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Asia Pacific Equity Research16 July 2012

Company Visit NoteSunteck Realty: Bargain hunting at BKC

Real Estate

Gunjan Prithyani AC

(91-22) 6157-3593

[email protected]

Saurabh Kumar

(91-22) 6157-3590

[email protected]

J.P. Morgan India Private Limited

See page 12 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Sunteck Realty is a Mumbai focused real estate developer with 14 msf of projects largely concentrated in the city centric location. Partnerships with reputed corporates like Piramal and via JV/JDA model has enabled the company achieve scale; while limiting upfront commitments and is thus light on debt. First phase of the company’s flagship BKC residential asset (~1msf) is slated for delivery in FY13, which should mark a turning point for the company’s operations and help boost profits. Recent launches (Goregaon/Airoli) by the company have met with some success despite sluggish market trends and it is now gearing up for larger launches in FY13. Mumbai RE market, in our view, could see a recovery in FY13 given improving regulatory environment and release of some pent up demand in the city (limited launches in last 2 years). Given SRIN’s launch plans and competitive pricing strategy, it could benefit from an expected revival in Mumbai. Inventory value is more than EV – SRIN has unsold inventory 3msf across

its ongoing projects including its flagship BKC project (0.7msf SRIL stake). Inventory sales in ongoing projects at current realizations coupled with cash collections from pre sales already achieved should yield over Rs30B of net cash flows over the next 3-4 years. Against this, the current EV for the company is ~Rs27B, thereby imputing limited value to new launches and future pipeline in prime Mumbai suburbs.

Key events going into FY13– (a) Delivery of 4 projects especially itsflagship BKC Island project (b) Consequent earnings scale up as 1msf of project completions are expected in FY13/14 (conservative accountingpolicy based on project handovers); (c) Pick up in launches with 3 new projects planned in Mumbai (Goregaon/Thane/Mulund). Response to recent soft launches in Goregaon/Airoli has been quite encouraging, given its competitive pricing.

Promoters have increased stake by 5% in recent past- SRIN’s promoters have been consistently buying from the open markets below Rs400 levels, resulting in ~5% increase in promoter stake over the last year. On consensus estimates, the stock is trading at 4x FY13 P/E & street price target is Rs430(Source: Bloomberg).

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Sunteck Realty - Key financialsRs in millions, year-end March FY09 FY10 FY11 FY12

Sales 206 284 204 170Net profit 160 64 30 31Net D/E 0.6 0.8 0.5 0.6 BPS 57.7 141.3 182.4 198.7EPS 2.9 1.1 0.5 0.5P/B 6.1 2.5 1.9 1.8

Source: Company

SRIN IN, Not Covered

Rs350.9, July 16, 2012

Price Performance Chart

Source: Bloomberg

One-year price performance

1M 3M 12M

Absolute (%) (6) (6) 18

Relative (%) (7) (5) 26

Source: Bloomberg

Company data

52-wk range (Rs) 439.95-242

Mkt cap. (Rs B) 22.1

Mkt cap. (US$ MM) 399

Shares O/S (MM) 63

Avg. daily volume 0.1

Liquidity (Rs MM) 4.1

Exchange rate 55.3

Index 17,103

Year-end March

Source: Bloomberg

0

200

400

600

800

Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

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Gunjan Prithyani(91-22) [email protected]

Mumbai based developer with a strong project pipeline

Sunteck Realty is a Mumbai based developer with land holdings largely focused in city centric locations. In a short span of time, SRIL has been able to build up a strongproject pipeline of 36msf (SRIN’s share - ~14msf). Of the total, 70% is concentrated in Mumbai suburbs including sizeable holdings in prime locations like Bandra (~1msf) and Goregaon (~6msf). The company’s product primarily caters to luxury and premium residential developments under the brand Signature (Luxury) and Signia (Premium).

