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Sobha (SOBHA)
Property
Key takeaways from management meeting and channel checks. Sobha remains
one of our top picks in the sector with (1) stock trading at 33% discount to our target
NAV, (2) current stock price implying minimal value apart from ongoing developments,
(3) presence in residential vertical and Bangalore geography – probably the least risky
segment in Indian real estate and (4) no significant land buying plan or outstanding that
could impact cash flows. Retain BUY with March 2012 NAV-based TP of Rs380/share.
Projects update – lots of preparation, no launches this quarter
Our management meeting/channel checks indicate (1) no new launches by Sobha in 4QFY11E (we
would have expected at least a partial launch of the 2.9 mn sq. ft Sobha Elypsium project in
Bangalore), (2) sales holding steady though with no new launches, we could see another quarter
of a marginal dip qoq and (3) Gurgaon launch is near term with some visibility among NCR brokers
and HUDA opening tenders for the Northern peripheral road which would improve connectivity for
Sobha’s project. We believe this project is key to Sobha’s investment thesis as (1) 52% of its
potential launch area over the next few quarters is at Gurgaon and likely it’s a higher proportion of
sales value, (2) provides proof-of-entry in a new market and (3) increasing signs of monetization of
vast land bank (227 mn sq. ft).
Bengaluru residential market continues to witness steady sales and pricing
Absorption in the Bengaluru residential market (Sobha’s primary market) remains stable with
annual absorption of over 36 mn sq. ft (versus all-time high of approximate 50 mn sq. ft).
Inventory is in line with trend (14 months) and prices have also remained stable post a 10%
increase over 1HFY11 but still remain below peak prices. We expect Bengaluru demand to
continue to stay robust given (1) positive outlook on IT services demand and hence hiring trend
remaining robust and (2) no evidence of any significant speculative element built into either
volumes or prices.
Current stock price implies minimal value beyond ongoing projects and book value
Our target price is Rs380/share based on March 2012 NAV assuming a WACC of 15%. Based on
the current stock price, we find minimal value being ascribed to either (1) development more than
current ongoing projects or (2) brand and Sobha operating as a going concern. 93% of Sobha’s
current EV is accounted by (1) PV of cash flows from current projects + (2) book value of land +
(3) value of the contracting business. Even at our target price, Sobha’s stock will be valuing
incremental development of 3 m sq. ft which is only equal to its current run-rate.
No new launches in 4QFY11E but Gurgaon project launch is key event to watch
Based on our management meeting and channel checks, we believe Sobha has not launched
any new project in 4QFY11E (to date) but (1) delivery/handing over has started for Ruby and
Ruby Platinum (West Bangalore, total 0.8 mn sq. ft), (2) sales in existing projects have held
up but no new launch implies we could see a qoq dip in volumes; however, overall
Bangalore market remains healthy and (3) we find increased visibility of Sobha’s first launch
in Gurgaon happening near term with (a) opening of tenders for the Northern Peripheral
road (Gurgaon) and (b) awareness of the project among brokers/agents. We would have
expected the launch and partial opening of sales for the Sobha Elysium project (2.9 mn sq. ft)
in Bangalore.
Gurgaon project details
Sobha’s Gurgaon project is situated at Sector 109 at Babupur village, Gurgaon and is a 4.3
mn sq. ft villa project, 4 kms from Dwarka and potentially 0.5 km from the Indira Gandhi
International Airport. As per press reports, HUDA (Haryana Urban Development Authority)
has opened tenders for the 18-km long Northern Peripheral Road and IndiaBulls has
emerged as the lowest cost bidder. If this process is finalized, it could lead to a launch of
multiple projects in this region which are stuck (despite approvals) due to lack of connectivity.
Sobha management believes that it has created enough visibility in the NCR market (a
Google search indicates that the project is indeed mentioned in one of the broker websites
(http://www.newprojects.in/sobha/) and with their strong brand and track record of villa
development, sales should not be an issue. We think launching a villa project (and some
early sales could be more like plot sales with construction outsourced to Sobha) is the best
choice as (1) it’s the safest purchase from a relatively less known developer, (2) helps
manage launch, (3) could attract investor demand easily and (4) differentiate versus other
group housing projects likely to be launched in that area.
We believe this project is a key to Sobha’s investment thesis as (1) 52% of its potential
launch area over the next few quarters is at Gurgaon and likely it’s a higher proportion of
sales value, (2) proof-of-entry in a new market and (3) signs of monetization of vast land
bank (227 mn sq. ft).
