Dollar bond worth less than half of a tower in Lower Parel: Abhishek Lodha

A sharp spike in the yield on the overseas bonds issued by the Lodha Group amid below investment grade ratings accorded by rating agencies could reflect a major stress in the operations of the realty developer. Abhishek Lodha, MD & CEO, Lodha Group, says this bond is a very minuscule part of their cash flow and that they have full arrangements in place to do it. Excerpts from an interview with ETNOW.

What is the issue with the dollar bonds?
The issue with the dollar bond is a lack of understanding. The dollar bond is worth less than half of the value of one of these towers we have in Lower Parel. It is nothing.

Rs 2,000 crore to put a number.
Rs 2,000 crore.

Is it nothing compared to your overall debt or what else is it nothing relative to?
Nothing in comparison to our assets or our cash flows. Our assets were valued last year by Knight Frank in August. Not just the development value, but the current value was Rs 70,000 crore. Our cash collections last year were Rs 9,200 crore. Our EBITDA is Rs 3,100 crore which means we are amongst the top 50 corporates in the country. And this Rs 2,000 crore due is nine months out and we have already made arrangements for it. In terms of trading, this has never been traded. These are high-yield bonds in the international market and they are very thin trading. The average quarterly trading on this bond is 50 crores or thereabouts.

How do you discover price on it? Any guy who wants to sell $2 million, 15 crores ka jisko bechna hai, usse price down ho jati hai, phir next month up ho jati hai (Whoever wants to sell it for Rs 15 crore, price goes down because of that, and then next month it is up again). This bond was at 82 in December, at 97 in March and sometimes is in the 70s today. But more importantly, this was truly reflective of our credit performance. This was 82 in 2015. 2015 se abhi 2019 ho gaya hai (It is 2019 now). We have an impeccable track record. With Lodha people do not ask delivery hogi ki nahi, project banega ki nahi (whether the delivery will happen, whether the project will get made). Hamare liya standards bahut alag hai (The standards are very different for us), but that is not the point. The point is that this bond is a very minuscule part of our cash flow and we have full arrangements in place to do it.

Ask any big corporate or any NBFC that can you show me the definitive way they are going to pay a liability nine months out. I do not know how many people are asked that question. The point is we are the largest real-estate developer in the country. We are the only one with an international bond and an international rating. So we get undue attention. The fact of the matter is that on the ground, the business is performing very well. This bond is a red herring. It will get paid out in full on the due date. We have serviced every interest on the due date. We have serviced everybody on the due date. You can ask anybody in the market whether there is a problem in reality. There are people who have never dealt with us and they have perceptions and comments because they think real estate is in a bad place. But our sales are doing exceedingly well. Our office and retail business is growing very well and we are very comfortable with where we are.

Why is your IPO delayed because I recall speaking with you almost a year back when you were on the verge of IPOing?
Two things happened. We were ready to move forward with the IPO and then IL&FS happened. From that time in August 2018 to today, you are more than aware of what has happened to the primary markets. Clearly we are in no rush. It would show if we were in a desperate situation as we would have cut and gone to the market. We are not and today we had a situation where over the last 12 months we have reorganised. We are now organised as a residential business and rental-asset business which is our office, retail and logistics. We have opened up two options before us which we will execute over the next two years -- either an IPO for the residential business or quite likely a REIT for our rental business because clearly the primary markets for IPOs are not very strong today and the REIT market is performing quite well. You have had one REIT. It has performed very well. There are other REITs which are likely to happen. In general, there is a compression in yield in the country. Interest rates are coming down and therefore the value of rental assets is going up. And we have a huge rental asset base ready and under construction. I am not talking about anything in the future, at current values they are worth about Rs 15,000 crore. So we will probably be able to do either of those two options over the next two years.

The general view is that there is lot of unsold inventory in the real estate sector and that that will keep prices under pressure and depress margins. What is the current state of affair with your company?
Definitely there was a situation where a lot of supply started off in real estate in India between 2010 and 2014 in premium housing because at that point everybody used to think that premium housing is Nirvana, with 50% margin, Everybody wanted to make those kinds of margin. So clearly, there has been oversupply in that market place and you can see that in parts of Mumbai too.

Thankfully, Mumbai because of its geography does have the same quantum of oversupply. But definitely where you are sitting at Lower Parel, there is over supply and yet in Lower Parel month on month between our two completed projects around -- the world towers and park -- we are selling 150 crores a month. Rs 150 crore a month just in Lower Parel is equivalent to probably the sales of any other developer across its portfolio. Across our portfolio, in spite of this sort of credit slowdown in the economy, this year since April we have been selling Rs 600 crore of new sales every month. More importantly, we are collecting Rs 600+ crores every month from our customers because we construct so much. And that is the fact. Real estate was oversupplied, supply is reducing and moderating right now, all the sales are going to the top credible developers who have a track record of delivery. Just to put that in context, last year alone we delivered 10,300 residential units and about 9 lakh square feet of office in retail space. 10,000 residential units is the sum of all the other developers in Bombay put together. So when you deliver so much, consumers buy because ultimately in India there is an inherent demand for housing because of our income and our demographic.

Yes nuclear family concept is taking over…
Yes bilkul (of course), that is the demographic situation in our country.