While award of Signature Island project – SRIN’s flagship project in BKC in 2006 marked the company’s foray in the residential segment, majority of the project pipeline for SRIL has been built over the last 3-4 years and at attractive valuations.Recent acquisition of 16 acre parcel in Goregaon (prime Mumbai suburb) for Rs3B is a case in point.

Figure 1: SRIN Portfolio break up by location

Source: Company

Table 1: SRIL - Mumbai Portfolio

Msf No of Saleable SRIL's

projects Area (msf) share

BKC Projects 3 1.6 1.1

South Mumbai 2 2.9 0.7

Western suburbs 9 7.1 6.9

Eastern suburbs 4 5.5 2.5

Thane 1 7.9 3.0

Navi Mumbai 2 0.4 0.2

Total 21 25.4 14.4

Source: Company

Figure 2: Pipeline of project accretion

Source: Company

Mumbai71%

Others5%

Jaipur24%

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Figure 3: Growth of SRIN

Source: Company reports

JV/JDA route has enabled it to keep the land cost low…

Most of Sunteck Realty’s projects have been acquired primarily via JV/JDA agreements thereby keeping the acquisition costs under check. The company has refrained from aggressive participation in open land auctions (except BKC project).

JV/JDA model has enabled the company to minimize upfront commitment and keep the cost of land low and boost project returns. Most importantly, this has helped the company to keep the balance sheet light (Net D/E – 0.6x). Avg cost of FSI is under Rs1000psf vs. its average realizations of ~Rs10-40Kpsf, implying high margins.

Figure 4: Sunteck Realty - Land Acquisition Pattern

Source: Company

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BKC flagship project- Work progressing well albeit after delays. Inventory sales in BKC remains the key value driver

SRIN’s flagship project - Signature Island is one of the most prime residential projects in BKC (Bandra Kurla Complex). Attractive location (midst of BKC), super luxurious offering (7000+ size units), selective marketing (sale by invitation) and lack of other quality residential development in the vicinity makes the project unique in itself. Shaporji & Pallonji is one of the contractors for the BKC project.

Construction work for the projects has been progressing well with the structure complete for Signature Island and finishing work underway. As per the company, deliveries for Signature Island will happen by the end of CY12, with other buildings to follow progressively over next 2-3 years. Company is looking to exit the entire project by FY15-16.

SRIN has already sold 30-45% of these projects since its launch; however incremental sales have been slow over the last few Qs. This is due to combination of both sluggish market trends and lack of aggressive marketing push from the company. Management indicated that they expect the sales to gather momentum after the initial set of deliveries happen in FY13.

Given the inventory in BKC project, it should continue to drive the bookings and cash flows over the next 3-4 years. Inventory sales (0.7msf) at current realizations and cash collections from sale already achieved in BKC project should yield at least Rs25B of net cash flows over the next 3-4 years.

Figure 5: SRIN's BKC project location

Source: Company

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Table 2: Update on BKC projects

Area (msf)Area sold Construction

progressJPM Comments

Signature Island (BKC)0.7 36% 80%

Structure largely complete. Finishing work in progress. Delivery expected by Dec-12

Signia Isles (BKC)0.4 45% 38%

Excavation work completed. RCC work completed upto plinth level slab. Expected completion by Sep-14

Signia Pearl (BKC)0.4 ~30% 36%

Excavation work completed. Expected completion by Mar-15

Source: Company

Debt commitments (adj Net D/E – 0.6x) well covered via ongoing project cash flows. Value of unsold inventory is more than current EV

Sunteck has unsold inventory 3msf across its ongoing projects like BKC, Goregaon and Borivali. These projects have already witnessed healthy sales and construction is currently underway. The company has Rs8B of cash inflows yet to come in from pre sales already achieved. In addition to this, inventory sales across ongoing projects at current prices and cash collections from pre sales done should yield over ~Rs30B of post tax net cash flows (net for construction capex) over the next 3-4 years.

