Suraj Estate Developers

Largely south-central Mumbai realtor

Specializes in the redevelopment of tenanted properties

Suraj Estate Developers, founded in 1986 by Rajan Meenathakonil Thomas, is a Mumbai-based real estate developer, with development across the residential and commercial sectors in the south-central Mumbai region. The company specialise in the redevelopment of tenanted properties.

It has residential portfolio located in the markets of Mahim, Matunga, Dadar, Prabhadevi, and Parel, all in the south-central Mumbai region. The company is now venturing into residential real estate development in the Bandra sub-market. In the south-central Mumbai region, it focuses on the value luxury, luxury segments and commercial segment.

With over 36 years of presence in the real estate market, it has completed 42 projects with a developed area of more than 1,046,543.20 square feet in the south-central Mumbai region. All these 42 projects are redevelopment projects with houses redeveloped for more than 1011 tenants free of cost under regulation 33(7) of the Development Control and Promotion Regulation, 2034 (DCP Regulations). Compliance of Regulation 33(7) of the DCP Regulations enables sanction of more than FSI - 3.00 for development from regulatory authorities.

The company caters to the discerning clientele across the `value luxury’ and `luxury’ segments, offering a diverse range of properties priced from Rs 1 crore to Rs 13 crore. It has constructed and sold built-to-suit corporate headquarters to institutional clients, which includes Saraswat Co-operative Bank Limited (Prabhadevi) and Clearing Corporation of India Limited (Dadar).

Expertise of the company lies in the redevelopment of tenanted properties under Regulation 33(7) of the Development Control and Promotion Regulations (DCPR) in the Mumbai region. Since most of the land parcels in the south-central Mumbai market are redevelopment projects, its core competence lies in tenant settlement which is a key element for unlocking value on such land parcels. It identifies cessed and non-cessed properties with existing tenants and ties up with the landlords of such tenanted properties by entering a development agreement or on outright purchase basis through conveyance deed.

In addition to the completed projects, it has 13 ongoing projects with a developable area of 20,34,434.40 square feet and saleable carpet area of 6,09,928 square feet as well as 16upcoming projects with an estimated carpet area of 7,44,149 square feet as on Oct 31, 2023. Twelve out of 13 ongoing projects and 13 out of 16 of the upcoming projects are redevelopment projects.

Of the 13 ongoing projects, it directly acquired land for nine through conveyance deed and the balance four were acquired by way of development agreement with landowners. Similarly, in the case of 16 upcoming projects,it directly acquired land for 10 through conveyance deed and the balance sixwere acquired by way of development agreement with landowners.

To cater to the increasing need for independent office buildings in the commercial segment, it is currently proposing a 16-storey commercial building situated in Tulsi Pipe Road, Mahim.

Its customer-centric business model focuses on addressing customer requirements in various locations, ticket sizes and configurations.

Positioned for future growth and expansion, the company holds certain strategic land parcels in Bandra (West) and Santacruz (East) for development. As of October 31, 2023, it possessed land reserves of 10,359.77 square meters, intending to capitalize on the entire FSI potential of more than index 2.0, subject to marketability and receipt of regulatory clearances. They have land parcels spanning 9,631.35 square meters in Bandra (West), Mumbai, Maharashtra, and 728.42 square meters in Santacruz (East), Mumbai, Maharashtra, showcasing its commitment to strategic real estate investments and future projects.

The company does not provide any construction services on its own and is 100% dependent on third-party contractors for the construction services of its projects.

The Issue and the object of the offer

The IPO is entirely a fresh Issuance of equity shares with no Offer for Sale (OFS) component. The issue comprises fresh issue of equity shares (of Rs 5 face value) worth Rs 400 crore.

Of the net proceeds of the Issue, the company intend to spend Rs 285 crore towards repayment and prepayment of the aggregate outstanding borrowings of the company and its Subsidiaries (i.e. Accord Estates Private Limited, Iconic Property Developers Private Limited, and Skyline Realty Private Limited); Rs 35 crore towards acquisition of land or land development rights and balance for general corporate purposes.

As of September 30, 2023, it had total financial indebtedness of Rs 568.825 crore and of which about 13.61% is unsecured loans.

Strengths

Established brand in residential real estate in SCM realty market with strong project pipeline of 2.03 million sft of saleable area in ongoing projects and 7.4 lakh sft of carpet area in upcoming projects.

One of market leaders in redevelopment projects in the south-central Mumbai realty market, with a market share of about 8%.

