Arvind SmartSpaces Limited (ARVSMART) Earnings Call Transcript

So Vishal, we are, of course, hoping to recognize revenue as soon as many of these OCs come in. We do have a good pipeline for the current year in terms of OCs, which are currently lined up. But the quarters are slightly difficult to predict whether we will have some of those in Q3 or Q2, I think that's slightly difficult to predict at this particular stage. But we are definitely going to see some, I would say, reasonably large uptick over the previous financial year when it comes to the accounting revenue that has been reported.

So my next question is basically on business development and MMR region. You've done BD in MMR recently. Do you feel a higher chunk of your project would be in MMR as compared to Gujarat soon? And what is the progress with the Khopoli project?

So I think, Vishal, we remain quite bullish, in fact, on the Mumbai market. So we are continuously looking for more opportunities there. And currently, we have INR 4,000 crores plus of GDV already locked in the market, and we are looking at more opportunities. So we do expect, yes, Mumbai is going to be a very large contributor. But it won't be at the cost of probably any defocus on Gujarat or Bangalore. I think we remain focused on adding projects in these 2 cities as well. But I think Mumbai, every incremental project can bring a lot of addition in terms of booking value. So yes, there is a possibility Mumbai grows faster than these 2 markets in terms of addition of GDV. That's a possibility. Second, I think from a launch perspective, Pen Khopoli, we are working on this particular project in terms of approval. And like I said, we are hopeful that we are able to bring at least 2 out of the 3 projects in Mumbai in the market in the current year. And H2, we do have some of these projects which are part of our launch pipeline, including the Pen Khopoli one.

The next question is from the line of Ishita Lodha from SVAN Investments.

What were the incremental efforts taken by the company on sales and marketing to drive up the sustenance sales? And can we expect a similar or a higher run rate in coming quarters?

So Ishita, I think from a sales perspective, we have been trying to strengthen our distribution capabilities and the way our processes and the teams work. So I think we have invested quite a bit in terms of one, strengthening the team all across, across all the 3 cities where we are now present and even ensuring that our distribution in terms of our channel partner reach, our marketing reach is further enhanced. So I think that has started to show in terms of the results and the numbers that we are seeing on the sustenance front. There is a -- compared to what we were aiming for probably on sustenance, we may -- with the first quarter being much better, it's possible that sustenance may be slightly more than maybe what we were aiming for. But having said this, we are an industry where inventory is always a function of the approvals you get. So while we are maintaining the overall sales guidance for the year, there's a possibility that sustenance may contribute slightly more because of the buildup in terms of our own teams internally.

[Operator Instructions] The next question is from the line of [ Anirudh Sharma ] from [ Ekant Investments ].

So a few questions from my side. So my first question is your unrecognized revenue has increased to approximately INR 3,800 crores. Could you help us understand the expected time line for converting this into reported revenue over the next few years?

Ekant, thank you for the -- sorry, Anirudh, thank you for the question. See this INR 3,800 crores of unrecognized revenue is essentially like Priyansh was mentioning, is a combination of the OCs that we'll get. So broadly, when we look at our project portfolio, it's a combination of plotted as well as high-rise. Plotted projects will typically get recognized over 2 to 3 years. And the high-rise component, the OC comes in, in about 4 years or so. So it is going to be a mixture of these 2 things. Broadly, I would say that all of this would get recognized over the next 4 years.

Okay. Okay. Understood. So my next question is that the presentation highlights an estimated unrealized operated cash flow exceeding INR 5,100 crores from the existing portfolio. What are the key assumptions behind this estimate? And how should investors think about its realization over the project life cycle?

So Anirudh, I think like I mentioned, when we talk about this INR 5,100 crores of cash flow, we are saying, we are targeting to look most of this probably getting realized over the next 4 to 5 years. So this is -- as the projects continue to move ahead. And this is, of course, from the existing set of projects, this number keeps on changing depending on when the -- as and when new projects start getting into the portfolio. So over the next 5 years, we feel we should be able to monetize most of it. And in terms of assumptions, generally, when we gave out these assumptions, the price is based on what we would have underwritten that particular project at. And even when it comes to our costing, we have a robust process where when we are underwriting a project, we look at what exactly is expected outflow. So we have taken those assumptions and basis that concluded and estimated this INR 5,100 crores of future cash flow.

