Suraj Estate Developers will continue to focus on the luxury residential segment while aiming to grow the commercial segment over the next two years. In an exclusive chat with Moneycontrol, the company’s managing director Rajan Thomas and executive director Rahul Thomas said that 60 per cent ‘value luxury’ stock, 25-30 per cent luxury goods and 10 He said the strategy of ~15 percent commercial inventory has been proven. It was a success for the company in both pre- and post-COVID-19 scenarios.
The company’s EBITDA margin was 49%, significantly higher than Suntec Realty, Keystone Realty and Shriram Properties, which were in the range of 6-20% in FY22-23. According to management, this can be attributed to two factors: First, the company has acquired land at unusually low interest rates over the past 15 to 20 years, and second, the properties were attractively priced.
Additionally, the company’s strategy includes replacing high-cost debt with lower-cost alternatives in areas where construction is underway. The goal is to achieve a comfortable debt-to-equity ratio of 0.5 to 1.
On completion of this issue, the company expects to have paid off debts of around Rs 285 million, leaving around Rs 270 million against its paid-up capital of Rs 50 billion. After this issuance, the debt-to-equity ratio is expected to fall to 0.5-0.6.
Your company is primarily focused on south-central Mumbai. Are you looking to diversify?
Rajan Thomas:
We started our operations in 1986 in Mahim, Mumbai. Later, we developed in and around Mahim, Dadar, Prabhadevi, areas of south-central Mumbai. Over the years, we have worked on 42 sites. We currently have site acquisitions for 13 ongoing projects and 16 upcoming projects.
We are considering other parts of the Mumbai metropolitan area and other locations as long as they offer good profitability in the future.
How many projects are going on in Greater Mumbai? Can you identify the locations in this area?
Rajan Thomas:
Our base is mainly between Mahim (west) and Prabhadevi, but we have also acquired land in Bandra. Proposals from Thane and other countries are also being considered. When going public, it’s all about delivering continued returns to investors, so each proposal is carefully evaluated for returns.
There are currently approximately 16 upcoming properties listed. This is at least another 4-5 years in the pipeline for him. Greater Mumbai has great development potential. He is also looking for one or two vacant lots for commercial projects.
We have well planned plans in the Mumbai metropolitan area and are open to other regions as well. But the first priority is to leverage all the assets you’re already working on.
Is there anything you are currently evaluating?
Rajan Thomas:
Yeah. We have acquired a very good plot of land along the prime highway Tulsi Pipe Road in West Mahim and plan to construct a 100,000 sq ft commercial building there. Plans have already been approved and are expected to begin in the next quarter.
The proceeds from this are expected to start appearing on the books from FY24 to FY25.
We prefer build-to-suit sales (where the property is built to the buyer’s specifications) to one or two major customers and are in discussions with several potential customers. If these negotiations come to fruition, we could see a positive outcome within the next 18 months.
Current prices in this area are around Rs 40,000-45,000 per square foot (psf) and we have around 100,000 sq ft of sales space. So, we hope to collect around Rs 400-500 million in FY24-25.
We are maintaining sales growth of 12-13% in 2022 and 2023. What kind of revenue growth can you expect from your planned expansions in both Bandra and Mumbai metropolitan areas?
Rahul Thomas:
Pre-sales is also important in real estate, so this time we will talk about pre-sales. In FY21-22, it amounted to about 360 million rupees and in FY22-23, it amounted to about 635 million rupees. That’s a big leap. We expect that momentum to continue this year.
In terms of focus, do you focus more on value pricing or luxury pricing?
Rajan Thomas:
Our portfolio is 60 per cent ‘value luxury’, 25-30 per cent luxury and 10-15 per cent commercial. This combination has worked well for us both before and after COVID-19 and we hope to continue doing the same and expand our market share by adding more projects .
Sunteck Realty, Keystone Realty and Shriram Properties have an EBITDA margin of 49%, but is it in the range of 6-20%? What explains this difference? Is it primarily focused on the south Mumbai market? Or is there some other reason?
Rajan Thomas:
The biggest reason for our profit margins is the fact that we have been buying land for 15 to 20 years at very low prices. Second, prices in our operating area are significantly lower than in the suburbs, conservatively ranging from 40,000 to 45,000 psf. In addition, the FSI (floor area index) is high due to the redevelopment of vacated properties.
We purchase land at a discount from the market price for redevelopment and tenant re-occupation. We have also received certain concessions from the BMC (Brihanmumbai Municipal Corporation) as we are rehousing tenants under Section 337 of the Development Control Promotion Regulations (DCPR). These factors also add to the margin.
Are you looking to increase value or volume?
Rajan Thomas:
both. We need to increase our footprint in terms of value, and we need to reduce consumption and interest costs, which will increase our revenue.
How were your sales in FY22-23, and how much do you plan to increase them in FY23-24?
Rahul Thomas:
As I said, we had pre-sales of Rs 635 million, recognized revenue of approximately Rs 350 million and EBITDA of Rs 151 million.
Given our growth over the past couple of years, we are confident that we will continue on the same trajectory.
Do you think 50% margin is achievable in FY23-24?
Rajan Thomas:
That’s definitely because of the low cost of acquisition.
Can you split the order into parts?
Rajan Thomas:
There are currently 13 ongoing projects. An additional 16 sites will be exploited in the future. The market is in a very good cycle and I expect it to remain so for at least another 4-5 years. The company has completed 42 projects so far.
Are you going to operate in the premium segment, or will you look at the affordable segment at some point? What will your focus areas be?
Rahul Thomas:
As I said earlier, 60 percent of future inventory will be “value luxury” homes. Because it was doing well both before and after the coronavirus. We will also focus on luxury goods, for example in Bandra. We will also do commercial projects because the demand for commercial projects is very high.
What percentage of your order book currently consists of commercial projects?
Rahul Thomas:
Currently it’s about 10-15%. We plan to increase this by 20-25% in fiscal 2024-25.
Are profit margins in the commercial sector better than in the luxury residential sector?
Rajan Thomas:
There is a 25-30% price difference between the luxury and commercial segments, so the former offers the most profit. However, in the commercial sector, demand from businesses results in high ticket sales.
Will the expansion be done through internal accrual or borrowing?
Rajan Thomas:
We already have enough surplus from our current sites that we plan to use for future projects. Paying off your loan can also save you a lot of money in interest. That should cover construction and approval costs.
Our debt-to-equity ratio for the three months ended June 30, 2023 decreased to 6.95x from approximately 8.31x in FY2022-2023. Given this issue, what impact do you expect on future debt-to-equity ratios? Furthermore, what level of debt-to-equity ratio do you think is comfortable for companies?
Rajan Thomas:
good question. The Rs 285 million raised through this issue will be used to repay high debt. We also plan to replace some high-cost debt during construction with lower-cost debt.
The debt-to-equity ratio that we are comfortable with is approximately between 0.5 and 1.
After repaying Rs 285 million, the company will have debt of around Rs 270 million against its paid-up capital of Rs 500 million, resulting in a debt-to-equity ratio of 0.5 to 0.6.