Shriram Properties Shifts Focus Towards Core Business
Transcript
00:00 Thanks for tuning in this conversation with Sriram Properties. They came out with a decent
00:05 quarter one, but more than that, there is a large block that has happened, top of one more block
00:11 happening. And while all of that is going on, there are a bunch of things within the company
00:16 that have happened in that ASK Property Fund has signed two projects with them. There's probably
00:22 top of some non-core assets being sold as well. So lots happening and lots to talk to Murali
00:26 Malayappan. He's the CMD of Sriram Properties, joins us right now on the show. Murali, great
00:31 having you. Thank you for taking the time out and speaking to us. Thank you, Nilesh. Thank you for
00:35 hosting us. Can I first start off with the core business? Because as per your presentation as
00:42 well, I believe, the three year earnings outlook, you're talking of some fairly strong numbers
00:48 coming in largely from the volumes that have already been sold and that there's a variety of
00:55 developments that you're doing. So can you tell us how is business momentum looking?
01:00 If you look at the business, particularly, I mean, real estate can be looked at into several ways.
01:07 One is post real estate, FDA was introduced in real estate, then demand crisis. The most
01:14 important one is post-demand, post-wera. Real estate has gone through serious changes of
01:20 particularly post-wera and demonetization and GST introduction. It's a big consolidation phase.
01:26 Last six years, India has been going through a serious consolidation phase, which has resulted
01:33 in segregating the large branded high quality developers, which are based on non-high quality
01:39 developers. So India has gone through a serious consolidation. My estimate is no more than 50-60
01:45 developers across the country, contributing over 90% of the demand. And each city, no more than 10-15
01:52 people contributing over 85-90% of the demand. So that's the consolidation story, which we have
02:00 taken advantage of the market environment. We have achieved our growth in the last four years,
02:06 we have been consistently growing from 3 to 3.5 to 3.8, 4 billion square feet. Next three years,
02:12 we are looking at further growth in a very big scale. So we are looking at this year, FY24,
02:19 close to 4.8 million square feet to 5.52, potentially 7 million square feet in the next
02:24 three years. That's the potential we see. We talked about the numbers. So we migrated to India
02:32 some time back. So India is, or most of the companies migrated to India, yes. So based on
02:39 whatever the performance has been done in the last three, four years time, more than two-thirds of
02:44 that gets resulted into P&L. So we have a very healthy P&L projections, or there is a good
02:52 amount of predictability on P&L. Last year, FY23, we had a profit of 68, before that we had a cut
02:59 of 18 to 68 in FY23 and FY24 looking very, very bright. So again, more than two-thirds of the
03:08 bottom line or revenues coming from the projects already sold in the last three years time.
03:14 So whatever we are doing now in FY24, maybe one third will approximately contribute to this
03:19 financial year. And next two, three years time, whatever we are doing now will get contributed.
03:24 So I'm seeing a very, very healthy growth potential for the next three years time.
03:29 Sorry, so am I understanding you correctly? So despite the fact that when I looked at the numbers,
03:37 FY19, you did about 650 crores, FY23, you did 674 crores in reported revenues. So it's not that
03:44 the last four years you've done something dramatically high, but you still believe
03:49 that over the next three years, you will nearly double your sales volume from whatever, three
03:55 and a half odd million to 7 million if I heard you correctly. And the contribution of the revenue to
04:00 the bottom line, did I hear you say would actually go up from where it is currently?
04:05 Absolutely. See, I mean, this in the years that are, whatever the construction completed,
04:11 based on that, the top line gets reflected. So you will see now, the last three years time,
04:16 we have achieved three to three and a half to 4 million square feet. So there has been a constant
04:20 growth. Now this year we are looking at about 4.8, and we will go to 7 million square feet in the
04:24 next three years time. That's the growth path we are looking at. All that will get captured in the
04:29 top line. On bottom line, there has been a steady growth. So as I said, FY22, we are about 18
04:35 crores pack, and FY23 is 16 crores pack, and FY24, we are given guidance, we should be close to about
04:42 117 crores pack. And FY25, again, there will be a reflection of the volumes, what has been done.
