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Scaling high with strong OCF generation

Signature Global (SIGNATUR), with its strong presence in strategic locations in Gurugram, is on track to capitalize on the ongoing demand, guided by a strong project pipeline of 24.3msf. With a projected 35% CAGR growth in pre-sales over FY24-27, the company is set to cumulatively collect INR285b. Its strategic shift from the affordable to mid/mid-premium segment is expected to drive a strong cumulative OCF of INR95b. This will enable the company to turn net cash positive and reinvest in land to fuel future growth. We reiterate BUY with a TP of INR2,000/share and a potential upside of 50%.

Key risks to our TP include: a) a slowdown in residential absorption, b) a delay in the monetization of forthcoming projects, and (c) slower BD convergence.

Expects to clock 35% CAGR in pre-sales over FY24-27

* Since commencing operations in 2014, SIGNATUR has focused on the underserved segment of affordable and mid-income housing in Gurugram through the state government’s policy.

* Its quick turnaround strategy (acquisition to launch) has led to a rapid scaleup. Further, its focus on value homes led to oversubscription (3x demand on average) of units at the time of the launch.

* In the past decade, the company has sold over 32,000 units or ~25msf and posted a pre-sales CAGR of 63% over FY21-24.

* The company posted a CAGR of ~13% in volumes, reflecting a substantial improvement in average realization, guided by its shift toward premium offerings.

* With a focus on premium offerings and a strong pipeline of 25.4msf, the company’s pre-sales are expected to clock a 35% CAGR in value terms.

Presence in a segment with a clear preference bodes well for strong growth

* During FY14-22, the Gurugram market saw 85-92% of supply in the ticket size below INR30m, with demand following a similar absorption trend. Notably, SIGNATUR also catered to the same ticket size, which enabled the company to capture significant volumes.

* The company’s strategy of moving from affordable to premium homes after FY22 was well-aligned with the changing trends, as the preference shifted toward homes priced at INR10m+, contributing 85%-98% to date.

* SIGNATUR’s recently launched projects, with realizations exceeding INR10,000/sft and sizes over 1,000sft, fall in the bucket where there is a clear preference among homebuyers.

Stock Performance (1-year)

Strategic land parcel allows future land aggregation

* Gurugram has four key micro-markets that drive maximum demand, including Golf Course, Golf Course Extension (GCE), South Peripheral Road (SPR), and Dwarka Express Highway (DEH). However, with the expansion of the master plan, Sohna and Manesar are also witnessing strong demand.

* SIGNATUR has a strong presence in four of the hottest markets—SPR, DEH, Sohna, and Manesar—with 23.4msf of future potential. This is expected to generate a strong response similar to the recent launch of 9.6msf projects.

* Each sector of Gurugram spans over 300 acres, and the company has projects located adjacent to highway, which allows it to utilize FSI at its optimal level.

* While the remaining land in the same sector is situated behind the company’s land, landowners are unable to fully utilize the potential FSI. Therefore, their options for monetizing the land are limited to either entering into a joint venture/development with SIGNATUR or selling the land. Since joint venture/development involves additional investments in approvals, the preferred option for many landowners is to sell the land directly to SIGNATUR.

* Therefore, the current strategic land parcels allow SIGNATUR to acquire land at highly competitive prices. However, the current cost of land is just INR1,000/sft or 10% of the sales realization, demonstrating the management’s efficiency in procuring land at an optimal price.

Strong cash flow allows future investments in land and reduction of debt

* Currently, SIGNATUR is executing ~51msf of projects, with 25.3msf underway and 25.4msf in forthcoming projects that are set to be launched in the next 12- 24 months.

* The company is estimated to cumulatively collect INR724b over FY25-30, while netting off construction, other overheads, and taxes will leave a cumulative net OCF of INR275b.

* Guided by strong cash flow generation, the company’s balance sheet is expected to turn cash positive by the end of FY25, enabling it to utilize the surplus to fuel future growth.

* With strong OCF generation, SIGNATUR is set to continually reinvest in land to replenish its raw materials and capitalize on the ongoing demand in the residential segment.

Excellent execution ensures 90% CAGR topline growth over FY24-27

* SIGNATUR’s approach of treating residential as an FMCG business, along with standardized offerings with respect to the design, layout, and adoption of construction technology, has enabled the company to shorten its construction cycle and reduce costs.

* As of Mar’24, the company has delivered 6msf and expects to deliver 16msf by FY26, achieving this within just one decade of operations, while some of its peers took more than a decade to reach this scale.

* SIGNATUR is scheduled to deliver ~51msf of ongoing and forthcoming projects in a record time of eight years, according to estimates. This will drive revenue growth at a projected 90% CAGR over FY24-27.

* SIGNATUR expects to recognize cumulative revenue of INR926b over FY25-32, with the delivery of ~51msf setting an execution benchmark for future projects.

Margin expansion not visible due to strong launches

* SIGNATUR’s embedded operating margins for its projects are upwards of 35%, while reported margins are far lower.

* The lower operating margins are attributed to higher indirect costs currently charged to the P&L for projects with lower realizations, which are in the revenue recognition phase. However, reported EBITDA margins are expected to show visible expansion from FY26 and steadily move toward embedded margins in the near future.

* FY26 and FY27 are expected to report 20% and 25% margins, respectively, as higher realization projects come up for recognition. Additionally, with the current visibility, all projects are expected to be launched by FY27, resulting in lower indirect cost recognition thereafter. As a result, a convergence of reported and embedded margins is expected beyond that.

Valuation and view

* As SIGNATUR prepares for a strong launch pipeline of premium projects, we expect it to deliver a 35% CAGR in bookings over FY24-27, sustaining the growth momentum.

* Strong pre-sales growth will drive a rapid scale-up in operations across key parameters, such as cash flows, revenue, and profitability, enhancing confidence in the company's execution capabilities and future growth potential.

* Based on the NPV method, we value SIGNATUR’s existing project pipeline of ~30msf (includes recent launch) at INR150b. Thus, the current valuation implies 34% of the going concern premium for the company, indicating that a significant portion of the future growth potential is yet to be accounted for.

* We reiterate our BUY rating with a TP of INR2,000/share, indicating a 50% upside potential.

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