IPO Analysis: Suraj Estate Developers Limited

IPO Rating: Apply for the long-term

About the Issue:

The company has been actively engaged in the real estate industry since 1986, specializing in the development of properties in both residential and commercial sectors. It is gearing up to launch its Initial Public Offering (IPO) for equity shares, each having a face value of Rs 5. The IPO price range is set between Rs 340 and Rs 360 per equity share, resulting in a total issue size of Rs 400 crore at the upper price band.

The IPO is scheduled to commence on December 18, 2023, and will conclude on December 20, 2023. The market lot size for the IPO is 41 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 533 shares or a total investment of Rs 1,91,880 assuming the upper price band.

Objects of the Issue

Considering that the offer is exclusively a fresh issue, it is crucial to emphasize that the company will directly profit from the offer proceeds. The company plans to allocate the net proceeds raised from the fresh issue for the following purposes:

1. Repayment or prepayment of the aggregate outstanding borrowings of the company and its subsidiaries, Accord Estates Private Limited, Iconic Property Developers Private Limited and Skyline Realty Private Limited
2. Acquisition of land or land development rights
3. General corporate purposes

Promoter holding

Rajan Meenathakonil Thomas is the promoter of the company. The promoter and promoter group currently hold a pre-issue shareholding stake of 100 per cent in the company.

Company profile

The company has been actively engaged in the real estate industry since 1986, specializing in the development of properties in both residential and commercial sectors within the south central Mumbai region. Its residential portfolio includes properties in the Mahim, Dadar, Prabhadevi, and Parel markets, which are sub-markets of the south-central Mumbai micro market. The company has a primary focus on value luxury, luxury segments, and the commercial sector. Currently, it is expanding its residential real estate development efforts to the Bandra sub-market.

The company does not independently offer construction services and relies entirely on third-party contractors to handle the construction aspects of its projects. The company specializes in the redevelopment of tenanted properties in the Mumbai region. Given that a significant portion of land parcels in the south central Mumbai market involves redevelopment projects, the company's primary expertise lies in effectively managing tenant settlements. This capability is a crucial element for realizing and maximizing the value of such land parcels.

Since its inception, the company has completed 42 projects, encompassing a total developed area exceeding 1,046,543.20 square feet in the south-central Mumbai region. In addition to these completed projects, there are currently 13 ongoing projects, with a developable area totaling 20,34,434.40 square feet. Over the course of its 37-year existence, the company has maintained a consistent project delivery pace, averaging 3 to 4 projects every 3 years. The company possesses specific land parcels located in Bandra (West) and Santacruz (East) earmarked for prospective development. As of October 31, 2023, it holds Land Reserves spanning 10,359.77 square meters, with plans for future development on these parcels.  

Financials

The company has showcased a sustained growth in both revenue and net profit. In the fiscal year 2023, it disclosed a revenue of Rs 306 crore and a net profit of Rs 32 crore, reflecting significant progress compared to the previous year's performance. Notably, the figures for the June quarter were particularly impressive, with revenue exceeding Rs 100 crore in just one financial quarter. The company boasts a return on equity (RoE) and return on capital employed (RoCE) of 58 per cent and 22 per cent, respectively, for the fiscal year 2023, underscoring its robust performance.

Valuation and outlook

The issue is priced with a P/BV ratio of 13.27 times, calculated using its Net Asset Value (NAV) of Rs 27.12 as of June 30, 2023. At the upper price cap, it is priced at a P/BV ratio of 3.29, considering its post-IPO NAV of Rs 109.58 per share.

When we calculate the PE ratio for the company by considering the annualized FY24 earnings relative to the post-IPO fully diluted paid-up equity capital, the resulting PE ratio stands at 20. As per its official documents, the company has referenced several listed peers, including Oberoi Realty Ltd, Keystone Realtors Ltd, Shriram Properties Ltd and Mahindra Lifespace Developers Ltd which are currently trading at PE ratios of 27, 51, 27 and 77, respectively. Considering the valuation and returns of comparable listed peers concurrently, the offering seems to be priced attractively.

Acknowledging potential risks, the business is intricately tied to the performance and conditions influencing the real estate submarkets within the South-Central Mumbai region. Additionally, there may be a susceptibility to seasonality factors.

However, despite the company's reliance on third-party contractors for construction services and not handling them independently, its specialized expertise and concentrated focus on land parcels in the South Central Mumbai market, predominantly involving redevelopment projects, have proven advantageous. This strategic approach, coupled with the projects currently underway and the land parcels earmarked for future developments, positions the company favourably for sustained growth. Hence, we recommend investors to subscribe to the issue with a long-term perspective.