04:49 So there will be a significant growth, which is expected in the next three years time.
04:53 Okay. And 70% of the aggregate revenues will come in from the March volumes itself?
05:02 Is that, I read it somewhere, is that a correct estimate?
05:05 Absolutely. Close to about 70% of our P&L for the next two years time, for FY24 and 25,
05:12 will come from the sales which has happened in the last three years time or last two years time.
05:16 So that's a very, I mean, predictability on the P&L which is there, predictability on the cash
05:21 flows which are there. There is a good growth momentum which is happening now.
05:24 Okay. Is the underlying demand reasonably strong enough for you to be able to predict this
05:32 confidently part one? And is it only a volume-based growth that you would do? Or would you reckon that
05:37 the blended realizations will move up? Because as I saw, Q1 blended realizations, I believe,
05:43 improved from 4700 odd to 5500 odd, if I'm not wrong.
05:48 Yeah. See, it is a combination of everything. It's just not the volume growth, it's a realization
05:54 growth. So also when we looked at these numbers, we have looked at only the projects which are
05:59 already in our portfolio. We have not taken any projects which are pre-added. So again,
06:04 if you look at the pipeline, whatever we are projecting now, we take up only the projects
06:09 which are already with us, fully funded, either approvals are 100% there or I mean, almost 80-90%
06:15 is there. There is no uncertainty linked to it. So there is a clear visibility of next three years
06:21 growth. With respect to the consolidation on the revenues growth, under this bottom line,
06:28 it is a combination of everything. And the market, there is a huge demand today.
06:33 And many people are buying as if there is no tomorrow. And will it continue? Yes, it will
06:38 continue for at least next five to seven years, is my view. Will it continue in this across sectors?
06:44 I don't have an answer. But it will certainly continue on the mid-market segment for the next
06:48 two, seven, eight years comfortably. That's where, as an organization, we have positioned ourselves
06:55 to be the dominant player in the mid-market segment. So that's where the growth is likely
07:00 to be at least seven, eight years consistently growing, both in terms of volume and as well
07:05 as the price realization. So that's a big advantage we are hiding on. Got it. How important
07:12 and crucial is this property, the ASK property fund, will you sign two projects, two more are
07:16 expected, that there is some investment platform through which this is happening? Can you explain
07:21 this? And what do you do more with ASK? Or are there other funds in the offing? And is there a
07:26 differentiated business model here? Or is it that they will pick up a part of the equity of the
07:31 project? And that's how the partnership will be? Right from the day one, Sriram Properties has
07:37 grown only through partnerships. We never looked at land banking. We never looked at land aggregation.
07:44 Right from the day one, we only looked at how do we grow ourselves through partnerships,
07:49 either through joint developments or joint ventures or property equity. That's how we
07:53 have grown. So ASK is a platform we have set up. It's a higher-report platform. ASK again is backed
07:59 up by Blackstone now. So a higher-report platform we set up. Two investments have been done so far.
08:05 We set up this platform, I think, in early, I guess, calendar year, I think, Jan, Feb,
08:10 February. The first investment has happened in the month of March. Second investment has happened
08:15 last month or in June. So August. August, we have had the second investment. So the final
08:23 portion will get consumed soon. So this is not the first one. ASK, we have already done one project,
08:28 which is completed, delivered, and they made very, very decent return. So it is not only ASK.
08:34 We have been working with the various partners, right from Sandapaloo to Waterfront Capital,
08:41 Starwood Capital, DPG, Gada Capital, Mitsubishi, Modial, Kotel, CDC. I mean,
08:46 you name any top names in the country who have been interested in India. So they partnered with
08:54 us. And the partnership has been extremely, extremely flourishing. And all the partners,
09:01 irrespective of what are the returns they made, they are extremely happy with us because of the
09:07 way we conduct our business, the way we do our governance, the way we get them involved in this
09:13 business. So I'm looking at excellent growth, again, through partnerships for the future also,
09:21 in line with whatever we have grown in the past. Are any of these partnerships with funds that
09:28 you're doing for building out annuity commercial projects or is it largely residential?
