Best play on Bangalore residential; Raise PO to Rs450
We believe Sobha is best placed among Bangalore developers to gain from the
positive pricing and volume trend in Bangalore residential market. We reiterate
our Buy rating on Sobha and have increased our PO to Rs450 offering 18%
potential upside to factor in higher residential prices and volumes in Bangalore
and lower debt. We expect rising realizations, land sales and accelerated
launches by Sobha over the next 6 months to provide triggers for outperformance.
Our volatility risk rating moves from B (Medium) to C (High) reflecting recent stock
price volatility trends.
Realizations to surprise on the upside
We expect realization to surprise on the upside in Bangalore as sales volume
continues to remain strong with falling inventory of under construction projects.
Prices in Bangalore are still 10-15% lower than their 2007 peak, even though
growth in income levels continues to be strong. Most of the recent launches by
Sobha have been at price points which are 10-15% higher than our expectation.
We believe the trend to become stronger over next 6 months.
Land sales to provide additional trigger
Sobha is targeting land sales of Rs2bn and operational surplus of Rs2.5bn in
FY11 to improve its leverage to 0.5x from current 0.8x by Mar 11. We model
Rs2.5bn cash surplus against management expectation of Rs4bn in FY11. We
expect land sales and better than expected improvement in leverage to act as
additional triggers for the stock over next 6 months.
Key Risk: Over dependence on IT/ITeS industry
Key risk to our call is the sustained growth in IT/ITeS industry. In case the growth
in the sector gets derailed due to slowdown in global economy led by US, we may
see a reversal in fortunes for Bangalore realty and in turn for Sobha.
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