In August 2018, when the slowdown talk was not haunting us, real estate was not doing exceedingly well. Now you can feel the slowdown. Earlier you were able to smell the slowdown and now the slowdown is biting us. So between August 2018 and August 2019, what has changed for your business?
I would say that we have become more prudent. We have focussed on making sure that we are value engineering. We are even more focussed on delivery than we were earlier and that is a very clear mandate. As I said, we never slow down construction and that is why you see all these gigantic constructions all over Bombay which are all built as compared to the situation in other parts of the country; or even parts of Mumbai where developers slow down their projects, do not deliver or whatever else may be the case. So we have become more prudent and are more focussed on delivery. On the sale side, while we are averaging about Rs 600 crore a month this fiscal, last fiscal we were averaging about Rs 650 crore a month. So you could say sales are flattish because the festival season is yet to come, but you could also say it is flattish to minus 7-8% depending on which way you cut the numbers.

That is the total debt on your balance sheet right now? All these sales that you are talking about, are they generating enough cash flow to try and retire that debt anytime soon leaving alone the IPO? And how much you are going to raise?
So we are not talking about any public-market events, just our business; and that is I would say the charm of this business. Just our ongoing residential projects, which are either ready or completing this fiscal or next, are going to generate 27000 crore at today’s prices. The cost to complete is Rs 9,000 crore. The residual is 18000 crore. So just the projects which complete this year or next year will pay off the entire debt.

Which stands at?
Rs 17000 crores is the Indian debt. And in addition to that, we have five crores square feet of ready-to-start projects which are worth about Rs 35,000 crore. We have a land bank of 4000 acres completely unencumbered which is worth another Rs 20,000 crore. We have about Rs 15,000 crore worth of office and residential projects and we have about $600 million pounds which is going to come from our UK projects -- one is complete and one is completing by December. It may take slightly longer -- 12 to 24 months -- because of what happens with Brexit.

But overall, if you add those numbers up, that number is over one lakh crores from what we have already owned, partly started or may start in the future. But our own land and assets, against that we have to pay off Rs 17000 crore and that average debt maturity is three-plus years. And that is seen in the performance. See, we have talked about the slowdown, but more important than that is the credit slowdown. There is not one instance where anybody has any issue with us. So performance speaks, right?

You acknowledge the overall tight-liquidity situation as of now? Pricing you said has remained stagnant as well. Is that likely to continue?
This is how I see it playing down. Interest-rate cuts have started in the country but they have a long way to go. There is no good reason why with 5% salary growth, which is the average this year, a person should be buying a car at 12% interest rate or buying a home at 8.5% interest rate -- it cannot work. Ten years ago, salary growth used to be 10-15% and interest rates were 10-11% and it used to make sense. So interest rates have to meaningfully come down. That is the hidden ammunition India has. I expect over the next 18 months, interest rates for a mortgage will come down to approximately 5-6%. So demand pickup will surely happen over 18 months.

On the other side, supply is coming down. For the tight liquidity reasons a number of developers are going out of business and consumers do not have confidence in a number of not-so-organised developers. So supply coming down, demand demographically supported, plus support by interest rates. I expect that the next 12-to-18 months is the best time to buy real estate because prices have not yet started moving up and you can buy a floating-rate loan and it will keep reducing as the interest rates are cut. So I expect that the market from this festive season onwards will start picking up. Prices are still expected to be flat over the next 12 months as this liquidity situation works itself through the Indian economy. But for the medium term I would say with almost 100% certainty, that in 2021 prices will be moderately up from where they are today.

But does that make you shift your focus from the premium segment to the affordable segment with the market conditions prevalent right now? I know a large part of your focus is towards affordable, however, you may want to define that in a city like Mumbai.
Great question. We are the ones who started affordable housing for an organised developer way back in 2009 when the first credit crisis of 2008 hit. Last year out of the 10300 homes, we delivered 7500 of what the government categorised as affordable housing. You know, not my categorisation of what that Mumbai developers wants to call it.

What is your categorisation is the FII definition?
Just to put it in context, 75% of our volume and 50% of our sales are coming from affordable housing. That is definitely going to become bigger and bigger going forward purely because that is a very underserved market. That is where the Prime Minister has said he wants to put the focus of the developer community -- to deliver affordable housing. So what is now defined as sub-45 lakhs, we will deliver on that too because we have the ability to execute. Building 10,000 homes in this country year on year is very difficult. We are the only ones who have the capability, the land and the cash flow to do it. We will keep growing that volume so our business will expand. We will do some luxury, etc, but affordable housing definitely will become an even bigger part of our business, just as over the last three years we have grown our office retail and logistics business.

How are Palava sales doing? Is it fully booked out?
See, Palava right now is home to 1,10,000 people. More than 30,000 homes have been sold, but Palava is a new city. Palava will eventually be home to 5 lakh families. 20 lakh people will live there; that is the population of Chicago by the way.

Are you focussing on residential real estate or commercial real estate? The latter is where some would argue stress could be large because suddenly you do not have too many capex announcements. You know that corporates are cutting back, you got the whole concept of WeWorks and shared economy which are kicking in now. What are your thoughts there? What will happen to real-estate yields and prices there?
Yields are definitely going to get significantly lower as interest rates get cut. If the Blackstone embassy REIT opened at 8.3% today, trades at about 6.9, we expect that that will shift to closer to 6, or even lower than 6%. Commercial real estate in our view is very challenged on supply. It takes a lot of capex to build it. Indian employment will grow. I do not know if you read the Economist this weekend. They are saying global banks are now making India the hub for their global operations, not just back offices. So India’s cheap manpower but good quality work ethic, cheap real estate and the fact that the government is wanting to attract foreign investment will continue to ensure that we have job creation happening across different sections of the economy. I believe that commercial real estate is an area which will continue to have very-very solid growth because it takes a lot of capital investment to build it and India does not have that kind of capital.