Against this, the current EV of the company is Rs27B, imputing limited value to future development pipeline and planned launches in prime Mumbai suburbs(including 4msf in Goregaon). Adjusted Net D/E for the company stood at 0.6x (as of FY12 end). Majority of the debt are project specific loans, which are well funded via project cash flows.

Table 3: Cash flows from pre sales already done

Area (msf)Area sold (till

FY12)Sale value (till

FY12)Advances received

(RsM)

Money yet to be received from pre sales done (Rs M)

Yet to be received - SRIN’

share (Rs M)Signature Island (BKC) 0.7 36% 8,060 5,040 3,020 2,640Signia Isles (BKC) 0.4 45% 5,650 2,540 3,110 1,560Signia Pearl (BKC) 0.4 30% 3,490 890 2,600 1,300Signia High (Borivalli) 0.4 27% 1,080 370 710 710Signia Oceans (Airoli) 0.1 55% 240 130 110 110Sunteck City (Gurgaon) 1.6 9% 1390 230 1,160 1,160Sunteck Grandeur (Andheri) 0.1 11% 80 20 60 60Sunteck Kanaka (Goa) 0.1 4% 30 10 20 10Signia Orion (Airoli) 0.3 35% 350 60 290 150

4.1 1.0 20,371 9,290 11,080 7,700

Source: Company

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Table 4: Inventory value more than current EV

Msf Rs B Comments

Cash yet to come in from pre sale7.7

Cash yet to come in from pre sale already achieved. Primarily in BKC project

Unsold inventory across ongoing projects 2.6

BKC

0.7 21.00.7msf unsold inventory in BKC projects assuming avg realization of

Rs30K psf

Goregaon - Phase 1

1.4 15.51.4msf of unsold inventory in first phase of Goregaon project at avg

realization of Rs10K psf

Others (Airoli, Andheri, Borivali)0.5 3.1

Other projects in Airoili, Andheri and Borivali. Assumed avg realization of Rs7K psf

Construction capex yet to be incurred for ongoing portfolio (4.7) Construction outflow yet to be incurred

Net cash flow pre tax 42.7

Post tax cash flows 32.0 Post tax

Mcap 22.1

Debt (including unsecured loans) 5.0 Including unsecured debt from promoters

Enterprise value 27.1

Source: Company

Launch activity to pick up in FY13. Response to recent soft launches has been encouraging.

SRIN’s recent soft launches in Goregaon (Sunteck City) and Airoli (Signia Orion) have done reasonably well despite overall sluggish trends in Mumbai residential market. This is primarily on the back of SRIN’s competitive pricing and relatively smaller unit size offering thereby reducing the overall ticket size. SRIN has been able to garner pre-sales of Rs2.1B from the soft launch of these two projects. Approvals are underway for these projects and an official launch is expected in next few months once the sample flat is ready.

In addition to these, the company has number of launches planned in other Mumbai suburbs (Mulund, Thane) which are also at various stages of approval. With new DCR norms now in place, approvals are expected to gain pace and launch activity should hence pick up in 2H (post monsoons).

Table 5: SRIN - Response to its recent soft launches

Project Location Area sold (msf) Sales (Rs M) Avg price (Rs psf)

Signia Orion Airoli, Navi Mumbai 0.1 700 6,667

Sunteck City Goregaon, Mumbai 0.1 1,390 9,929

Total 0.2 2,090

Source: Company

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Mumbai market, in our view, should outperform going ahead. SRIL well positioned to benefit from this

Mumbai market, in our view, could outperform this year as launches pick up in Sep/Oct around the festive season, after a lull of almost 2 years. Mumbai had been worst affected market both in terms of absorption and launches over the last 2 years given approval issues and stretched affordability. This has probably led to some pent up demand in the market. Volumes in the market are close to trough levels seen during 2008 GFC levels.