Okay. Okay. So sir, your net debt to equity has increased to 0.29x as the company continued to invest for growth. What would be the comfortable leverage range over the medium term, especially considering the strong project acquisition pipeline?

So we have said also in the past, and we are maintaining our comfort at 1:1 debt equity. So till that level, we are quite comfortable. So we do expect a gradual increase in our debt level, which is a part of our conscious strategy to expand and increase the portfolio size. And we remain quite comfortable when we are looking at this particular debt level because it's also -- when we look at the debt, it's also a function of the kind of OCF we generate. And equity base is a function of the revenue recognition point that we all were speaking about for quite some time. So when you look at the total collections and total OCF that we look at, this 1:1 is a very comfortable threshold in our view.

Understood, sir. So one last question from my side. So you had a great start to this financial year. Could you share your expectations for the bookings, your collections and the business development for the full year? And what are the key opportunities and risks that investors should monitor over the next 3 quarters?

So in terms of our guidance for the bookings, we've said we expect to grow by about 35% to 40% over previous year, which takes us to a range of INR 2,100 crores to INR 2,200 crores in terms of a number for the current year. When it comes to business development, INR 4,000 crores to INR 5,000 crores was the GDV target or the aim we were looking at. And we've already done close to about INR 2,600 crores. So we feel we are on track, maybe aiming for the higher band in terms of the GDV on the BD front. And I think for now, we remain quite confident that we are giving these guidances out, I think, fairly on track. From a collection perspective, we have not put out a total annual guidance. But if you see, I think the quarter we have had, this is actually our second best quarter in terms of collections in our history. So quarter 4 was our best ever quarter. And we -- so we are happy to see that we are now clocking INR 300 crores quite frequently in terms of our collection numbers. So we do expect to have a decent growth over the last year in terms of collections as well.

The next question is from the line of Jainam Shah from Equirus Securities.

Congratulation on a great set of numbers. Sir, my question is more from a futuristic perspective. Firstly, if we see your journey eventually after getting demerged from the current entity and now doing a good sustenance sales, we have -- came a long way. Earlier, what used to happen is that whenever we had any specific, what you can say, launch at that point in time at that quarter, we'll be having a good sale for a quarter or so and then sustenance eventually dried up. Now we are doing good sustained sales eventually after you can say, going into this market. And the question would be, let's say, after reaching this INR 2,000 crores plus kind of presales, how we would be seeing, let's say, next 5 to 10 years' time? We are still not a very large player in any of the market, which is Mumbai, Bangalore and NCR. We are still a large player in Ahmedabad. How do we see our overall journey to be, let's say, national player or something like that? And because real estate cycle has been good between, let's say, '22 to till date, even if it goes for next few years, how do we able to do it in a better way to let's say go towards INR 5,000 crores, INR 10,000 crores, whatever maybe the number for the presales, considering we already have a good overall project pipeline along with the bidding that we are doing?

Right. Jainam, very interesting question. And so when we look at, firstly, our 4- to 5-year plan, I think our guidance has been that we can continue to grow at about 25% to 30% CAGR. And I think we remain quite confident that we should be able to achieve this. Now when you look at the split, I think what has interestingly happened on our portfolio now and which is by our strategy and design, the inventory that we have sitting in our portfolio, now we have actually reasonable stock in all the 3 markets. And like I said, if you see Mumbai is sitting at INR 4,000 crore plus worth of stock. Bangalore is close to INR 3,000 crores worth of stock. So now we are truly moving beyond one market in the right possible way. So I think this 25%, 30% CAGR will also bring us to a very reasonable scale in the next 5 years. And while we are maintaining this particular trajectory, I think if we are able to do this particular phase of growth quite well, we believe, I think from there, I think truly becoming one of the large developers on a national level, I think, gets incrementally easier once you have put your foothold in 3 markets which are fairly large. I think that opportunity, and I think now that particular vision is seeming, I think, within our plan, within our reach. At the same time, I think we've always said we will continue to maintain a very deep focus on profitability. So while we expect to be one of the large national developers over this 10-year journey that you were talking about, but at the same time, I think we are not going to compromise financial discipline just to achieve booking value growth. So we are feeling nearer to our plans. I think the way this company, like you said, is getting built over the last 10 years and the next 5-year plan. And maybe I think after 5 years, we'll probably take a stock whether we look at more markets, whether we -- how do we evaluate our next set of growth.

