IPO: Suraj Estate Developers

Suraj Estate Developer, a Mumbai-based real estate developer, is coming out with its IPO (initial public offering) on December 18, 2023. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : Its three-year average ROE and ROCE are 53 and 19 per cent, respectively. Moreover, it has generated positive cash flows in two of the last three financial years. However, its debt-to-equity and interest coverage ratio stood at 8.3 and 1.4 times, respectively, in FY23.
  
• Growth : Its revenue and net profit grew at an annual growth rate of 13 per cent and 128 per cent, respectively, in the last three financial years. Also, its three-year average operating profit margin stood at 43.5 per cent.
  
• Valuation : The stock is valued at a P/E and P/B of 49.7 and 3.3 times, respectively, compared to its peers' median and average of 45.8 and 2.9 times.
  
• Overview : Rising income levels, easier access to home loans and increasing demand for office space are expected to drive growth. However, a high debt-to-equity ratio and capital requirements remain a concern.

About the company

Incorporated in 1986, Suraj Estate Developers is a real estate developer primarily focusing on the luxury and commercial segments. It operates mainly in the South Central Mumbai region and has plans to enter the Bandra sub-market.

Strengths of Suraj Estate Developers

• Strong brand. It is a known name in the South Central Mumbai region, operating for over 30 years, and has developed 42 projects covering 10 lakh sq ft.

Weaknesses of Suraj Estate Developers

• It is dependent on third-party contractors for construction services , exposing it to quality concerns.
  
• It operates in a capital-intensive industry . In fact, around 70 per cent of the net proceeds will be used for debt repayment.
  
• The real estate segment is highly unorganised and competitive .

Risk report

Company and business

• Are Suraj Estate Developers' earnings before tax more than Rs 50 crore in the last 12 months?
  No. Its FY23 profit before tax is Rs 43 crore.
• Will Suraj Estate Developers be able to scale up its business?
  Yes. Rising income levels leading to higher demand for luxury homes and increasing demand for office space will help it scale up. Furthermore, post RERA act, there has been a growing preference for organised players.
• Does Suraj Estate Developers have recognisable brands with client stickiness?
  Yes. It has an established brand in the South Central Mumbai region and has been operating for more than 30 years.
• Does the company have a credible moat?
  No. It operates in a highly fragmented market and faces immense competition.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Promoters' stake will be 75 per cent post IPO.
• Do the top three managers have more than 15 years of combined leadership at Suraj Estate Developers?
  Yes. Ranjan Meenathakonil Thomas, Chairperson and Managing Director, has been associated with the company since inception.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is Suraj Estate Developers free of promoter pledging of its shares?
  Yes. Suraj Estate Developers is free of promoters pledging shares.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. Its three-year average ROE and ROCE are 53 and 19 per cent, respectively. In FY23, its ROE and ROCE were 58 and 22 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  No. It reported negative operating cash flow in FY21.
• Is the company's net debt-to-equity ratio less than one?
  No. Its net debt-to-equity stood at 6.4 times as of the quarter ended June 2023.
• Is Suraj Estate Developers free from reliance on huge working capital for day-to-day affairs?
  No. It has high working capital requirements due to delays in converting earnings into cash flows.
• Can the company run its business without relying on external funding in the next three years?
  No. It plans to enter the Bandra sub-market and may require external funds. Moreover, around 80 per cent of the net proceeds will be used for debt repayment and land acquisition.
• Is Suraj Estate Developers free from meaningful contingent liabilities?
  No. Contingent liabilities as a percentage of equity is 31.6 per cent (as of Q1 FY24)

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers a 6.9 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  No. It is valued at a price-to-earnings ratio of 49.7 times compared to peers' median level of 45.8 times.
• Is the stock's price-to-book value less than its peers' average level?
  No. It is valued at a price-to-book ratio of 3.3 times compared to peers' average level of 2.9 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

Suggested read: Learning from IPOs