Sunteck Realty Ltd

15 Pages·2017·0.55 MB·English

Initiating Coverage
Sunteck Realty Ltd

6 August 2018
Robust execution coupled with strong visibility of future cash flows will
lead to substantial value creation, initiate with BUY and a TP of Rs 585

CMP : Rs 416 Sunteck Realty Ltd (SRL) is a Mumbai based real estate developer, primarily
Rating : BUY catering to the ultra-luxury and luxury residential segment. With city-centric
operations well spread out across the Mumbai region, SRL has a project portfolio
Target : Rs 585 of ~30 msf spread across 25 projects, with ~12.3 msf under execution by end

FY23. With marquee portfolio positioned at the top end of each micro market,

STOCK INFO
SRL has a strong visibility of future cash flows. With low debt and robust
INDEX
execution, SRL can achieve substantial value creation in the medium term. We
BSE 512179
remain positive on SRL’s future prospects and initiate coverage with a ‘Buy’
NSE SUNTECK

Bloomberg SRIN IN rating and a TP of Rs 585, which gives an upside potential of 40.6%.
Reuters SUNT.BO

Sector Real Estate  Strong visibility of future cash flows
Face Value (Rs) 1
SRL has strong visibility on future cash flows from its ongoing and already
Equity Capital (Rsmn) 140
completed projects. From SRL’s 9 completed projects and 6 ongoing projects,
Mkt Cap (Rsmn) 58,371
52w H/L (Rs) 470 / 215 the company is expected to generate ~Rs 38.5bn of cash flows. While from its 3
Avg Weekly Vol (BSE+NSE) 2,18,410 upcoming projects SRL is expected to generate ~Rs 15.5bn of cash flows.

Cumulatively from all the above projects SRL is expected to generate net cash
SHAREHOLDING PATTERN %
flows of Rs 53.9bn.
(as on June, 2018)

Promoters 66.7
 Consolidated revenue to grow at a CAGR of 15.7% over FY18-FY20E
Public & Others 33.3
Over the past few quarters SRL is showing increased traction in its pre-sales
Source: ACE Equity, Arihant Research
(new bookings) volume and has reported 79% qoq growth in its pre-sales for

STOCK PERFORMANCE(%) 3m 6m 12m Q4FY18 at ~Rs 1.9bn. SRL also witnessed robust collections in Q4FY18 at
Sunteck Realty -1.9 2.1 67.5 Rs 1.5bn, a growth of 38% yoy and 53% qoq. Going forward we expect SRL to

SENSEX 7.0 8.1 16.0 sustain its current growth momentum and have forecasted a consolidated
Source: ACE Equity, Arihant Research
revenue CAGR of 15.7% in our model over FY18-20E period.

Sunteck Realty v/s SENSEX
 PAT CAGR of 13.1% over FY18-FY20E with stable EBITDA margin of 38-40%
We believe, going forward, SRL’s robust sales momentum coupled with strong

execution of its ongoing projects would help the company to ramp up its
earnings over the next few years. We expect SRL to report 13.1% CAGR in its
earnings over FY18-20E with stable EBITDA margin of 38-40%.

Valuations
We have valued SRL using DCF method, wherein we have calculated value of its

real estate business comprising ongoing and forthcoming projects, planned
Source: ACE Equity, Arihant Research
projects, pending value from completed development projects and completed

annuity projects. Our DCF method yields a NAV of Rs 836/share for SRL.

Applying a 30% discount to our NAV, we arrive at a target price of Rs 585/share

for SRL. At the CMP of Rs 416, SRL is currently available at a significant discount

of 50.2% to its NAV of Rs 836, which is quite attractive given the company’s

future growth potential. We initiate coverage on SRL with a BUY rating and a
target price of Rs 585, which gives an upside potential of 40.6%.

Financial Performance

YE March EBITDA
Net Sales EBITDA PAT EPS (Rs) RoE (%) P/E (x) EV/EBITDA (x)
(R s Mn) Margin %
FY16 7865 2500 1628 13.6 31.8 10.0 30.7 24.6

FY17 9522 3481 2040 17.0 36.6 11.4 24.5 16.6
FY18 8883 3720 2142 15.3 41.9 8.1 27.3 16.7
F Y19E 9483 3698 2234 15.9 39.0 8.5 26.1 16.9
FY20E 11889 4459 2738 19.5 37.5 10.0 21.3 13.8

Source: Company, Arihant Research

Arihant Capital Markets Ltd Arihant Capital Markets Limited|Research Analyst SEBI Registration No:INH000002764
1011 , Solitaire Corporate Park, Bldg No.10, 1st Floor, Andheri Ghatkopar Link Rd, Chakala, Andheri (E), Mumbai 400 093.
Initiating Coverage| Sunteck Realty Ltd

