Description

Apologies for the short write-up but the opportunity is moving quickly. Sunteck is a leading real estate developer in India and is focused on Mumbai residential projects. The industry is better than one thinks from a US perspective as Indian homebuilders are dominated by smaller players who have a sketchy track record of delivering projects on time and customers prepay a significant part of the home cost via a customer deposit. A strong brand means when you pay the deposit, you know you are going to get a quality product and so the branded segment of which Sunteck is part has been taking consistent market share in a market that itself is growing nicely due to India's secular growth. Furthermore, the brand aspect means leading developers like Sunteck can do asset lite developments with landowners where Sunteck develops the project and pays a % revenue share to the landowner and the landowner benefits because due to Sunteck's brand, the project can monetize at a higher rate than if the landowner developed it solo. From our research, Sunteck and its controlling shareholder, Kamal Khetan, have one of the strongest long-term track records in the Mumbai RE market over the past 10-15 years, and you have strong alignment with Kamal as he owns nearly 75% of the business and has been adding in the market. Kamal is self-made and has taken Sunteck from nothing to a company with almost a $1B market cap today (generating huge wealth for himself in the process). 

At any rate, back to the immediate opportunity. Given the near 75% ownership from Kamal, there is limited free float in the stock and a large holder, Pabrai Funds, has been reducing to 0% from ~ 10% (a huge overhang on the free float). The company will disclose how many shares Pabrai has left to sell and the amount now is getting nominal, and the stock has been responding. Peers trade at 1.5x to 2x NAV, Sunteck was at 0.8x P/NAV at the peak of the overhang and is now at ~ 1.1x P/NAV at the time of this write-up. Sunteck has historically traded at a modest discount to peers. We could therefore see a 30%+ move left to go in the stock. There also reasons to believe the historical discount to peers should no longer apply - Sunteck is now much more liquid than before and in much of its history, NAV was dominated by two large projects leading to modest NAV per share growth. Sunteck now has a strong pipeline of new projects and we expect NAV per share growth of 25%+ in INR terms over the next few years vs. history of ~ 10% (not very high growth in INR terms). 

While there is an immediate trade that we wanted to highlight, one can also see over a 100% upside over 2 years given greater than 50% NAV per share growth and the re-rating we see. 

Catalyst

Overhang clearance