Mahindra Lifespace Developers - Well poised for growth; initiate with BUY - ICICI Securities

We initiate coverage on Mahindra Lifespace Developers Ltd. (MLIFE) with a BUY rating and target price of Rs939 valuing the company at a 30% premium to FY22E NAV of Rs723/share. The company is perceived to have missed the bus over the last decade as peers have significantly scaled up their residential business while MLIFE has remained stagnant. However, with a new leadership in place and backing from the company's parent (the Mahindra Group), the company is targeting aggressive expansion over the next three-four years. With plans to spend Rs5bn each year on land which can potentially generate annual sales of Rs20-25bn, we expect the company's annual sales bookings value to grow at a 39% CAGR over FY21-25E to Rs25bn. Key risks to our rating are a demand slowdown in the Indian residential market and rising interest rates in India.

- Top management changes give fresh ambition to grow the residential business: While the company has always benefited from the parentage of the Mahindra Group, a lack of aggression has resulted in MLIFE's residential business remaining stagnant with annual sales volumes of just 1-1.7msf and sales value of Rs7-10bn over FY17-21. However, with the current MD and CEO, Mr. Arvind Subramaniam at the helm for a year and a new set of business heads, the company is well poised to grow its business in the medium term. As per the company management's stated intent, it is targeting addition of three to four new land parcels each year which will entail annual land spend of Rs5bn and can generate annual sales value of Rs20-25bn. The company has demonstrated its intent with the addition of three new land parcels in FY21 having potential sale value of Rs15bn.

- Annual sales expected to grow 3-4x by FY25E: While the impact of the second Covid wave will continue to weigh on the company's performance in H1FY22, we expect a significant uptick in activity from H2FY22, along similar lines of FY21 where H2FY21 saw a strong bounce back in sales volumes across listed players. We expect MLIFE to clock Rs12.3bn of sales bookings in FY22E and expect annual sales to touch Rs25bn by FY25E implying a sales value CAGR of 39% over FY21-25E. Given the company's strong corporate brand and presence in five of the major Tier 1 residential markets in India which account for over 80% of India's residential sales value, we believe this is easily achievable assuming that the new land bank additions come through.

- Thane land parcel may add significant value if approvals come through: MLIFE has an unencumbered land parcel of 60acres along the Ghodbunder Road in Thane, MMR where current residential prices hover between Rs7,000-8,000/psf and this project, if launched, can potentially have saleable area of ~10msf. While the company is working towards getting this land parcel ready for launch sometime towards the end of FY23E, we await approvals for the project coming through before incorporating this in our estimates.

- Opportunity to grow further post FY25E remains huge: With MLIFE targeting to generate Rs25bn of sales value annually by FY25E at an EBITDA margin in excess of 20%, we believe that this business can potentially generate over Rs5bn of annual operating surplus cash flow (OCF surplus) in 3-4 years' time. Assigning an 8-10x OCF multiple, MLIFE's residential business could be worth between Rs40-50bn in the medium term. Beyond FY25E, the company has huge scope to grow considering that it may have just over 1% residential market share in Tier 1 cities by FY25E.

Shares of MAHINDRA LIFESPACE DEVELOPERS LTD. was last trading in BSE at Rs.580.95 as compared to the previous close of Rs. 586.35. The total number of shares traded during the day was 13052 in over 1306 trades.

The stock hit an intraday high of Rs. 599.95 and intraday low of 562. The net turnover during the day was Rs. 7614955.

Source : Equity Bulls

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