Sunteck Realty - Bold pipeline; execution to be watched out - Edelweiss

We met the management of Sunteck Realty (SRL) to understand business strategy, prospects and current slate of projects. Sunteck Realty (SRL) is a Mumbai-centric residential developer with key projects in BKC and Goregaon. It is headed by Mr. Kamal Khetan, the company's promoter who entered the real estate business in the year 2000 with a focus on leasing commercial real estate in BKC, Mumbai. The biggest break-through for the company came in 2006 when it won a land tender for residential property in BKC in Mumbai for Rs1.4bn, after which it entered into a 50:50 JV with the Ajay Piramal Group. Today, the company has a portfolio with 36msf of development potential (SRL share 18msf) of which 25.7msf (SRL share 14.6msf) is in Mumbai.

Mumbai-centric development

Sunteck Realty (SRL) has its focus on Mumbai-centric residential development with key projects in BKC and Goregaon. BKC projects are in the super luxury space with ticket size in the range of INR 20 crs to INR 35 crs. On the other hand, the Goregaon project is more mass market with ticket in the range of INR 1 cr to INR 1.5 crs. Additionally, it also has projects in Mulund, Thane, Dadar, Andheri, Borivali, Mahalaxmi and Navi Mumbai. It has a total of 36msf development potential (SRL share 18msf) of which 25.7msf (SRL share 14.6msf) is in Mumbai.

Land acquisition pattern and pricing - key value drivers

Sunteck is a fairly young company with limited track record of deliveries. The company has been fairly successful in acquiring good quality land parcels at reasonable prices. For instance, FSI cost of land in Goregaon at INR 717/ sq. ft is extremely low. Similarly, in BKC projects the company given its monopoly advantage has been able to keep selling prices high. In other instances, the company has a joint development agreement with Ajay Piramal which keeps land costs contained.

Limited track record

The ability of the company to replicate this low cost acquisition pattern remains to be seen. The company's first development projects are due for delivery in March, 2013. Thus, track record on deliveries too is yet to be proved.

Fairly concentrated portfolio, leading to risks

Sunteck has a largely concentrated development portfolio with ~70% of the value being driven by just 2 locations - BKC and Goregaon. With BKC being a super-luxury offering and concentrated, absorption rates on projects would be a key monitorable. For instance, even though work is scheduled to be completed on Signature Islands project in March, 2013, only 33% of the inventory has been absorbed so far, indicating slow absorption rates. Similarly, on Goregaon as the projects are spread in the same micro-market, development and sales will be on a gradual basis thus limiting immediate realization potential.

Outlook and valuations: Bold pipeline; execution to be watched out, 'Not Rated'

In our view, Sunteck has a bold pipeline of projects under planning. Land acquisition pattern so far has remained the core differentiator for the company. However, risks like concentration of portfolio, slow sales as well as limited execution track record make us cautious on the stock. The company recognizes income on 'project completion method' and hence over the past 5 years has not recognized any substantial revenues since none of the projects have been completed. However, FY13 onwards, the company should see substantial pick-up in revenue recognition as some projects reach completion threshold. Currently, the revenues comprise sub-lease rentals. The stock is not under coverage.

Source : Equity Bulls

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