Got it, sir. Got it. So one more thing on this future plan is that if we see all the larger players, here or there, they will always have some kind of a commercial or a retail portfolio wherein they'll get annuity kind of an income. Of course, the upfront CapEx will be higher in that case. We are only focused as of now on the residential part. Are we planning to have anything on the -- you can say annuity portfolio, maybe not today, but maybe after 2, 3 years time or something like that? Even in the worst-case scenario, let's say something goes off for the real estate market as a whole, we'll have a sustenance kind of even the cash flow, which will eventually take care of our overall company in the worst-case scenario?

Right. I think, Jainam, it's a very fair point and something we are also thinking about and we take your input and feedback on this. This is something which we are also thinking about. There's a possibility, I think after a few years, we will want to look at this particular opportunity. Today, I think step one for us is that we also want to develop some of these assets probably, I think, and test out the development even if they are done with an intent for sale basis. So we may actually look at probably understanding more assets from a for-sale basis. And then maybe once we have delivered some of these, we know the nuances of delivering some of these assets, and then we can probably at a future date, also look at what you probably mentioned that we can hold it in our portfolio. It's a few years away, but something that we are thinking about as we grow. I think that could also be an interesting use of capital once this cash flow that we are talking about, which is in a way going to realize over the balance sheet starts coming in and we can think about this.

The next question is from the line of from Trisha from Shah Family Office.

So I have a couple of questions. So first being the company now has a sizable pipeline of projects planned for a launch across Gujarat, Mumbai, Bangalore, et cetera. So which of these launches are expected over the next 2, 3 years? And what level of presale contribution we can expect coming from these recently launched projects?

So [ Trisha ], for this year, like I said, one project in Ahmedabad, we are definitely looking at launching, one of the new projects that we had acquired, which is in Vastrapur in Ahmedabad. So that is what we'll bring to market. Bangalore, we expect 3 projects. One of them already, in fact, which has received approval is the new Sarjapur project that we had acquired. So that has already got approvals as well. So that is also going to be one of the launches. Other than that 2 more projects in Bangalore that we are working on in terms of getting to the market. Mumbai, 2 more projects, so which will allow us, frankly, launches in all the 3 cities that we operate in. I think, again, when we talk about next year, we are building our BD pipeline for all the 3 markets, and we are hoping that we can continue and in fact, augment this run rate of about INR 300 crores to INR 3,500 crores of booking value that we intend to bring in the current year. We are hoping next year, in fact, we will be able to bring more inventory with BD actually going quite well for us.

Okay. Understood, sir. And coming to the operating cash flow, which fairly remained strong during the quarter despite the continuous investment which we are doing in land and the approvals and everything. So keeping that in mind, how do you intend to balance the capital deployment towards the business development while also maintaining the leverage -- the healthy leverage, which we are having currently along with the cash generation?

So [ Trisha ], if you see our -- generally, our quarterly run rate, so if you probably were analyzing our operating cash flow, we can do about INR 400 crores to INR 500 crores of cash flow, which can come from our operating business itself. So that is the first part, which will go towards new BD and new land acquisition. Second, like we said, I think on the balance sheet, we have enough room to be able to add quite some debt. We are at 0.29, and we have said we are comfortable 1:1. So that also gives us a fairly large chunk of money which we can borrow. And when I'm giving our BD guidance, I'm saying we are looking at about INR 600 crores to INR 1,000 crores from a cash deployment within the current year. So I think with INR 400 crores, if it's coming from operating side and with debt lines being comfortably available, I think we have enough room to be able to meet this guidance of the business development land deployment that we're talking about.