Company Background

Sunteck Realty Limited (SRL) is a Mumbai based real estate developer, primarily
catering to the ultra-luxury and luxury residential segment. With city-centric
operations well spread out across the Mumbai region, SRL boasts of a development
portfolio of about 30 mn sq ft. spread across 25 projects at various stages of
development including 9 completed projects. SRL’s business focuses on designing,
developing and managing high-end and premium residential and commercial
properties. SRL has carved out a niche for itself in the luxury and ultra luxury
segment by differentiating itself in each micro-market through premium product
positioning, brand partnerships and having different reputed channel partners for
each product to attract corporate, HNI and retail customers. SRL is renowned for its
strong project execution skills by virtue of its in-house project management team
and strategic tie-ups and associations with domestic and International contractors,
architects, engineers and brand partners.

SRL’s presence across Mumbai

Source: Company Presentation, Arihant Research
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Initiating Coverage| Sunteck Realty Ltd

Business Overview
SRL’s strength lies in niche positioning of its products to each micro-market that the
company caters to. Thus in order to differentiate its projects from its peers in the
market, SRL has developed four brands that resonate well with its product offerings
across its residential and commercial developments.
1. ‘Signature’ brand – This brand is used for ultra luxury residences aimed at
high net worth individuals. The property is located in prime city locations
and has apartment size of over 7,000-11,000 sq ft. The company’s flagship
development ‘Signature Island’ in Bandra-Kurla Complex (BKC) Mumbai, is
marketed under this brand.

2. ‘Signia’ brand – This brand is used for premium and mid-level residences
in select suburban micro-markets. Apartments under this brand are
generally between ~1,200 and ~5,000 sq ft in size.

3. ‘Sunteck’ brand–This brand is used for commercial developments.

4. ‘Sunteck City’ brand – This brand is used for larger formats and mixed
used developments.

SRL’s strategy of differentiated branding across product segments has helped the
company command premium positioning across segments. Very soon SRL is
planning to come out with its fifth brand targeted to the affordable segment,
mainly for aspirational mid-income value homes. SRL has already acquired land for
this project under the fifth brand in Naigaon and planning to launch the project in
next few months.

SRL’s various projects located in BKC

Source: Company Presentation, Arihant Research
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Initiating Coverage| Sunteck Realty Ltd

Industry Analysis – Present Scenario
The real estate sector is still reeling under the impact of the triple whammy of
demonetisation, the roll-out of goods and services tax (GST), and the introduction
of new real estate regulations (RERA). The latest data from the project-tracking
database of the Centre for Monitoring Indian Economy (CMIE) suggest that new
real estate projects launched in the June quarter (April-June 2018) were the lowest
since 2005. New project launches dropped by 29% QoQ and by 60% YoY in the
April-June quarter. In terms of project costs, the value of new projects launched in
FY18 was 23% lower than that of FY17 and 5% lower than FY16.

Total value of new projects over the years (Rs bn)
900
800 Total value of new projects (Rs bn)
700
600
500
400
300
200
100
0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Source: CMIE, Arihant Research

A large part of the sluggishness in the real estate sector in FY18 can be attributed
to the Real Estate (Regulation and Development) Act (RERA). Developers across the
country chose to put on-hold new project launches in order to gauge the impact of
RERA on their ongoing and tentative projects and the regulatory and compliance
measures needed to be taken in order to be compliant. As a result, FY18 remained
tepid for the real estate industry.

There are a number of reasons why the outlook for the sector does not appear very
bright going forward. There is very little pick-up in borrowing from banks for real
estate, bank lending data shows. In fact, credit growth to commercial real estate
has consistently fallen since 2014 and remains at subdued levels. Not surprisingly,
property prices have stagnated or fallen in many cities, especially where
investment demand was a big driver of the real estate market. Suburban markets in
Delhi-NCR region and Mumbai have been hit the hardest, data from the National
Housing Bank (NHB) Residex shows. Despite a correction in prices, a report dated
25 July by property consultant Knight Frank India suggests that home sales have
failed to take off so far in 2018. Given the increasing likelihood of policy rate hikes
in the months to come, interest rates are likely to harden, which will raise
borrowing costs and likely dampen real estate investments. As a result we believe
one has to wait a bit longer for a sustained recovery in the real estate sector.
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Initiating Coverage| Sunteck Realty Ltd