We expect this underperformance to reverse given the pent up demand over the last 2 years and expected pick up in launches with new DCR norms now being in place. While there has been some pick up in approvals and new launches over the last month (Godrej Chembur, Sheth Sion, IBREL Worli); we expect activity to improve meaningfully towards 2HFY13 (around festival season). These new launches, if accompanied by 10-15% price correction, can help quickly rebound the absorption levels in the market.

SRIL has been able to gather decent volumes in its soft launches even in sluggish markets due to its price discounting strategy. Given this and the number of launches in the pipeline, SRIN could benefit from any revival trends in Mumbai RE market.

Figure 6: Mumbai City - Absorption trends (units)

Source: Prop Equity

Execution abilities yet to be tested. FY13 to witness initialset of project deliveries

Sunteck is a relatively new player and has a fairly limited operating history. The company is yet to deliver its first residential project i.e. BKC Signature Island. While the onsite progress is tracking well after delays, the handover here in (by Dec-12) should mark a milestone for its execution and branding. Overall the company is looking for 4 project handovers (BKC, Airloli, Goa, Andheri) in FY13 totaling over 1msf of area.

SRIN outsources its project execution to reputed contractors, engineers and architects, which provides comfort to some extent. Key contractors for the company include Shapporji Pallonji, NCCL, Man Infra etc; while company has tie ups for landscaping and designing with international firms like Site Concepts Pte (Singapore) and Magnusson Klemencic Associates (Seattle).

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

8



Figure 7: Sunteck Realty - Upcoming completion in FY13Total Area (msf)

Signature Island (BKC) 0.7Signia Oceans (Airoli) 0.1Sunteck Grandeur (Andheri) 0.1Sunteck Kanaka (Goa) 0.1

Total 1.0

Source: Company

Revenues from BKC project to start kicking in from FY13. Trading at 4x FY13 P/E Consensus valuations

SRIN’s reported financials are not a true reflection of operating performance as the company follows project completion method of accounting. This policy is rather conservative vs. percentage completion method of accounting followed by peers and permissible under ICAI guidelines for revenue recognition. Project completion method also makes the income statement quite lumpy in year of project completions.

Overall, the company has outstanding order book of ~Rs15B (SRIN stake) from its ongoing portfolio, which is yet to be recognized as revenues. Few key projects are nearing completion including BKC Signature Island and Oceans in Airoli. These projects have pre sales of Rs7.4B in place, which should boost the revenues in FY13, according to company. Consensus EPS estimate for FY13 is Rs88, implying a PE multiple of 4x.

The company has a number of other projects (Isles & Pearl in BKC, Goregaon,Airoli) which should get completed over the next few years thereby helping the company sustain the scale in revenues/profits post FY13 as well.

Table 6: Sunteck Realty - Projects expected to complete in FY13 & their respective o/s order book

Total Area (msf) Area soldTotal Pre Sales

(Rs M)Pre sales (SRIN

stake) - Rs M

Signature Island (BKC) 0.7 0.26 8,063 7,055Signia Oceans (Airoli) 0.1 0.08 240 240Sunteck Grandeur (Andheri) 0.1 0.01 79 79Sunteck Kanaka (Goa) 0.1 0.01 29 14

Total 1.0 0.3 8,410 7,388

Source: Company

Strong partnerships helped company achieve scale and mitigate risk

Sunteck has enjoyed strong relationships with Ajay Piramal Group and Kotak’s realestate arm. Partnership with Piramal group has enabled the company access to new growth opportunities, mitigate development risk and enhance brand image. SRIN is currently developing a number of projects in 50:50 JV with the Piramals. Kotak RE holds close to ~10% in SRIN at entity level and has also helped funding at project level (SPV) thereby providing the growth capital.

Historically both these partnerships have helped the company achieve scale without huge upfront capital commitment. However, Piramals have now set up a new independent real estate venture Piramal Realty. Piramal Realty has been in aggressive project acquisition mode over the recent past (not in JV with Sunteck), building up its real estate portfolio across Mumbai. The company has been a bidderfor most new prime parcels that have come to the market and has won a few of them(Gullita, Mafatlal Zoo etc).

