Sobha Developers - Blue-blooded Bangalore play:: Macquarie Research,

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Sobha Developers
Blue-blooded Bangalore play
Event
 Sobha, founded in 1995, is a Bangalore-based real estate developer engaged
in mid- to premium-residential development. Since inception, it has developed
37mn sq ft of both contractual and own real estate developments across 20
cities in India. It has a land bank of 2,936 acres spread across 10 cities,
primarily in South India and other IT hubs.

Impact
 Strong core market: We believe the Bangalore market, for the most part, is
showing signs of ‘sanity’ vs other markets, such as parts of Mumbai and NCR.
The micro-markets of Bangalore (barring some exceptions) are seeing
consistent improvement in volumes even as prices inch up. As we expected
late last year, Bangalore is now the No. 1 destination for commercial space
leasing. More than 7m sq ft of IT office space has been leased so far in CY10.
Our channel checks indicate CY11 may see leasing of as much as 10m sq ft
based on current enquiries. The resumption of hiring has led to an
improvement in consumer confidence amongst IT professionals. IT
professionals have also seen wage hikes (of 10–30%) in 2010 as post-crisis
retention measures. This has had a direct impact on enquiries and sales of
residential property.
 Sobha is set to benefit from these trends, in our view, due to its focus on the
Bangalore residential market (57% of NAV) and improved visibility in its
contractual and manufacturing business (6.5% of NAV). While the contribution
of commercial IT to Sobha’s NAV is limited, the market tends to see Sobha as
an indirect play on a commercial recovery, as this eventually drives residential
demand with a lag of around years.
 Improving balance sheet: One of the key investor concerns has been
Sobha’s gearing levels, which rose dramatically during the credit crisis. Net
debt to equity ratio peaked at 1.75x in March 2009. Leverage has since
improved, driven by a US$110m secondary offering and land sales. We
expect the pickup in residential sales and further land sales to drive net debt
to equity down to 0.65x by end-FY12 and provide positive stock triggers.
Action and recommendation
 Good-quality land bank and disclosures and focus on execution suggest to us
that Sobha should trade at a premium to peers – at a 20% discount to NAV, in
our view.


Sobha Developers Aide Memoire
Operational issues
1. What is your outlook on residential prices and volumes in the Bangalore market?
2. Which product types (residential- mass/luxury, commercial and retail) are likely to see the most action in the next 12
months and the next three to five years?
3. Please throw some light on your upcoming projects over the next two to three years.
4. What has been the response on the projects that have already been launched?
5. What do you think could be bottlenecks in achieving planned expansion in terms of material supply, capacity and capital?
Financial issues
1. Please share some thoughts on the capital requirement for your planned expansion. Do you have any fundraising plans?
2. Please throw some light on your targeted cash flow from operations in the next 12 months.
Regulatory issues
1. What would you think are the biggest risks facing the company? Do you think there are any regulatory/policy risks?
2. What are the regulatory and policy risks the sector and company are facing?