Investment Rationale for Sunteck Realty
As we mentioned in the current scenario analysis of the real estate industry, due to
the persistent slowdown faced by the real estate players, an investor has to be
cautious while choosing a player to bet on. We believe with the introduction of the
new regulations the organised players with a strong balance sheet and robust
execution skills will be the key beneficiary at the expense of the unorganised
players with stretched balance sheets and reeling under heavy debt burden.
Sunteck fits the above bill perfectly as it has a low net debt/equity ratio of 0.14 at
the end of FY18. Average cost of secured debt for SRL is ~9.5%, one of the lowest in
the real estate sector while incremental debt funding for SRL happens in the range
of 9.-9.25%. The company maintains strict financial discipline in raising equity and
did not have any equity dilution in the past 8 years barring the latest QIP and
preferential allotment. With high promoter shareholding at ~67% with no pledging
of shares and no corporate guarantee given, SRL is an ideal candidate of good
corporate governance with strong financials and established execution capabilities
whom investors can bet on from a medium to longer term perspective amidst all
the tainted and debt heavy players in the sector.

 Consistently built pipeline proves SRL’s acquisition strength
SRL has a unique strategy of focusing on development of urban land plots through
JDA/JV with historical property owner or by partnership with local authorities. This
strategy of SRL has lent significant visibility to its project execution and accretion
pipelines. SRL has shown its unique ability to predict growth areas ahead of the
curve and took calculated risks by doing acquisition during peak recessionary
periods. As a result the company was able to achieve well timed capital allocation
which has prepared the company to capitalise on the next round of opportunity
which has come up due to opening up of further acquisition opportunities post
demonetisation, RERA and government’s focus on affordable housing (Naigaon
project of Sunteck).

Project accretion chart of Sunteck over the years

Source: Company Presentation, Arihant Research
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Initiating Coverage| Sunteck Realty Ltd

 Multiple engines to chart the next level of growth for SRL
SRL is well poised for the next level of growth fuelled by the following four growth
engines in its portfolio.

1. BKC – SRL’s growth engine no. 1
2. ODC – SRL’s growth engine no. 2
3. MMR Region – SRL’s growth engine no.3
4. Projects across different micro-markets in line with core value proposition

1. BKC – Value creation in the financial hub of India
SRL has identified residential potential in BKC at a time when locale was only of
commercial orientation. Further with extensive research SRL identified that
premium luxury residential offering commands 3-4x premium versus commercial in
Central Business Districts (CBD) and with that conviction, the company bought land
at a premium to ready properties in nearby locations (Kalanagar, Kalina). BKC is the
true CBD of India like Manhattan (USA), Singapore or downtown Dubai (UAE). BKC
is home to most of the biggest corporate, financial institutions and stock exchange
bourses. It has the best infrastructure which provides the only ‘slum free’ and a
‘hawker free’ zone in India.

Today SRL’s residential projects have given multi-bagger returns in terms of capital
appreciation, significantly outperforming the expectations of even PE players. SRL’s
established brand name has helped it to acquire two commercial projects in BKC
recently under the asset-light JV/JDA model. Currently SRL has 5 projects in BKC
with estimated future operating cash flows worth ~Rs 24.3bn.

SRL’s project portfolio in BKC
In Rs mn
Estimated
% of No. of Unsold Estimated Estimated Estimated
Sr. Project units units saleable pricing inventory Receivables costs yet to operating cash
No. Name flows
sold unsold area (msf) (Rs/sq ft)* value be incurred
Signature 13,682
1 66% 22 0.22 61,000 13,420 262 0
Island
2 Signia Isles 91% 7 0.03 49,000 1,470 1,976 0 3,446
5,525
3 Signia Pearl 73% 22 0.11 45,000 4,950 622 47
Total Residential 22,653

Estimated
Unsold Estimated Estimated Estimated
Sr. Project operating cash
saleable area pricing inventory Receivables costs yet to be
No. Name (msf) (Rs/sq ft)* value incurred flows
1 Sunteck Icon 0.05 20,000 1,000 164 361 803
2 Sunteck 0.06 20,000 1,200 0 382 818
Gateway 51
1,621
Total Commercial

Value represent SRL share in above calculation
* In line with recent pricing trends

Source: Company Presentation, Arihant Research

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Initiating Coverage| Sunteck Realty Ltd

2. ODC (Goregaon) – Replicating the vision of BKC in ODC, the next BKC of Mumbai
SRL was successful in identifying the next potential destination in Goregaon (West),
which was planned and being developed as a CBD by MMRDA, the same planning
authority which delivered BKC successfully. With further research, SRL identified
the undervalued potential of ODC (Oshiwara District Centre) at discounted prices as
compared to neighbours like Goregaon (East) and Lokhandwala (Andheri West) and
surrounded by commercial hubs like Nirlon, Nesco, Mind Space, Infinity Park etc.
MMRDA is undertaking significant infrastructure development in ODC with two
flyovers connecting East to West and Ram Mandir station on Western Railway line
already operational. Also it is doing road widening work at six 90ft roads.

