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Sobha ( SOBHA )
Property
In-line results but volumes disappoint. Sobha reported an in-line quarter with
revenues 4% lower than KIE while net income is 16% above KIE estimate. With
3QFY11 sales volume down 5% qoq, we now expect Sobha to just about meet its
FY2011E sales target of 3 mn sq. ft. We increase our WACC assumption to 15% and
cut target price to Rs380. We retain our BUY rating as we believe Sobha’s Bangalorecentric
residential model is relatively more insulated compared to peers.
3QFY11 in line with estimates
Sobha’s revenues of Rs3.6 bn (+18% yoy, -15% qoq) were marginally lower than expected due to
lower volume booked while net profit at Rs490 mn (+20% yoy, -17% qoq) was 16% above
expectation led by (1) 3% positive surprise in EBITDA led by a 160 bps qoq expansion and
(2) lower interest cost expensed in 3QFY11.
Sales volume declines qoq, now unlikely to outperform FY2011E target of 3 mn sq. ft
Sobha reported sedate sales volumes of 705,031 sq. ft in 3QFY11 versus 744,678 sq. ft in
2QFY11, 2.1 mn sq. ft in FY2010 and 0.9 mn sq. ft in FY2009. Average pricing has increased by
5% qoq which will not help reduce concerns of a possible volume slowdown. In 3QFY11, Sobha
has launched 1.7 mn sq. ft spread across three projects – (1) Sobha Forrest View at Banashankari
Extension in South Bengaluru which has 492 apartments for total area of approx. 900,000 sq. ft,
(2) Sobha Ivory in Pune for an area of approx. 250,000 sq. ft and (3) Sobha Sapphire which has
216 apartments for a launch area of 500,000 sq. ft. At the margin, we believe that it is still
possible for Sobha to achieve its FY2011E target of 3 mn sq. ft sales but it is unlikely that they will
outperform their target.
Contractual business steady on IT services growth and addition of new clients
Sobha’s revenues from contractual and manufacturing segment remained steady qoq at Rs985 mn
but grew 42% yoy. Sobha currently has 6.5 mn sq. ft under contracts from Infosys and other
leading companies in India and a strong pipeline of 6.9 mn sq. ft that will progressively start over
FY2011E. In 3QFY11, Sobha has added 15 new clients including ITC, Biocon and GMR.
Retain BUY but cut target price on higher WACC assumption
We retain our BUY rating on Sobha but cut our target price by 7% to Rs380 and (1) increase
FY2011E and FY2012E net income estimates by 21% and 6%, respectively, (2) increase our cost of
debt by 100-200 bps over FY2012-13E and (3) increase our WACC to 15% from earlier 14%.
We believe Sobha’s relatively high D/E of 0.7X is partly balanced by a Bangalore-centric residential
portfolio and restrict our increase in cost of capital to 100 bps.
Cut target price to Rs380/share on higher WACC
We make the following changes to our earnings and valuation model
Reduce revenues by 4% and 1% for FY2011E and FY2012E, respectively, led by
marginally lower land sales and contractual business assumptions.
Increase net income by 21% and 6% for FY2011E and FY2012E, respectively, led by
lower interest cost expensing ratio despite increasing interest costs by 100-200 bps over
FY2012E/13E.
We increase our WACC to 15% from earlier 14% due to (1) greater volume uncertainty
and (2) a similar increase in cost of debt available to real estate developers.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Sobha ( SOBHA )
Property
In-line results but volumes disappoint. Sobha reported an in-line quarter with
revenues 4% lower than KIE while net income is 16% above KIE estimate. With
3QFY11 sales volume down 5% qoq, we now expect Sobha to just about meet its
FY2011E sales target of 3 mn sq. ft. We increase our WACC assumption to 15% and
cut target price to Rs380. We retain our BUY rating as we believe Sobha’s Bangalorecentric
residential model is relatively more insulated compared to peers.
3QFY11 in line with estimates
Sobha’s revenues of Rs3.6 bn (+18% yoy, -15% qoq) were marginally lower than expected due to
lower volume booked while net profit at Rs490 mn (+20% yoy, -17% qoq) was 16% above
expectation led by (1) 3% positive surprise in EBITDA led by a 160 bps qoq expansion and
(2) lower interest cost expensed in 3QFY11.
Sales volume declines qoq, now unlikely to outperform FY2011E target of 3 mn sq. ft
Sobha reported sedate sales volumes of 705,031 sq. ft in 3QFY11 versus 744,678 sq. ft in
2QFY11, 2.1 mn sq. ft in FY2010 and 0.9 mn sq. ft in FY2009. Average pricing has increased by
5% qoq which will not help reduce concerns of a possible volume slowdown. In 3QFY11, Sobha
has launched 1.7 mn sq. ft spread across three projects – (1) Sobha Forrest View at Banashankari
Extension in South Bengaluru which has 492 apartments for total area of approx. 900,000 sq. ft,
(2) Sobha Ivory in Pune for an area of approx. 250,000 sq. ft and (3) Sobha Sapphire which has
216 apartments for a launch area of 500,000 sq. ft. At the margin, we believe that it is still
possible for Sobha to achieve its FY2011E target of 3 mn sq. ft sales but it is unlikely that they will
outperform their target.
Contractual business steady on IT services growth and addition of new clients
Sobha’s revenues from contractual and manufacturing segment remained steady qoq at Rs985 mn
but grew 42% yoy. Sobha currently has 6.5 mn sq. ft under contracts from Infosys and other
leading companies in India and a strong pipeline of 6.9 mn sq. ft that will progressively start over
FY2011E. In 3QFY11, Sobha has added 15 new clients including ITC, Biocon and GMR.
Retain BUY but cut target price on higher WACC assumption
We retain our BUY rating on Sobha but cut our target price by 7% to Rs380 and (1) increase
FY2011E and FY2012E net income estimates by 21% and 6%, respectively, (2) increase our cost of
debt by 100-200 bps over FY2012-13E and (3) increase our WACC to 15% from earlier 14%.
We believe Sobha’s relatively high D/E of 0.7X is partly balanced by a Bangalore-centric residential
portfolio and restrict our increase in cost of capital to 100 bps.
Cut target price to Rs380/share on higher WACC
We make the following changes to our earnings and valuation model
Reduce revenues by 4% and 1% for FY2011E and FY2012E, respectively, led by
marginally lower land sales and contractual business assumptions.
Increase net income by 21% and 6% for FY2011E and FY2012E, respectively, led by
lower interest cost expensing ratio despite increasing interest costs by 100-200 bps over
FY2012E/13E.
We increase our WACC to 15% from earlier 14% due to (1) greater volume uncertainty
and (2) a similar increase in cost of debt available to real estate developers.
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