crores, INR 18,000 crores of JDs which you have signed till now?

[Abhishek Mangal Lodha, executive]

So we have signed approximately INR 24,000 crores of JDAs in the last 5 quarters. and estimating what the landowner share is going to be is obviously a little bit of a guesstimate size. Having said that, what we would expect it to...

[Technical Difficulty]

[Operator]

Ladies and gentlemen, the line for the management is reconnected. Thank you, and over to you, sir.

[Abhishek Mangal Lodha, executive]

Yes. Sorry, so 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% to 25% of those revenues. So if the revenues are about 25%, it will range between INR 5,000 crores to INR 7,000 crores of outflows.

[Kushagra Bhattar, analyst]

Got it. And just one last question on this wage inflation. So at one point, you sort of mentioned that wage inflation will continue to sort of pick up, resulting in better affordability. But at the same time, wages, which is almost 1/3 of your cost, there seems to be lower than inflationary numbers than the other components. So just picking 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 supported in the broader affordability factor. Like, will this percolate in your wage cost as well? And are you building anything over there in your price hike strategies?

[Abhishek Mangal Lodha, executive]

Yes, it's a good -- it's a very thoughtful question. Obviously, wages are determined by the trade-off of supply and demand. And as we know, India is abundantly supplied with the semi-skilled labor at the bottom of the pyramid. If you look back at the data series over many, 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 based on the level of skill and the supply/demand level. So I don't really see this as a dichotomy. This is a historical fact.

We do build in construction cost inflation into our models, which is a blend of the material as well as the labor cost inflation. And we have actually found that the way we model it is quite reasonable and accurate. So, so far, we haven't been surprised negatively. But the 2 inflations of the middle 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 buyer, annual house level income at the minimum has to be between 6 lakhs to 10 lakhs. That's a very different situation from a construction worker whose monthly wages would range between INR 15,000 to INR 25,000 a month. And therefore, very different parts of the pyramid.

[Operator]

Ladies and gentlemen, due to time constraint, we take that as the last question. I now hand the conference over to the management for their closing comments. Over to you, sir.

[Abhishek Mangal Lodha, executive]

Thank you, everyone. Feel free to reach out to me or Sushil. I have highlighted, we are in very exciting time period where the sector continues to perform very well. So if you have any further questions, please feel free to reach out to me. Thank you.

[Operator]

Thank you. Ladies and gentlemen, on behalf of Antique Stock Broking, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.