ODC is the third CBD of Mumbai and is located between Goregaon east and
Lokhandwala, Andheri west. In ODC, ~10 msf office space is already operational like
Nirlon Knowledge Park, Nesco, Mind Space, Industrial and SME’s areas. Several
back offices of banks like Citi, J.P. Morgan, Barclays, Kotak, Deutsche Bank and also
many IT companies are present in this area. This area is being planned with a target
of additional 0.25mn jobs. The area has a stable residential market of western
suburbs with a potential saleability of about 4,500 plus units annually. SRL was able
to create value through acquisition of 23 acre land for only ~Rs 4,500mn (fully paid
for) translating to <Rs 1,000/ sq ft. SRL is targeting customers in the mid-income
households looking for luxury houses at affordable prices. SRL initially launched the
project at ~Rs 8,000/sq ft and the project is currently commanding a selling price of
~Rs 14,000/sq ft. SRL has 4 residential projects in ODC with estimated future
operating cash flows worth Rs 23.8bn.

SRL’s project portfolio in ODC
In Rs mn
Estimated
No. of Unsold Estimated Estimated Estimated
Sr. Project % of units units saleable pricing inventory Receivables costs yet to operating
No. Name sold cash flows
unsold area (msf) (Rs/sq ft)* value be incurred
1 Su1nst tAevcekn Cuitey , 51% 228 0.35 14,500 5,075 1,463 947 5,591
2 S2unndt Aecvke nCuitey , 52% 255 0.30 14,500 4,350 2,354 3,174 3,530
3 Sunteck City, 0 0 0.88 14,500 12,760 0 5,284 7,476
3rd Avenue
4 Sunteck City, 0 0 0.86 14,500 12,470 0 5,209 7,261
4th Avenue
23,858
Total Residential
Value represent SRL share in above calculation
* In line with recent pricing trends

Estimated
Leasable area Estimated annual lease Estimated costs to
Sr. monthly net
No. Project Name potential rental range rental potential range be incurred (Rs mn)
(msf) (Rs mn)
(Rs/sq ft/mn)
Sunteck City, 7,196
1 1.2 135-150 1,993-2,214
5th Avenue
Sunteck City, 7,956
2 6th Avenue 1.4 145-160 2,366-2,611
15,152
Total Commercial
Value represent SRL share in above calculation

Source: Company Presentation, Arihant Research

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3. MMR Region – Mid-income value homes (affordable housing)
SRL has forayed into the affordable housing segment by acquiring land in MMR
region of Naigaon and is planning to launch the project in next few months.
Affordable housing offers compelling opportunity for the developers with 100%
deduction on profits and gains for a period of 5 years starting 2017 and ending in
2022. Due to interest rate and tax benefits, PAT margin can be sustained. Home
buyers also get substantial benefit by way of reduced interest rates (effective
interest rate 3.5% for a Rs 26.3 lakhs loan as per HDFC presentation), resulting in
increasing demand for affordable housing projects.

SRL’s project portfolio in Naigaon (affordable housing)
In Rs mn
Unsold Unsold saleable Estimated Estimated Estimated Estimated
Sr. Project operating cash
Location saleable area area potential – pricing future sales costs to be
No. Name potential (msf) SRL share (msf) (Rs/sq ft) value incurred flows
New brand
Naigaon,
to be
1 launched MMR 10.0-12.0 7.4-8.9 5,000 37,047-44,456 18,000-21,600 19,047-22,856
region
soon

Source: Company Presentation, Arihant Research

Naigaon : Upcoming location with superior infrastructure

Source: Company Presentation, Arihant Research

4. Projects across different micro-markets in line with core value proposition
Going forward SRL will be identifying emerging locations on the western suburbs of
MMR, which are entitled for SOPs of affordable housing by keeping the unit size
right. The company is planning to do extensive research on the upcoming
infrastructure, ticket size etc to zero in on the locality. SRL is banking on increased
volumes and faster turnaround for these type of projects to drive profitability, with
an aim of value positioning with realisations around Rs 5,000/sq ft. For the large
sized projects in affordable segment (like Naigaon) SRL plans to do acquisition
under the asset-light JV/JDA model to mitigate risk.

