IPO Size: Rs. 400 cr, Entirely Fresh Issue   

• Rs 285 cr debt repayment of Rs. 600 gross debt  
• Rs. 35 cr to acquire land/ land development rights

Price band: Rs. 340-360 per share

M cap: Rs. 1,597 cr, implying 25% dilution

IPO Date: Mon 18^th Dec to Wed 20^th Dec 2023, Listing Tue 26^th Dec 2023

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Mumbai Based Real Estate Re-Developer

Suraj Estate Developers undertakes redevelopment projects (not slum rehabilitation) in Mumbai’s South Central real estate markets of Dadar, Mahim, Matunga, Prabhadevi, Parel and Bandra, in both residential (value luxury and luxury) and commercial segments. In 37 years of existence, company has completed 42 projects (10 lakh sq. ft. developed area) and presently has 13 ongoing projects (6.1 lakh sq ft saleable area) and 16 upcoming projects (7.4 lakh sq ft saleable carpet area) including 10,360 sq. mt land reserves.

High Margins

Due to focus on redevelopment project, which have higher floor space index and fungibility, company clocked high EBITDA margin of 48-49%. On FY23 revenue of Rs. 306 cr, EBITDA stood at Rs. 153 cr. However, interest cost ate into profits, leading to PAT of Rs. 32 cr in FY23. For Q1FY24, revenue and PAT stood at Rs. 102 cr and Rs. 15 cr respectively.

Company has a lot of capital blocked in inventory, which stood as high as Rs. 634 cr, funded via Rs. 86 cr net worth and Rs. 598 cr debt.

Debt taken at Very High Cost

As of 30.6.23, gross debt stood at Rs. 598 cr, bearing an average rate of 18% pa interest cost, resulting in Rs. 100 cr annual interest outgo. Despite increased profit, from Rs. 27 cr in FY22 to Rs. 15 cr in Q1FY24, company’s debt has not reduced, and remained constant, from Rs. 600 cr, as of Mar 2021.

Net debt equity ratio, now steep at 6.4:1, will drop to 0.6:1 post IPO, due to repayment and equity jumping 5x to Rs. 486 cr. Interest cost will halve to Rs. 50 cr, but to fund future growth, additional debt may be taken, which may also come at high cost, as it is mainly for pre-construction phase.

Single Geography and presence in a Small Micro Market

Redevelopment opportunity is large, due to scarcity of land and 19,642 cessed properties in Mumbai yet to be redeveloped. But Suraj’s presence is restricted to a smaller micro-market, with project size also not large.

Promoter holding of 100%, will drop to 75% post IPO. There is cross holding, with 98.37% material subsidiary, Accord Estates, holding 4.5% in Suraj Estates.

Fully Valued Business

PE multiple is not apt for valuing real estate companies, as revenue recognition differs from actual sale, distorting the profitability.

Suraj’s booking value rose at 30% CAGR from Rs. 374 cr in FY21 to Rs. 634 cr in FY23, but slowed to Rs. 219 cr in 7MFY24, raising questions on the sustainability of growth and also making long term outlook pale. It remains to be seen if FY23 was merely an outlier, due to 2 luxury projects and 3 commercial bookings during the year.

On annualising 7MFY24 bookings value of Rs. 219 cr, enterprise value (EV) of Rs. 1,863 cr is being discounted by a multiple of 4.9x, which is quite high. Mumbai based Keystone is ruling at EV/booking value multiple of 3.9x and Godrej Properties is under 3x, while Bengaluru based Sobha is sub-2x. Thus, on current published information, issue looks fully valued.