Suraj Estate Developers’ (SURAJEST) strong redevelopment capabilities, healthy development pipeline and a well-located land bank drive our confidence in its long-term growth story. Our optimism is also supported by a structurally buoyant home market. We initiate coverage with a ‘BUY’ rating and a TP of INR757, valuing the stock at 1.4x FY26E NAV. Key growth triggers are:
i) Pre-sales CAGR of 49.2% over FY24–27 on the back of a strong launch pipeline (~INR5,200cr, 0.9mn sq. ft.);
ii) Excellent product positioning with most inventory falling into the sub-INR10cr category;
iii) Its expertise in redevelopment projects under Rule 33(7) of DCPR in MMR;
iv) Favourable dynamics in the MMR market, with inventory at a 15-year low of 10 months;
v) Strong expected net cash surplus of INR3,579cr over FY25–32 led by pre-sales growth; and
vi) Improving Balance Sheet health led by IPO proceeds and internal accruals (net D/E ratio to improve to 0.1x as of FY27E-end from 0.6x as of March).
It has 13/18 ongoing/upcoming projects, with an inventory/saleable area of 0.12mn sq. ft./ 0.9mn sq. ft. (GDV: ~INR631cr/~INR5,200cr). It has land reserves of ~2.6 acres that will be used for future development. We expect the entire GDV of ~INR5,831cr to be liquidated by FY32 and see a cash surplus of ~INR3,579cr from ongoing and upcoming projects. We see new project additions once it launches most of its existing projects. We value SURAJEST at a 40% premium to its FY26E NAV considering its land reserves and ability to aggressively add new projects in its existing micro-market given its brand value and improved Balance Sheet.
Favourable dynamics in its home market of MMR, inventory at record-low of 10 months
With a record low inventory of 10 months, MMR is one of the fastest growing realty markets and ranks second in terms of the area sold. In MMR, SCM is one of the smallest (1–2% share in terms of units sold) but is one of the most sought-after micro-markets due to: i) its luxury positioning, and ii) presence of a high-income and affluent client base. While SCM has a dearth of vacant land parcels, it has more than 16,500 buildings that are older than 80 years and need redevelopment.
Asset-light redevelopment under Rule 33(7) of DCPR drives margin and RoE
SURAJEST’s specialisation in the redevelopment of properties in SCM gives it access to relatively cheap prime land parcels. Its understanding of end-user needs is key to its success in SCM. It has two product categories: value luxury (INR1–3cr) and luxury (INR3–13cr). It identifies properties with 25–30 tenants under the pagdi system that fall under Rule 33(7) of the Development Control and Promotion Regulations, 2034. The scheme’s benefits are: i) FSI of three without any TDR or additional cost, ii) relatively low approval cost, and iii) ~30% discount on land cost. Till date, it has delivered ~1mn sq. ft. across 42 projects in prime locations, largely falling under Rule 33(7) of DCPR. With a discount on land prices, an FSI of three, and availability of legacy land parcels, it can churn its assets and deliver an EBITDA margin of over 50%. While redevelopment projects have a higher turnaround time (54–72 months) versus vacant land development (42–48 months), the strong margin makes up for the long gestation, leading to a strong RoE.
Expect a launch of 9.01lk sq. ft. by FY28-end
It has significantly scaled up its project pipeline aided by: i) favourable market dynamics, ii) rich experience, and iii) proceeds from its December 2023 IPO. It has 13 ongoing projects (residential /commercial: 11/2) with an inventory of 1.2lk sq. ft., or ~INR631cr. Eighteen projects (residential /commercial: 17/one), with a carpet area/GDV of 9.01lk sq. ft./ ~INR5,200cr, are under planning and will be launched by FY28-end. We expect the entire inventory to get liquidated by FY31.
Healthy project pipeline, expect cash surplus of ~INR3,579cr
With an EBITDA margin of over 50%, we expect ongoing and upcoming residential projects to generate a gross/net cash flow of INR7,358cr/INR3,579cr over FY25–32. We expect margin to stay over 50% given: i) the development of legacy land parcels, ii) its access to land parcels at relatively attractive prices, iii) price premium in SCM, and iv) effective tenant and marketing cost management. Over 71% of the IPO proceeds were deployed towards de-leveraging and bringing the net D/E ratio to 0.6x as of March. We see the D/E ratio falling to 0.1x by FY27-end on healthy internal accruals and lower spends on business development, which will drive up RoCE.
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