Sunteck Realty Signs a Pact to Develop 50 acres in Vasai

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Synopsis: Sunteck Realty, a Mumbai based real-estate developer has signed a pact to develop 50 acres in Vasai, Mumbai. We analyse what this could mean for the company and the impact it can have on its business.

Media reports today announced that Sunteck has signed a pack to develop a large 50 Acre land parcel in Vasai, a far-flung western suburb of Mumbai. Report quotes the project to have a 7 year timeline and a revenue potential of 5,000 crores

Lets analyse and decode the details of the deal and its possible impact on Sunteck

  1. Assuming 7 year project and 1 year project approval lead time, revenue is likely to accrue for 6 years starting FY22
  2. Project has potential of develop-able area of 4.5 million sq ft, and on 50 acre plot, this translates to an FSI of little over 2.
  3. Haven’t verified it, but this FSI seems in reasonable range
  4. Taking into account 4.5 million of saleable area, average rate per sq ft comes to about 11,100 per sq ft
  5. If we check Sunteck’s current project in Naigaon, Vasai they are quoting a 1 BHK flat of 392 carpet area at 34 lakhs, which comes to about 8,650 per sq ft
  6. So given the current damp economic sentiment in the country, especially in real-estate segment, this rate may be steep, but if we consider that the project sales cycle is going to strech to next 6-7 years, if economic recovery happens even within next 2 years, they can command a higher per sq foot realization towards the back-end of the 7 year project
  7. Also, since its a large 50 acre township kind of project, there is likely to be significant portion of commercial / retail component, which will yield superior rates, thus boosting overall per sq ft realisation of the project.
  8. Additionally, Sunteck’s township projects come with all luxury amenities such as car parking, swimming pool, clubhouse, gardens, security etc. Again, its usual for builders to charge extra for all such amenities, over and above the price of the apartment. With such charges, the realisations do go up by 5% to 10%.
  9. Its a JV with the landlord bringing in land parcel and the development rights, for which he will get 25% of revenue
  10. So given the sales projection of 5,000 cr, Sunteck share of revenue is likely to be Rs 4,000 cr, translating to about 600 – 650 cr per year, considering a 6 year project timeline.
  11. Construction costs are pegged at about Rs 2,000 cr. With a large township project, the total built up area including non-FSI area could be close to aboout 63,00,000. At a construction cost of about 2,800 per sq ft (including all expenses and overheads), the total construction cost of the project would be about 1764 cr. Considering inflation over next 6 to 7 years, the cost is likely to be in the range of 2,100 – 2250 cr, so the projected figure seems fairly realistic too
  12. Now, for those who are not familiar with locations in Mumbai, Vasai, is located in the far, far flung areas of Mumbai western suburbs. Vasai-Virar has its own Municipal corporation, and its really, the end of Mumbai geographically. Though it is densely populated area, its not a very affluent area, so apartment sizes are typically small. Hence a significant volume of the apartments in this location could qualify under the affordable housing criteria
  13. As per GST council’s revised ruling, GST on affordable housing is levied at rate of 1%. GST of completed apartments is levied at 5%. Assuming a blended GST rate of even 5%, the revenue net of GST is likely to be in range of 3800 cr.
  14. So the gross margin from the project would be in the range of about 1550 cr, at 40%, spread over 6 years.
  15. Over the years, Sunteck’s operating profit margin has been swinging from 44% in FY15, to 10% in FY16, to 36% in FY17, to 41% in FY18, to 44% in FY19, to 31% in Trailing 12 months. So gross margin from this project seems in line for a OPM of 30+%
  16. Historically, since they operate in luxury segment, their NPM has been pretty strong too, at 21.4%, 24.1% and 26.5% for the past 3 financial years, and at 20.5% for the TTM.
  17. With the existing large ODC project in Goregaon, existing township project in Naigaon, and this new one in Vasai, the project pipeline is definitely strengthening.
  18. Real-estate business typically deliver lumpy revenue, based on the cycle of project launch and completion timelines. Now, with these multi-year projects pipeline, hopefully, Sunteck’s revenue visibility and certainty will be improving significantly
  19. If the company executes well, hopefully, within next couple of years, we could see the sales breach the 1000 cr mark, and if margins hold good, we could see a PAT in excess 200 – 250 Cr range

However, as with every project, there are associated risks that need to be considered

  1. Execution risk – with real estate, there is always the execution risk. What helps is tht Sunteck has a fairly clean reputation, and I have not seen any of their projects getting stuck in regulatory, litigation or other such mess
  2. Market risk – Real-estate has been on the downcycle for past 6-7 years, and demand as well as prices have been subdued, with one mega event after other impacting the sentiment. Demonitisation, NBFC / HFC meltdown, Slowdown in growth in economy and GDP, Constant flux in real-estate regulatory landscape in Mumbai and Regulatory delays due to mumbai 2034 DP approval, GST blow, and now Covid-19 induced economic mess. All of these have taken a toll on the industry, and if things worsen, people would be averse to taking big-ticket loans for purchase of properties, and this could have a direct impact on Sunteck’s performance as well
  3. Price Realisation – If the real-estate market remains subdued for next 3-4 years, the realisation per sq ft may be lower, thus hitting the margins adversely
  4. Regulatory risk – If the benefits on lower GST on affordable housing and the interest subsidies under government schemes are withdrawn or reduced, it could also have adverse impact on housing demand.

In line with Sunteck’s preferred, relatively safe business model of joint venture based development, this project has the potential to deliver significant boost for Sunteck’s business. The affordable housing segment has emerged a promising area for real estate developers. With a large, multi-year development project, Sunteck’s revenue visibility and certainty will be much better in coming quarters, thus potentially boosting the revenue, bottom-line as well as the stock price of the company.

Detailed media reports can be accessed from the link below.

Disclaimer: I am not a SEBI registered analyst. This article is for educational purposes only. This is not a stock recommendation, nor an advice to buy or sell a stock. Please consult your financial adviser before you make an investment decision.

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