09:34 Mostly residential. We have only one commercial development which has been completed in Chennai.
09:39 They developed and sold it to Zander Fund. So again, another large fund I mentioned,
09:46 I mean, I'm missing, Zander is supported by DPG and Texas Teachers Fund. So we developed a large
09:52 office space in Chennai and sold it to them. It was a forward sale. We sold it to them. We did a
09:59 development management with one portion we have developed and sold, other portion we did development
10:04 management with Zander. Otherwise, we don't do annuity income. Our primary focus will be
10:10 build market housing. So again, Prime Minister has talked about housing for all in 2016, my memory is
10:16 right. So, and government mission is to make sure that housing for all. In fact, somebody else was
10:23 mentioning, one of the great Indian investors was saying that post-independence India was talking
10:29 about roti, kapda, makkaal. So now people forgot in this digital world, roti and kapda, they are
10:38 looking at, I mean, makkaal is the first one. You know with that, I mean, digital space is the second
10:44 one. Then third, roti and possibly kapda. So that's where the world has changed today. But in this
10:52 next three, four years time, I'm looking at, there's only competition between whether it's
10:57 a home or digital space. So these two will be competing. Roti and kapda has taken a backseat.
11:03 So it is our responsibility to make sure that we also contribute in the mission of Prime Minister
11:10 in housing for all. But we don't think we'll be able to contribute a lot towards affordable housing
11:16 and economic intersection because environment is not conducive enough for business houses to do it.
11:20 But mid-market segment is the next one, which is the need for urban cities today. That's where we
11:28 continue to focus. Okay. Would you be able to execute all the plans that you have with internal
11:35 approvals or would you need to raise some debt or would you need to monetize some non-core assets?
11:41 Because there is this note which talks about you in the final stages of selling a part of the land
11:48 parcel, if I'm not wrong, that you have in Kolkata. Yeah. So it is, I mean, it's something
11:55 to do with our DNA. As a person, personally, I never wanted to borrow money. My father told me
12:00 when I wanted to buy my first home, so he told me he will not borrow money. I said, it's going to
12:05 help me in taxation, home loan, help me in reducing the income tax and all that. He said, all that I
12:11 understand. But he's a teacher. He said, you should not borrow money. If you can, I mean,
12:17 use your own capital to buy a home, it is fine. Otherwise, if there's a shortfall, I'll support you.
12:22 It's your choice, but you will not borrow money. So it's something with DNA. As an organization,
12:27 we never wanted to borrow money. So we do not look at growth through borrowed capital. Again,
12:34 in real estate, whatever you get into it, it could become a real long-term asset. Whereas
12:40 in India, long-term capital is not available too much. It's all short-term capital, whether it's
12:45 a debt or any form of investment. If you take that money with the pressure on your head and
12:52 you invest it in the long term, you are likely to get in difficulties. So that's where some good
12:57 developers got into serious difficulties, which right from day one, we decided we will not do
13:02 this. Having said that, for the working capital, we take construction loan, wherever the--
13:08 Just 90.
13:09 So very, very small one. Hence, we will not look at growth using borrowed capital. We will look
13:16 at growth either through internal accruals or third-party equity like Amina, ASK, which we
13:21 should have a lot of partners we have been working with. So they will-- it's Vishy Amina. The only
13:26 relationship in India in real estate development is the best. And they are extremely happy. And
13:31 they live so much diligence for five years, finally decided to partner with us. So it's a very large
13:36 name, Japanese fund. So we have got good partnership, good partners. So through partnership,
13:43 we look at growth. Internal accruals are good enough to look at the growth. Having said that,
13:48 we have got-- I mean, net debt is about 400 crores. We want to bring it to about 250 to
13:54 60 by 2024 end. That's a constant endeavor. But still, we'll never become net debt free
14:02 because working capital will always be there. But our endeavor is to keep on reducing it.
