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Sobha Developers -3Q a mixed bag; Reiterate Buy
„Strong earnings but flat volume; Reiterate Buy
Sobha reported in line 3Q earnings with net profit at Rs490mn (growth of 20%
YoY). But net debt at Rs12.5bn and the sales volumes at 0.7mn sq ft were flat
QoQ. Positively management has maintained the sales guidance at 3mn sq ft for
FY11 as demand across projects continues to be strong. We reiterate our Buy
rating with PO of Rs450 offering potential upside of 60%.
Sales to accelerate on new launches
We expect sales growth to pick pace in next two qtrs as Sobha launches large
projects across Bangalore and newer locations – NCR and Chennai (sales have
been flat at 0.7mn sq ft in last four qtrs). We see upside risk to our sales estimate
of 4mn sq ft in FY12 considering the strong launch pipeline of over 11mn sq ft.
Muted cash flow a concern
Sobha did not report any cash surplus this qtr due to investments in new launches
expected over next few qtrs and lower land monetization. But it has adequate loan
sanctions in place and is comfortably placed to meet debt repayment obligation of
Rs5.5bn by Mar 12. It is targeting increased execution in real estate business
from 3-4mn sq ft annually to 6mn sq ft over next 15-18months, which we believe,
will be key to achieve our estimate of Rs3bn cash surplus in FY12. .
Bangalore and IT sector on sound ground
IT industry is expected to add record 0.4mn employees in 2011 against just 0.1mn
added in 2010. The continued strength in IT industry is expected to keep demand
for residential high in Bangalore while property prices in most micro markets are
still below 2007 peak. We expect Sobha to be key beneficiary of these trends as it
derives 62% of its NAV from Bangalore.
New locations to aid sales growth
We expect launch of projects in new locations like NCR and Chennai should help
to increase sales from an average of 0.7mn sq ft to over 1mn sq ft per quarter.
While in the last 12 months, sales from Bangalore have shown steady growth,
other locations have been muted. Bangalore contributed 80% of the total sales in
3Q, up from just 65% in FY10. Therefore in order to increase the sales growth to
over 4mn sq ft annually, contribution from other larger locations like Chennai and
Gurgaon are important.
Execution scale up key to cash flows
Sobha has averaged around 6mn sq ft of completion annually across real estate
and construction division in last 5 years. Management indicated that it has the
capability to scale up to 10mn sq ft of execution each year without incurring much
additional capex. We believe scale up in real estate execution would be key for
Sobha to deliver higher operational cash surplus from FY12. While FY12 may see
a drop in completion in real estate due to lower new launches in FY08-09, we
expect strong pick up from FY13.
Earnings adjusted lower by 2-4%
We have adjusted our earning estimate for FY11-13 by 2-4% to factor in higher
taxes in FY11 and higher construction cost in FY12 and 13 due to increased
construction costs by almost 10% as indicated by management. We have
factored in flattish ASP at Rs3900/sq ft for FY12 and 7.5% increase in FY13
Price objective basis & risk
Sobha Developers (SBDRF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate projects. Our price objective of Rs450 is
therefore based on our NAV of Rs529. We expect Sobha to trade at a discount of
15% to large developers like DLF on discount to NAV basis, because of its
smaller size and concentration of land bank primarily in one location, Bangalore.
Key assumptions underlying our NAV are WACC of 15.1%, capitalization rate of
11% and inflation of 5% from FY13 on both selling price and construction costs.
On a P/E basis, at our PO of Rs450, the stock would trade at 21x FY11E
earnings. Downside risks are lower than expected volume and prices in the
Bangalore residential market.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Sobha Developers -3Q a mixed bag; Reiterate Buy
„Strong earnings but flat volume; Reiterate Buy
Sobha reported in line 3Q earnings with net profit at Rs490mn (growth of 20%
YoY). But net debt at Rs12.5bn and the sales volumes at 0.7mn sq ft were flat
QoQ. Positively management has maintained the sales guidance at 3mn sq ft for
FY11 as demand across projects continues to be strong. We reiterate our Buy
rating with PO of Rs450 offering potential upside of 60%.
Sales to accelerate on new launches
We expect sales growth to pick pace in next two qtrs as Sobha launches large
projects across Bangalore and newer locations – NCR and Chennai (sales have
been flat at 0.7mn sq ft in last four qtrs). We see upside risk to our sales estimate
of 4mn sq ft in FY12 considering the strong launch pipeline of over 11mn sq ft.
Muted cash flow a concern
Sobha did not report any cash surplus this qtr due to investments in new launches
expected over next few qtrs and lower land monetization. But it has adequate loan
sanctions in place and is comfortably placed to meet debt repayment obligation of
Rs5.5bn by Mar 12. It is targeting increased execution in real estate business
from 3-4mn sq ft annually to 6mn sq ft over next 15-18months, which we believe,
will be key to achieve our estimate of Rs3bn cash surplus in FY12. .
Bangalore and IT sector on sound ground
IT industry is expected to add record 0.4mn employees in 2011 against just 0.1mn
added in 2010. The continued strength in IT industry is expected to keep demand
for residential high in Bangalore while property prices in most micro markets are
still below 2007 peak. We expect Sobha to be key beneficiary of these trends as it
derives 62% of its NAV from Bangalore.
New locations to aid sales growth
We expect launch of projects in new locations like NCR and Chennai should help
to increase sales from an average of 0.7mn sq ft to over 1mn sq ft per quarter.
While in the last 12 months, sales from Bangalore have shown steady growth,
other locations have been muted. Bangalore contributed 80% of the total sales in
3Q, up from just 65% in FY10. Therefore in order to increase the sales growth to
over 4mn sq ft annually, contribution from other larger locations like Chennai and
Gurgaon are important.
Execution scale up key to cash flows
Sobha has averaged around 6mn sq ft of completion annually across real estate
and construction division in last 5 years. Management indicated that it has the
capability to scale up to 10mn sq ft of execution each year without incurring much
additional capex. We believe scale up in real estate execution would be key for
Sobha to deliver higher operational cash surplus from FY12. While FY12 may see
a drop in completion in real estate due to lower new launches in FY08-09, we
expect strong pick up from FY13.
Earnings adjusted lower by 2-4%
We have adjusted our earning estimate for FY11-13 by 2-4% to factor in higher
taxes in FY11 and higher construction cost in FY12 and 13 due to increased
construction costs by almost 10% as indicated by management. We have
factored in flattish ASP at Rs3900/sq ft for FY12 and 7.5% increase in FY13
Price objective basis & risk
Sobha Developers (SBDRF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate projects. Our price objective of Rs450 is
therefore based on our NAV of Rs529. We expect Sobha to trade at a discount of
15% to large developers like DLF on discount to NAV basis, because of its
smaller size and concentration of land bank primarily in one location, Bangalore.
Key assumptions underlying our NAV are WACC of 15.1%, capitalization rate of
11% and inflation of 5% from FY13 on both selling price and construction costs.
On a P/E basis, at our PO of Rs450, the stock would trade at 21x FY11E
earnings. Downside risks are lower than expected volume and prices in the
Bangalore residential market.
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