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Figure 8: Sunteck Realty Structure

Source: Company

Shareholding pattern – Promoter buying has been very high over the recent past

Promoters have been consistently acquiring shares from the open market below Rs400 levels (see chart below). Promoter’s stake has increased by over 5% to current 71% levels over the last year.

Figure 9: Sunteck Realty - Insider Activity has been high (promoters have been buying consistently over the last 2 years)

Source: Bloomberg

Figure 10: Sunteck Realty - Shareholding Pattern (as of Mar-12)

Source: Company

Promoters71%

FII6%

Body Corporate11%

DII0%

Others12%

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Management Profile

Sunteck Realty is promoted by first generation entrepreneur, Mr. Kamal Khaitan, who worked in his family's small construction business before starting own real estate venture (“Sunteck Realty”) in 2000. He started the business with operatingbusiness centers at the Bandra-Kurla Complex (BKC) in Mumbai, to cater tomultinational firms. The company’s big foray in residential segment happened in 2006 when it won the tender for the BKC project. Land prices have rocketed since then and BKC has emerged as one of the most prime locations in Mumbai.

Figure 11: Sunteck Realty- Management Profile

Source: Company

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Sunteck Realty: Summary of Financials

Income Statement Cash flow statement

Rs M, year-end Mar FY09 FY10 FY11 FY12 FY09 FY10 FY11 FY12

Revenues 206 284 204 170 EBITDA 114 120 120 120

% change Y/Y NA 38% -28% -17% Other income 111 24 108 134

EBITDA 103 113 34 42 Taxes (29) (19) (18) (65)

% change Y/Y NA 9% -70% 23%

EBITDA Margin (%) 50% 40% 17% 25% Changes in working capital 1,267 (7,185) (910) (874)

Cash flow from operation 1,464 (7,060) (700) (685)

Earnings before tax200 120 91 110

Net Capex(988) (28) (11) (6)

% change Y/Y NA -40% -25% 22% Change in investments (322) 1,325 (194) (106)

Tax 28 58 52 65 Interest (1) (5) (37) (51)

as % of EBT14% 49% 58% 59%

Cash flow from investments(1,311) 1,292 (242) (163)

Net Income (adjusted)168 62 32 31

% change Y/Y NA -63% -49% -3% Change in net debt 138 (2,387) 214 (877)

Shares Outstanding 63 63 63 63

EPS (adjusted) 2.7 1.0 0.5 0.5

% change Y/Y NA -63% -49% -3%

Balance sheet Ratio Analysis

FY09 FY10 FY11 FY12 %, year-end Mar FY09 FY10 FY11 FY12

Cash and cash equivalents 8 344 534 492 EBITDA margin 50% 40% 17% 25%

Accounts receivable 24 80 16 369 EBIT margin 43% 36% 10% 16%

Inventories 2,724 8,864 15,697 19,036 Net profit margin 82% 22% 16% 18%

Others 693 3,969 3,447 4,105

Current assets 3,448 13,256 19,694 24,001

Sales growth NA 38% -28% -17%

Total Investments 1,808 472 346 452 Net profit growth NA -63% -49% -3%

Net fixed assets 90 1,231 842 833

Liabilities 2,143 6,745 9,926 13,363

Provisions 28 20 16 13

Total current liabilities 2,171 6,765 9,942 13,376 D/E 0.6 0.9 0.6 0.7

Total assets 3,173 8,193 10,940 11,913 Net D/E 0.6 0.8 0.5 0.6

Asset Turn 0.1 0.0 0.0 0.0

Total debt 1,185 3,899 4,046 4,882 Average ROE 8% 2% 1% 1%

Shareholders' equity 1,988 4,294 6,894 7,031 Average ROCE 3% 2% 0% 0%

BVPS 58 141 182 199

Source: Company.

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In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. 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Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules.

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General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised July 14, 2012.

Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

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