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Initiating Coverage| Sunteck Realty Ltd

 Strong visibility on future cash flows
SRL has strong visibility on future cash flows from its ongoing and already
completed projects. From SRL’s 8 completed projects and 6 ongoing projects, the
company is expected to generate ~Rs 38.5bn of cash flows. While from its 3
upcoming projects SRL is expected to generate ~Rs 15.5bn of cash flows.
Cumulatively from all the above projects SRL is expected to generate net cash flows
of Rs 53.9bn.

Future cash flow potential from SRL’s various projects
In Rs mn
Estimated
% of No. of Unsold Estimated Estimated Estimated
Sr. Project Name units units saleable area pricing inventory Receivables costs yet to operating
No. cash flows
sold unsold (mn sq ft) (Rs/sq ft) value be incurred
Completed 25,477
13,682
1 Signature Island 66% 22 0.22 61,000 13,420 262 0
2 Signia Oceans 100% 0 0 13,000 0 0 0 0
365
3 Sunteck Grandeur 100% 0 0 14,500 0 365 0
4 Sunteck Kanaka 100% 0 0.02 9,000 180 22 5 197
105
5 Signia Skys 64% 13 0.02 5,500 110 0 5
3,446
6 Signia Isles 91% 7 0.03 49,000 1,470 1,976 0
7 Signia Pearl 73% 22 0.11 45,000 4,950 622 47 5,525
2,157
8 Signia High 41% 48 0.13 13,500 1,755 412 10
9 Sunteck Centre
12,857
Ongoing
1 Sunteck City, Ave. 1 51% 228 0.35 14,500 5,075 1,463 947 5,591
2 Sunteck City, Ave. 2 52% 255 0.30 14,500 4,350 2,354 3,174 3,530
906
3 Signia Pride 0% 19 0.05 20,000 1,000 45 139
4 Signia Waterfront 45% 94 0.08 13,000 1,040 270 161 1,149
803
5 Sunteck Icon 0% 0.05 20,000 1,000 164 361
6 Gilbird Hill 0% 0.06 20,000 1,200 0 322 878
15,555
Upcoming
7,476
1 Sunteck City, Ave. 3 0.88 14,500 12,760 0 5,284
2 Sunteck City, Ave. 4 0.86 14,500 12,470 0 5,209 7,261
818
3 Sunteck Gateway 51 0.06 20,000 1,200 0 382
Total 53,889
Values represent SRL’s share
> Other planned projects at South Mumbai, Sion, Vile Parle, Jaipur, Naigaon not included in the above table

Source: Company Presentation, Arihant Research

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Financial Performance Analysis

 Consolidated revenue to grow at a CAGR of 15.7% over FY18-20E
SRL has strong revenue visibility from its ongoing and already completed projects.
Its premium BKC projects continue to see strong traction registering robust price
growth, margin expansion and increased enquiry levels. Its other projects namely
Sunteck City at ODC Goregaon (Avenue 1&2) and Signia High in Borivali have also
witnessed robust pre-sales. During last fiscal of FY18, SRL has commenced
construction at its Sunteck Icon and Gilbird Hill projects, which will further boost its
cash flows going forward. Over the past few quarters SRL is showing increased
traction in its pre-sales (new bookings) volume and has reported 79% qoq growth
in its pre-sales for Q4FY18 at ~Rs 1.9bn. SRL also witnessed robust collections in
Q4FY18 at Rs 1.5bn, a growth of 38% yoy and 53% qoq. Going forward we expect
SRL to sustain its current growth momentum and have forecasted a consolidated
revenue CAGR of 15.7% in our model over FY18-20E period.

Consolidated revenue growth trend of SRL
15000
180%
10000 130%
80%
5000
30%
0 -20%
FY16 FY17 FY18 FY19E FY20E
Revenue (Rs Mn) Revenue Growth (%)

Source: Company, Arihant Research

 PAT to witness 13.1% CAGR over FY18-20E with stable margin of 38-40%
We believe, going forward, SRL’s robust sales momentum coupled with strong
execution of its ongoing projects would help the company to ramp up its earnings
over the next few years. We expect SRL to report 13.1% CAGR in its earnings over
FY18-20E with stable EBITDA margin of 38-40%.

SRL’s PAT trend over the years EBITDA margin trend of SRL over the years

4000 50%
140% 44.2% 41.9%

37.5%
3200 40% 36.6%
90%
39.0%
2400 30%
31.8%
40% 30.1%
1600 20%

800 -10% 10%

0 -60% 0%

FY15 FY16 FY17 FY18 FY19E FY20E FY14 FY15 FY16 FY17 FY18 FY19E FY20E

PAT (Rs Mn) Growth (%) EBITDA Margin (%)

Source: Company, Arihant Research Source: Company, Arihant Research

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