Investment Idea: A Real Estate Player
A contrarian idea in the momentum sector
The Real Estate sector has been going through one of its best cycles in India. Many listed residential real estate developers are able to launch and sell the entire project in a matter of 3-4 days. These are large projects worth INR 5000-1000Cr. On an already high pre-sale base of FY24, companies are guiding for further growth with enhanced project launch pipelines. All the indications point to this ongoing benign cycle to continue with potentially falling interest rates giving a further impetus.
Many investors choose to play the real estate cycle via proxies such as cement, tiles, pipes, wires, plywood etc and choose to stay away from real estate development players. The peculiar nature of accounting and complexity in cash flow generation from launch to final delivery makes it hard to build an understanding and track the real estate development companies.
A real estate project where the project gets 100% sold within a few weeks of launch is a very capital-efficient and profitable venture. This enables developers to remain cashflow positive across all the stages of the project - collection of receivables linked to the construction progress. What they need to ensure is construction execution. For a successful project, equity-level IRRs are very healthy since the equity requirement is only needed in the first phase of launch.
Considering the high project-level ROIs which established companies having good track record have, it merits investing in strong real estate development companies. We have been working on a Mumbai-based real-estate player Sunteck Realty Ltd for quite some time and recently we added this company to our model portfolio. With the help of this post, we wanted to highlight the broad investment thesis, potential upside and risks.
Sunteck Realty was started by a first-generation entrepreneur with a single project where Piramal backed Mr Khetan. The project was a huge hit and was very profitable for Piramal. Good experience from the first project led Piramal to participate in over 10 projects of Sunteck. Many other established institutions such as Kotak, and KKR also joined hands with Sunteck on various projects. Sunteck since its inception created a strong track record of delivering a quality product on time in its focussed MMR (Mumbai Metropolitan Region) market.
Over the last 18 years, Sunteck has built a very formidable brand in its focused MMR market. However, the company has its share of mistakes as well - outside MMR projects not being hit and also ultra uber luxury BKC project which was completed in 2015 still not sold fully. Having realized and learned from its mistakes, Khetans are now clear about what they want to do and how they want to create value.
Sunteck today is at a very interesting place. It is trying to create a very healthy portfolio of development projects and rental projects (annuity).
On the development side, the company has projects to cater to the needs of uber luxury customers to aspirational lower mid-income customers. A real estate development company should be measured on 1) pre-sales, 2) balance sheet strength, 3) collection and cashflow generation 4) Inventory and launch pipeline (GDV: gross development value) 5) Track record and 6) Landbank.
We extensively spent time covering these 6 aspects of Sunteck and have come to conclude that Sunteck is positioned very attractively. We will present our analysis and views on these 6 aspects during our client interaction on Sunteck scheduled on the 1st of June 2024. (if you wish to know more about our services, please email us at Gaurav.a@nineonecapital.in)
The current GDV (Gross Development Value which means the value of projects which are already launched but not sold or yet to be launched in the next one year) stands at ~INR 30,000Cr. Based on management estimates and guidance, this GDV is expected to go to ~INR 60,000Cr in the next 3 years. This means that the pace of the launch will remain strong. Presales which is currently at INR 2000cr for FY24 is expected to grow at a healthy pace of 20-25%. The company makes a blended EBITDA margin of ~35% and a PAT margin of 23-24%. The collections have been strong leading to strong cashflows and debt repayments and hence the balance sheet with negligible debt (debt to equity ratio of just 0.05x). More details on our call.
Besides, Sunteck has entered into a partnership with IFC- World Bank to undertake MMR focused platform to build high-quality green urban large-scale housing projects targeting the mid-income demographic. IFC has one of the most stringent due diligence processes which Sunteck cleared, showing a very healthy corporate governance at play.
On the annuity side, we expect Sunteck to generate an annuity income of INR 300-350Cr by FY27 from the current FY24 annuity income of INR 35Cr. Annuity income generally has 90% EBITDA margin and provides a good cushion during the bad phase of the real estate cycle. Many large and successful real estate companies have created their annuity income portfolio like Prestige, DLF, Brigade etc.
Valuation and shareholding dynamics:
Since March 2023, Sunteck Realty stock been the worst performer across all the real estate stocks with market cap of more than INR 1000Cr. Some reasons that can explain this underperformance are as below.
Pre-sales growth has grown at 20-25% while other bigger real estate companies have shown massive 50-100% kind of pre-sales growth
Virtually negligible P&L booking as compared to other real estate players
No big bang project launch announcements
Technical reason of one large institutional shareholder exiting the company (this institution is exiting all its India investment)
We believe all of the above factors will change from negative to positive. In our call with our clients, we shall discuss all these factors in greater detail. We believe Sunteck to generate a CAGR of at least 20% over the next 3-5 years in our base case. The detailed valuation scenarios will be shared post the call.
Disclaimer: Sunteck is in the top 5 positions of our portfolio now. The above article is not a recommendation to buy or sell. Please consult your financial advisor before making any investing decision.
PS: If you are interested to know more about our us, please feel free to write to gaurav.a@nineonecapital.in