Understood, sir. Very well answered. And coming to just one more last question, if I may. So the adjusted EBITDA margin, which improved meaningfully at around 48% to 49% this particular quarter. So how should we as an investor view this like should we consider it as a sustainable margin profile? Or were there any project mix or revenue recognition factors that could have benefited this quarter? So basically, 2 viewpoints.

Yes. So I think, of course, we are quite delighted that some of our projects in our portfolio are reporting this kind of margin. But when we are advising you, we will always say, I think look at the aggregate and the average portfolio margin. Average portfolio margin that we look at is about 25%. Fortunately, in our case, many of our projects have overperformed on that particular -- on that margin. And one of the projects which got into revenue recognition in this quarter was Orchards, where we are way above our guidance. So we will advise and treat it maybe as one project which has done exceedingly well. But at the same time, probably factor in a 25% EBITDA at this particular stage as a company average.

The next question is from the line of [ Arvind Singh ] from [ Maitri Investments ].

Am I audible, sir?

Yes, Arvind.

So congratulations on great set of numbers. So I just wanted to ask a question on the industry side. So how much price appreciation do you see in the upcoming next 2 to 3 years on the overall real estate industry? Because I think there are a lot of price appreciation happened in the last 3, 4 years. So just wanted to know your broad view on the pricing?

So I think you're right, Arvind, over the last few years, I think a lot of price appreciation has happened. My personal view is, I think now the price increase cycle, I think, is stabilizing. While -- because the demand remains strong, there are pockets where there are opportunities to pull up the pricing. But at least when we are underwriting, our business plan, we are ensuring we are not dependent on very large price hike. So that is generally something we have avoided as a part of our underwriting strategy. While -- so we believe, I think now the price increases should be slightly moderated. The demand continues to be very, very strong. I think in most of the markets where we are operating, I think the absorption is strong. But at the same time, I don't think we will now see the kind of price increases that we may have seen in the last 3, 4 years. I think it's going to be slightly moderated in terms of the increases.

Okay. Great to hear, sir. And sir, one more question that many of the investors said that the real estate cycle is almost done, but you guys are posting robust numbers. So where do you see the cycle -- where we are in the real estate cycle, if you can give us just broad picture?

I think my own reading is that when we were probably looking at a very, very rapid uptick in growth in the cycle probably when we were talking 2 years ago. I think now we are in a stage where probably the cycle demand is stabilizing. But when we look at a country like ours, I think the structural demand still remains very, very strong. So even when we talk about these markets, the 3 markets, particularly which we are tracking very actively, I think these markets, depending on the reports you look at, I think you will be -- one will be looking at anywhere between INR 3 lakh crores to INR 4 lakh crores in terms of annual residential absorption. So these are fairly deep and large markets in terms of the size that we look at. So even if they see some stable growth, we believe I think there is a lot of opportunity for developers like us to continue to grow even if the current, I would say, structural demand adding to it without the cycle demand giving a lot of uptick.

Okay. And sir, one last question, please. How do you see -- if you are planning to go into the Tier 2 markets, so how do you see the margin trajectory there?

So for now, Arvind, our focus remains on largely these 3 cities, which are all Tier 1: so Bangalore, Mumbai and Ahmedabad. That's what we are continuing to focus on. And these 3 cities, I think, like I said, they give us an EBITDA of between 22% to 25%. So we are seeing that we are able to maintain these margins in all the 3 cities. Between the 3, the price uptick in Bangalore has probably ensured that there are probably better margins in some of the projects that we may have underwritten in the past in Bangalore. So that's something which is happening as a part of the pricing cycle that you have spoken about in the last few years.

Ladies and gentlemen, that was the last question from the participants. I now hand over the conference to Mr. Priyansh Kapoor for closing comments. Over to you, sir.

Thank you, everyone, for participating in today's earnings call and for your continued interest Arvind SmartSpaces. I hope we have been able to address most of your questions today. However, if there is anything we may have missed or if you require any further information, please feel free to reach out to our Investor Relations team, who will be happy to assist you. Thank you once again for your time and continued support. We look forward to interacting with you all once again in the next quarter. Thank you.

Thank you. On behalf of Arvind SmartSpaces Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.