Suraj Estate Developers to continue to focus on luxury segment, reduce debt

Suraj Estate Developers to continue to focus on luxury segment, reduce debt

Suraj Estate Developers will continue to focus on the luxury residential segment even as it aims to grow its commercial segment over the next two years. In an exclusive chat with Moneycontrol, Rajan Thomas, the company’s Managing Director, and Rahul Thomas, the Executive Director, stated that the strategy of 60 percent `value luxury’ inventory, 25-30 percent luxury, and 10-15 commercial inventory has proven successful for the company, in both pre and post-Covid scenarios.

The company's EBITDA margin of 49 percent is significantly higher than Sunteck Realty, Keystone Realty, and Shriram Properties, which ranged between 6 to 20 percent in FY22-23. According to the management, this can be attributed to two factors: firstly, the company acquired land at exceptionally low rates over the past 15-20 years, and secondly, the properties commanded attractive prices.

Additionally, the company’s strategy involves replacing high-cost debt with lower-cost alternatives in areas where construction is ongoing. The goal is to achieve a comfortable debt-to-equity ratio of between 0.5 and 1.

Upon the conclusion of this issue, the company expects to pay off around Rs 285 crore of debt, leaving approximately Rs 270 crore against a paid-up capital of Rs 500 crore. Following the issue, the debt-to-equity ratio is expected to reduce to 0.5 to 0.6.

Your company is majorly focused on south-central Mumbai. Do you intend to diversify?

Rajan Thomas:

We started way back in 1986, in Mahim, Mumbai. Subsequently, we developed in and around the area — Mahim, Dadar, Prabhadevi, i.e., south-central Mumbai. Over the years, we've done 42 sites, and as we speak, we have 13 ongoing projects and 16 upcoming ones where we have acquired the sites.

We are exploring other parts of greater Mumbai and anywhere else, for that matter, so long as there's good profitability on the horizon.

How many projects are in the pipeline in greater Mumbai? Could you specify the locations within this area?

Rajan Thomas:

Our sites are mostly between Mahim (west) and Prabhadevi, but we have acquired land in Bandra also. We are also looking at proposals from Thane and other places. Each proposal is carefully evaluated for returns, because when you go public, it's all about giving continuous returns to our investors.

Today we have about 16 upcoming properties. This is a pipeline for another four to five years minimum. Greater Mumbai has a fantastic potential for development. We also are on the lookout for one or two vacant lands for commercial projects.

We have enough on the plate in greater Mumbai, and are open to other areas as well, but the first priority would be to exploit all the properties to which we have already committed.

Anything you are evaluating right now?

Rajan Thomas:

Yeah. We have acquired a very good land parcel in Mahim west on the prime, arterial Tulsi Pipe Road, where we are coming up with a commercial building of 1 lakh square feet. The plans are already approved, and we will be launching in the next quarter.

Revenues from this will start reflecting in our books in FY24-25.

We prefer build-to-suit (where the property is constructed per the buyer’s specifications) sales to one or two anchor clients, and we are in discussions with a couple of prospective parties. If those talks go through, we'll see good realisation in the next 18 months.

The going price in that area is about Rs 40,000-45,000 per square foot (psf) and we have about 1 lakh square feet to sell. So we hope to collect around Rs 400-500 crore in FY24-25.

You have maintained a topline growth of 12-13 percent in 2022 and 2023. With the expansion that you have planned both in Bandra and greater Mumbai, what kind of revenue growth can one expect?

Rahul Thomas:

I will talk about pre-sales because in real estate pre-sales is also important. We did approximately Rs 360 crore in FY21-22, and about Rs 635 crore in FY22-23. That's a huge jump. We expect to continue that trajectory this year as well.

In terms of focus, will you lean more towards value or luxury pricing?

Rajan Thomas:

Our portfolio is 60 percent `value luxury’, 25 to 30 percent luxury, and 10 to 15 percent commercial. This mix has worked well for us, both pre and post Covid, and we’d like to continue with the same and increase our market share by adding more projects.

You have an EBITDA margin of 49 percent, whereas Sunteck Realty, Keystone Realty, and Shriram Properties range between 6 to 20 percent? What explains this difference? Is it primarily due to your focus on the south Mumbai market, or are there other reasons?

Rajan Thomas:

The number one reason for our margins is the fact that we’ve been purchasing land at very low values over 15-20 years. Number two, the prices in our areas of operations are pretty good compared to the suburbs, ranging between Rs 40,000-45,000 psf, conservatively speaking. Also, because of redevelopment of cessed properties, the FSI (floor space index) is higher.

We buy land at a discount to the market price as we redevelop the property and re-house tenants. Also, under section 337 of the Development Control and Promotion Regulations (DCPR), we get certain concessions from the BMC (Brihanmumbai Municipal Corporation) since we are re-housing tenants. These factors also add to the margins.

Are you aiming for growth in value or volume?

Rajan Thomas:

Both. We need to increase our footprint in terms of value, and also reduce consumption and interest costs, which will add to our bottomline.

What were your sales like in FY22-23, and how much do you intend to increase that by in FY23-24?

Rahul Thomas:

Like I said, we did pre-sales of Rs 635 crore, recognised revenues of approximately Rs 305 crore, and had an EBITDA of Rs 151 crore.

Given the growth we’ve had in the last two, three years, I'm confident we will maintain the same trajectory going forward.

You think a 50 percent margin is doable in FY23-24?

Rajan Thomas:

Absolutely, because of our low acquisition costs.

Could you break up your order book?

Rajan Thomas:

We have 13 ongoing projects as we speak. Going forward, we have 16 more sites that are to be exploited. The market is in a very good cycle and we expect the same to continue for another four to five years at least. The company has completed 42 projects thus far.

Do you intend to operate in the premium segment? Or would you perhaps look at the affordable segment at some point of time? What's your focus area going to be like?

Rahul Thomas:

As I said earlier, 60 percent of our upcoming inventory would be `value luxury’ housing because that has done well both pre and post Covid. Luxury is also something which we will be focussing on, for example, in Bandra. And we will do commercial projects as well because there's a huge uptick in demand for that.

Commercial projects are what percent of your order book right now?

Rahul Thomas:

About 10 to 15 percent as of now. We intend to grow that by 20 to 25 percent in FY24-25.

Are margins in the commercial segment better than in luxury housing?

Rajan Thomas:

There’s a 25-30 percent price difference between the luxury and commercial segments, hence the former gives us the maximum returns. But in the commercial segment you get big ticket sales because of the demand from corporates.

Would your expansion happen through internal accruals or debt?

Rajan Thomas:

We already have a good surplus from our ongoing sites, so that will be deployed for our upcoming projects. We will also save a chunk of interest by repaying the loan. That should take care of the cost of construction and approvals.

Your debt-to-equity ratio decreased to 6.95 times for the three months ended June 30, 2023, from around 8.31 times in FY22-23. Considering this issue, what's the anticipated impact on your future debt-to-equity ratio? Additionally, what level of debt-to-equity ratio is considered comfortable for the company?

Rajan Thomas:

Good question. We will be using Rs 285 crore raised from this issue to repay high-cost debt. We will also replace some high-cost debt with low-cost debt where our construction is on.

The debt-to-equity ratio that we are comfortable with is roughly between 0.5 and 1.

After paying off Rs 285 crore, we will be left with approximately Rs 270 crore of debt against a paid up capital of Rs 500 crore, which makes the debt-to-equity ratio between 0.5 and 0.6.