In a recent interview with the Economic Times of India, Mohnish Pabrai (Trades, Portfolio) declared that the bulk of the funds invested on behalf of his investors at Pabrai Investment Funds are in just three stocks: Fiat Chrysler Automobiles NV (FCAU, Financial), Rain Industries (BOM:500339, Financial) and Sunteck Realty Ltd. (BOM:512179, Financial). Here is the full quote from the interview:
"Out of about $700 million of Pabrai funds, $400 million is three stocks — Fiat Chrysler, Rain Industries and Sunteck. In both Rain and Sunteck, we own 10%. They were all bought at what I would call a PE of 1 or less. All of these have gone up quite a bit since we bought them. We have decent amount of cash, but we have what I would call some great businesses, which we paid up for. Those will do well but they will not do as well as the PE of 1s."
Of these companies, Rain Industries and Sunteck are both India-focused businesses. Fiat Chrysler is based in Europe.
I've covered both Rain Industries and Fiat Chrysler before, so in this piece I want to take a look at Sunteck to try and establish whether or not this business is worth buying today.
Sunteck Realty
First things first: What does this company do?
Sunteck is a real estate developer. The company is focused on the ultra-luxury and luxury residential segment with 25 projects at various stages of development as well as rented assets.
This investment seems to be a classic "heads, I win; tails, I don't lose much" Pabrai-style investment.
According to various sources, the value investor started buying shares in the real estate business at the beginning of 2017, a time when other investors were avoiding the sector due to concerns about growth.
The company didn't have much of a record of value creation either. After peaking at a high of 344 rupees ($18.83) at the end of 2010, the stock gradually declined to a low of 91 rupees at the end of 2016. It is fair to say that 2016 and 2017 were the low points in the company's history.
For full-year 2016, Sunteck reported earnings per share of 1.9 rupees and a return on equity of 1.5%. Earnings are expected to explode through 2020 as new projects are completed and investment in growth pays off.
The company has barely any debt on its books and earnings per share are expected to hit 30 rupees in 2020, producing a return on equity of 13%. Based on these expectations, it is no surprise that since the beginning of 2017, the stock price has increased by 424%.
Pabrai isn't the only well-known investor buying. Billionaire Ajay Piramal holds just under 5% of the company's stock. Pabrai has described Piramal as the “Warren Buffett (Trades, Portfolio) of India” and described Piramal Enterprises as “India’s Berkshire Hathaway” (BRK.A, Financial)(BRK.B, Financial).
Mega-project
According to my research, it seems one of the key catalysts for the stock this year has been the agreement between Sunteck and another real estate company to develop a 100-acre land parcel into an affordable housing project on the outskirts of Mumbai. The package of land has a total of the development potential of 10 million square feet and is located in Naigaon. This is projected to be a significant revenue generator for the company over the next two years and is supported by the government under the initiative of "Housing For All by 2022."
In total, management believes the project will generate revenues of over 5,500 crore (55 billion Indian rupees) over its lifetime. To give some idea of just how much of a big deal this is, Sunteck's current market capitalization is 67 billion rupees.
While this may look attractive on paper, I am no expert in analyzing Indian securities. This is only meant to be an overview of the company. Still, based on this rough analysis, it is pretty easy to see why Pabrai owns 10% of Sunteck.
Disclosure: The author owns no stocks mentioned.