Current price implies minimal value for ongoing business
Based on the current stock price, we find minimal value being ascribed to either (1)
development more than current ongoing projects or (2) brand and Sobha operating as a
going concern. 93% of Sobha’s current EV is accounted by (1) PV of cash flows from current
projects + (2) book value of land + (3) value of the contracting business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sobha (SOBHA)
Property
Key takeaways from management meeting and channel checks. Sobha remains
one of our top picks in the sector with (1) stock trading at 33% discount to our target
NAV, (2) current stock price implying minimal value apart from ongoing developments,
(3) presence in residential vertical and Bangalore geography – probably the least risky
segment in Indian real estate and (4) no significant land buying plan or outstanding that
could impact cash flows. Retain BUY with March 2012 NAV-based TP of Rs380/share.
Projects update – lots of preparation, no launches this quarter
Our management meeting/channel checks indicate (1) no new launches by Sobha in 4QFY11E (we
would have expected at least a partial launch of the 2.9 mn sq. ft Sobha Elypsium project in
Bangalore), (2) sales holding steady though with no new launches, we could see another quarter
of a marginal dip qoq and (3) Gurgaon launch is near term with some visibility among NCR brokers
and HUDA opening tenders for the Northern peripheral road which would improve connectivity for
Sobha’s project. We believe this project is key to Sobha’s investment thesis as (1) 52% of its
potential launch area over the next few quarters is at Gurgaon and likely it’s a higher proportion of
sales value, (2) provides proof-of-entry in a new market and (3) increasing signs of monetization of
vast land bank (227 mn sq. ft).
Bengaluru residential market continues to witness steady sales and pricing
Absorption in the Bengaluru residential market (Sobha’s primary market) remains stable with
annual absorption of over 36 mn sq. ft (versus all-time high of approximate 50 mn sq. ft).
Inventory is in line with trend (14 months) and prices have also remained stable post a 10%
increase over 1HFY11 but still remain below peak prices. We expect Bengaluru demand to
continue to stay robust given (1) positive outlook on IT services demand and hence hiring trend
remaining robust and (2) no evidence of any significant speculative element built into either
volumes or prices.
Current stock price implies minimal value beyond ongoing projects and book value
Our target price is Rs380/share based on March 2012 NAV assuming a WACC of 15%. Based on
the current stock price, we find minimal value being ascribed to either (1) development more than
current ongoing projects or (2) brand and Sobha operating as a going concern. 93% of Sobha’s
current EV is accounted by (1) PV of cash flows from current projects + (2) book value of land +
(3) value of the contracting business. Even at our target price, Sobha’s stock will be valuing
incremental development of 3 m sq. ft which is only equal to its current run-rate.
No new launches in 4QFY11E but Gurgaon project launch is key event to watch
Based on our management meeting and channel checks, we believe Sobha has not launched
any new project in 4QFY11E (to date) but (1) delivery/handing over has started for Ruby and
Ruby Platinum (West Bangalore, total 0.8 mn sq. ft), (2) sales in existing projects have held
up but no new launch implies we could see a qoq dip in volumes; however, overall
Bangalore market remains healthy and (3) we find increased visibility of Sobha’s first launch
in Gurgaon happening near term with (a) opening of tenders for the Northern Peripheral
road (Gurgaon) and (b) awareness of the project among brokers/agents. We would have
expected the launch and partial opening of sales for the Sobha Elysium project (2.9 mn sq. ft)
in Bangalore.
Gurgaon project details
Sobha’s Gurgaon project is situated at Sector 109 at Babupur village, Gurgaon and is a 4.3
mn sq. ft villa project, 4 kms from Dwarka and potentially 0.5 km from the Indira Gandhi
International Airport. As per press reports, HUDA (Haryana Urban Development Authority)
has opened tenders for the 18-km long Northern Peripheral Road and IndiaBulls has
emerged as the lowest cost bidder. If this process is finalized, it could lead to a launch of
multiple projects in this region which are stuck (despite approvals) due to lack of connectivity.
Sobha management believes that it has created enough visibility in the NCR market (a
Google search indicates that the project is indeed mentioned in one of the broker websites
(http://www.newprojects.in/sobha/) and with their strong brand and track record of villa
development, sales should not be an issue. We think launching a villa project (and some
early sales could be more like plot sales with construction outsourced to Sobha) is the best
choice as (1) it’s the safest purchase from a relatively less known developer, (2) helps
manage launch, (3) could attract investor demand easily and (4) differentiate versus other
group housing projects likely to be launched in that area.
We believe this project is a key to Sobha’s investment thesis as (1) 52% of its potential
launch area over the next few quarters is at Gurgaon and likely it’s a higher proportion of
sales value, (2) proof-of-entry in a new market and (3) signs of monetization of vast land
bank (227 mn sq. ft).
Current price implies minimal value for ongoing business
Based on the current stock price, we find minimal value being ascribed to either (1)
development more than current ongoing projects or (2) brand and Sobha operating as a
going concern. 93% of Sobha’s current EV is accounted by (1) PV of cash flows from current
projects + (2) book value of land + (3) value of the contracting business.
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