14:07 This is one side. On the other hand, we have-- I mean, one asset in Calcutta,
14:12 this is a very large township. So the township, for you to develop 100%, it would take longer
14:18 time. Hence, we thought we should monetize part of the asset. So part of the asset, we should
14:23 develop. So we have put a program for monetizing the part of the asset. That should happen,
14:29 hopefully, coming up. This year, partly, it should happen. It is not only one hour. Maybe
14:33 the next three years' time, we'll be able to monetize. Whatever the monetizable allocated
14:38 that portion, remaining portion will be there. So by when would this happen?
14:42 Hopefully, one monetization should happen before this year end.
14:46 Before this financial year end, you mean? Yeah, yeah.
14:51 OK. And sorry, when I heard you say one monetization will happen,
14:55 is there some other monetization also in place? Sorry if I've misunderstood.
14:59 So that Calcutta project, which has about 340 acres land. It's a very large township land.
15:05 Out of which, about 60 acres is under development. We are doing about close to about 5,000 plus
15:10 homes under construction now. Some of them are delivered. Some of them are under construction
15:15 now. So the development will continue. So we have about 10 million square foot for
15:20 our own development. The remaining land parcels, all FSA, including FSA, we'll monetize.
15:25 So that monetization program will take place over about three years' time.
15:28 The first level of monetization program should get concluded this financial year.
15:33 OK. And just wondering, what is the ballpark numbers that you expect from this? I heard you
15:38 say 360 acres. Out of that, you're probably developing 60 acres. So would you sell off
15:43 remaining 300 acres, 200 acres? How would it be? And what is the kind of amount that you anticipate?
15:50 This is about 314 acres. It's not 360. It's 314. Out of which, about 60 is under development.
15:56 So the remaining land parcels are available, which we'll look at monetizing.
16:00 One portion, we are in discussions with a few people. About 60 acres of land,
16:07 we are in discussions. So that should get monetized during this financial year.
16:13 And the rest will take place maybe in the next two years' time.
16:17 How much do you expect from the 60 acres sale?
16:19 I don't think I can disclose the number now because still NDA is signed with
16:24 the potential buyers.
16:26 Is there a bare minimum that you want from this? Sorry, I don't want to pry too much.
16:29 I mean, it's sensitive information. But is there a bare minimum sum that you anticipate from this?
16:32 Yeah, we are likely to get some.
16:35 OK.
16:36 We are likely to get some.
16:36 Good stuff.
16:37 No, I understand. OK. Just one last question. Is there any other land parcel,
16:43 asset, et cetera, that you might be in a position to sell?
16:46 No, we don't have anything. We don't own any land bank.
16:49 As I said, in our entire portfolio, right from day one, we looked at
16:54 growing through only partnerships. So we started with joint developments and joint ventures.
17:00 Then nicely we moved into development management. We are a pilot in development management today.
17:06 Close to about 34% of our portfolio, we have a portfolio of about 33 million square feet.
17:10 34% of our portfolio comes under development management.
17:13 So it's a completely asset-led model. We don't own asset.
17:17 Kolkata is one asset which we started the joint venture and are owning their asset.
17:23 Chennai, we have another asset. It's a very small asset. It's about 700,000 square foot potential.
17:27 So that also we will either develop or monetize soon.
17:31 Other than that, we don't own any assets. It's all either through joint development
17:36 or joint venture or development management. And neither we are looking at any assets.
17:42 Okay. So Kolkata is one. You're doing piecemeal sale over three years in different shapes and
17:48 forms. And there's an asset in Chennai which you might sell or might develop.
17:51 You're not sure of that as of now? Yeah.
17:54 Okay. Fair call. Okay. Great. Wishing you all the best for all of these plans.
18:01 Murali, thank you for taking the time out and speaking to us. And lovely having you.
18:07 Thank you. Thank you, Nilesh. Thank you.
18:11 And the pleasure is ours. Viewers, thanks for tuning in.
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