Smartworks Coworking Space Ltd. (Avoid)

Highlights

Smartwoks Coworking Space Limited (SCSL), incorporated in 2015, provides office experience and managed campus platforms and they are the largest managed campus operator, amongst the benchmarked operators in terms of total stock, with a lease signed portfolio of 8 million square feet (mnsqft). They have leased, and manage a total super built-up area of 8.99 mnsqft.

They typically focus on leasing entire/ large, bare shell properties in prime locations from Landlords and transform them into fully serviced, aesthetically pleasing and tech-enabled Campuses with daily-life and aspirational amenities.

Their office experience and managed Campus platform caters to 4 key stakeholders: (i) Clients, (ii) Landlords, (iii) Clients’ employees, and (iv) service partners. Their offerings primarily include managed workplace solutions under the straight lease model. They have also recently commenced variable rental business model by signing term sheets with Landlords in Gurugram for a Centre with a total SBA of 450,000 sqft. under the variable rental business model, of which SBA of 33,504 sqft has been operationalised.

Out of the total proceeds of Rs. 5,825 mn, ~Rs. 1,140 mn would go towards repayment of certain borrowing availed by the company. Rs. 2,258 mn would go towards CAPEX for fit-outs in the new centres and for security deposits of the new centres. ~Rs. 1,052 mn would be utilized for general corporate purpose and Rs. 1,375 mn would go towards existing selling shareholders of the company.

Key Highlights

• Flexible workspace solutions are becoming an integral part of the modern work culture, catering to diverse working styles and introducing flexibility to the commercial office market. The total flexible workspace stock ranging between 82 – 86 mnsqft by the end of CY2024, is forecasted to grow to ~140 – 144 mnsqft across Tier 1 cities by end of CY2027 with a CAGR of ~18 – 20 pct.

• SCSL launched value-added services (VAS) in FY3, whereby, through revenue sharing arrangement with their service partners, SCSL offer services like cafeterias, sport zones, Smart Convenience Stores, gymnasiums, crèches and medical centres. They also launched fit-out-as-a-service (FaaS) in 2024. Under FaaS, they utilise extensive design library and vendor network to provide tailored design and build solutions for customers’ offices with advance payments from such customers.
• VAS and FaaS are ancillary businesses that serve as monetising opportunities to the company and they are asset light businesses considering the low capital investment and minimal upfront capital deployment, which are margin-accretive for the company.
• SCSL follow a diversification strategy by typically not leasing more than 30 pct space in a Centre (over 0.15 mnsqft) to a single Client. This ensures that no single client dominates revenue stream and it reduces potential impact on SCCL sales due to Clients move-outs.
• SCSL’s key growth strategies includes (i) capitalise their market leadership, learnings, and expertise to further scale core business (ii) Enhance capital efficiency through variable rental business model and managed contracts (iii) Scale up new revenue streams, which are margin-accretive (iv) Continue to build proprietary technology to improve operational efficiency and create opportunities for monetisation (v) To become a sustainable company.
• The sales and EBITDA of the company has grown by 38.98 pct CAGR and 42.19 pct CAGR over FY223 – FY 25. In FY25 the company reported sales of Rs. 13,741 mn, which grew 32.2 pct YoY while EBITDA of the company rose 29.55 pct YoY to Rs. 8,573 mn. In FY25 loss of the company widens to Rs. 632 mn from loss of Rs. 500 mn in FY24 due to high Leasing expensed and depreciation expenses.

Key Risk

• Certain of SCSL Promoters had pledged the Equity Shares held by them with a security trustee under borrowing arrangements.
• Their business and profitability depend on the performance of the commercial real estate market in India. Any fluctuations in the commercial real estate market may have an adverse effect on business.
• Their clients may prematurely terminate their agreements with and the company may not be able to attract new clients in sufficient numbers, which could adversely affect the business of the company.

Financial Performance

Peer Comparison Based on FY25 Financials

Valuation

Smartworks Coworking Space Limited (SCSL) designed to meet the specific needs of Enterprises seeking fully serviced, aesthetically pleasing and tech-enabled office environments along with daily life and aspirational amenities to their employees. SCSL strive to make Enterprises and their employees in India more productive at work by providing value-centric pricing and superior office experience vis-à-vis traditional workspaces, with access to enhanced services and amenities. At the upper end of the price band of Rs. 407, the issue priced at EV/Sales of 6.05x of FY25 earnings post issue. The issue appears to be fully priced. One can avoid this issue.

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