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Indian realty stock: Why Jefferies sees a 35% rally

Indian realty stock

Global brokerage Jefferies has launched coverage of Suntec Realty shares with a buy rating as it believes Suntec is on track to double its projected sales to Rs 25 billion in three years because of new projects built during the Covid-19 pandemic.

“Suntec’s portfolio of projects has almost doubled post-Covid and as the monetization of land parcels begins, we see sales showing a CAGR of 25% in FY22-25E. More than 70% of sales come from the affordable and middle-income segment of Mumbai’s residential sector, where competition from organized developers is limited. Net leverage is low, as the expansion is done through an efficient capital consortium model,” the note indicates.

Jefferies has launched a buy-on coverage of Suntec Realty shares with a price target of ₹621 each, which means there is a more than 35% upside potential for Indian real estate stocks. “Target price has been set at 1-year forward NAV, and we believe that as pre-sale earnings rally, the stock should trade closer to NAV,” he said.

The brokerage said Suntech’s largest peers had adopted the growth partnership model (GPL, Lodha and Prestige) trading at NAV premium. However, the brokerage believes that investors will follow the pre-sale in the expansion phase, which is the key to achieving better performance.

“The company has effectively used the partnership model when aggregating projects, and the structure is primarily based on a revenue-sharing method. Over the past ~6 years, net leverage has been in the 0.1-0.2x range and operating cash The inflows (before interest and capex) have generated a surplus of Rs 6 billion over the past nine quarters. Continued balance sheet discipline, operating surplus and increased monetization should provide room for growth,” added Jefferies.

The company is well known for its high-end residential developments in BKC. “We expect the existing mix of more than 70% affordable and middle income to continue and remain the key focus area. The ticket size helps Suntec effectively tap into the entire Mumbai Metropolitan Region (MMR) and the company has yet to receive significant competition from larger, more organized peers, giving Suntec a leading advantage.” They said.

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