Buy Sunteck Realty Ltd For Target Rs.740 - Emkay Global
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FY22 sales guidance intact
* Presales aided by ODC and Naigaon: Sunteck presales increased 55% QoQ and 36% YoY to Rs2.7bn, translating into H1FY22 sales of Rs4.5bn (up 49% YoY). ODC and Naigaon accounted for ~75% of total Q2FY22 sales.
* New planned launches to drive presales momentum in 2H: Notably, presales are trending at 31% of our full-year forecast (H1FY21 accounted for 29% of FY21 sales), which also holds true for other MMR-based developers as H1 was seasonally weak in terms of launches and sales. New planned launches (Naigaon phase 3, Vasai), along with existing unsold inventory in ODC, should aid sales momentum in H2FY22. Management reiterated its FY22 presales guidance of Rs14-15bn.
* Collections running strong: H1FY22 collections rose 84% YoY to Rs3.8bn. Notably, collections/sales on a four-quarter basis improved to 82%, implying a strong execution focus. Management expects FY22 collections to grow by 35-40% YoY.
* Operating margins set to improve hereon: EBITDA margin expanded by 500bps QoQ and YoY, aided by a higher share of revenue recognition from ODC. Better pricing in Naigaon has also supported margins. In the medium term, management expects operating margins to improve to 30% on account of high value-accretive projects in its pipeline, including higher floors in ODC (Avenue 1, 2 & 4).
* We believe that Sunteck is set to reap the benefits of its strategically-located, high-value land acquisitions (>20msf of JDAs signed in the last 12-18 months). We forecast sales to double over FY22E-FY24E. Reiterate Buy with a Dec’22 TP of Rs740 (unchanged).
* Launch-heavy second half positions the company well to achieve its FY22 sales guidance of Rs14-15bn. The two big launches planned in the second half are Naigaon Phase 3 and Vasai. Going by the developer’s launch success of Naigaon phase 1 & 2 with presales run-rate averaging >Rs5bn in FY19/FY20, we expect a similar performance for the upcoming launches, given the unique proposition and product positioning in that micro market. We also note that ODC (~50% of FY21 sales) has unsold inventory of Rs10-11bn, including higher floors that will be launched in H2.
* Reiterate our Buy rating; Dec’22 TP unchanged at Rs740. We believe that Sunteck is set to reap the benefits of its strategically-located, high-value land acquisitions. Investment positives are: 1) favorable supply dynamics in key micro-markets, as seen from reduced inventory overhang in Vasai (14 months as of Mar’21) and in MMR (26 months); 2) absence of other prime or Grade-A developers in its core growth micromarkets; 3) unique product positioning—aspirational luxury project in Vasai and luxury project in Borivali (W); 4) management’s ability to identify high-value micro-markets (BKC, ODC) and grab first-mover advantage—this has translated into industry-leading project IRR (>20%); and 5) comfortable B/S leverage (Adj. Net Debt / Equity at 19%).
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