Strong expertise in tenant settlement in the redevelopment projects

Redevelopment in SCM market is a large and ongoing opportunity with cessed buildings of more than 50 years and 80 years and need redevelopment in SCM numbering about 19642 and 16502, respectively.

A diversified portfolio in value luxury and luxury segment as well as commercial.

Weakness

Largely focused on one micro market of the Mumbai Metropolitan Region realty market, with its entire ongoing project are in the south-central Mumbai micro market. Any regulatory changes, economic and other changes as well as natural disasters in the SCM region might impact the business of the company.

Unsold units in the ongoing projects as of October 31, 2023, numbers 216 and not selling this project inventory in a timely manner may adversely affect the business operations.

The real estate industry is cyclical in nature. It is also competitive and highly fragmented resulting in increased competition in purchasing land and development rights at right price and timely sale of the inventory.

The real estate industry in India is heavily regulated by the central, state and local governments. Any change in regulations may adversely affect the business of the company.

Redevelopment projects are subject to certain risks involving existing tenants and applicable Government regulations.

Redevelopment of co-operative housing societies projects are awarded following competitive bidding processes and satisfaction of prescribed qualification criteria as set out by the housing society and thus the growth of the company largely depends on ability to qualify and win bids.

Have in the past experienced, and may in the future, experience negative operating cash flows.

Portion of the net proceeds are for repayment and prepayment (in full or part) of borrowings availed by its subsidiaries, which does not contribute in its consolidated revenues from operation during the Fiscals 2021, 2022 and 2023 and three months’ period ended on June 30, 2023.

Redevelopment projects have long gestation periods and any delays and cost overruns in relation to Ongoing Projects and Upcoming Projects could adversely affect the prospects, business, and results of operations.

Development and re-development of projects in MMRA may require additional FSI (TDRs), which may not be available or may not be available at the expected price.

Have outstanding legal proceedings aggregating to Rs 53.59 crore, against certain of its subsidiaries (i.e. Skyline Realty Private Limited, Accord Estates Private Limited, and New Siddharth Enterprises) that are incidental to its business and operations. Any adverse developments related to which could adversely affect its business, reputation, and cash flows.

The company has not obtained occupation certificate for 16 flats out of its four completed projects, which include projects Ocean Star – II, Harmony, Jacob Apartments, and Gloriosa Apartments, and may require to incur additional cost.

Sujatha R. Thomas, member of the promoter group and non – executive director have an interest in the company other than remuneration, benefits, and reimbursement of expenses incurred as she has entered into lease deed dated July 17, 2015, with Accord Estates Private Limited, a material subsidiary of the company, for taking on lease four ground plus one upper floor row houses and having possessory rights with respect to land underneath and land appurtenant thereto in Mount Mary Hill, Bandra West for lease rent of ? 10,000 per month.

As on October 31, 2023, three ongoing projects, seven upcoming projects were operated by its subsidiaries and six land reserves were held by its subsidiaries. For this, it has pledged 100% of total issued and paid-up share capital of one of its subsidiaries, Skyline Realty Private Limited to secure financing.

Rely on various contractors or third parties in developing all its projects, and factors affecting the performance of their obligations could adversely affect the projects of the company.

Valuation

For the fiscal ended March 2023, sales were up Rs 305.74 crore. With the operating profit margin expanding by 110 bps to 49.4%, operating profit was up 15% to Rs 151 crore. Gained by lower depreciation and lower tax incidence, PAT was up 21% to Rs 32.06 crore.

For the quarter ended June 2023, sales were Rs 102.41 crore. With the OPM standing at 45.6%, operating profit was Rs 46.73 crore. Eventually, PAT was RS 14.53 crore.

At the upper price band, the PE works out to 50 times of its FY2023 EPS, the P/BV works out to 3.3 times, and EV/Sales works out to 7 times.

In comparison, realty players operating in Mumbai Metropolitan Region market such as Keystone Realtors, Suntek Realty, Hubtown, Mahindra Lifespace and DB Realty quote at a P/BV of 4.1 times, 2.5 times, 0.5 times, 4.6 times, and 5 times, respectively. Similarly, Keystone Realtors, Suntek Realty, Hubtown, Mahindra Lifespace and DB Realty quotes at EV/Sales of 11.5 times, 21.1 times, 5.2 times, 14.2 times, and 18.6 times, respectively.

Bigger Mumbai-based realty players such as Macrotech Developers, Oberoi Realty, and Godrej Properties quote at P/BV of 7.1 times, 4.4 times and 6.2 times, respectively, and EV/Sales of 10.5 time, 13.7 times and 28.2 times, respectively.