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Sobha Developers
Best realty play in Bangalore;
Reiterate Buy
Fundamentals strong; Reiterate Buy
We reiterate our Buy rating with PO of Rs390 with potential upside of 30%. The
stock has outperformed the broader realty index and we expect the performance
to continue given strong fundamentals of Bangalore market, comfortable liquidity
in the balance sheet and expected strong cash flows as new launches pick up the
pace in FY12. We have cut our PO by 13% and EPS estimates by 12% for FY12
and 13 to factor in flat prices in FY12 against our earlier expectation of a 10%
increase.
Strong launch pipeline to support cash flows in FY12
We expect continued strong sales for third year running in FY12 to lead to
substantial improvement in cash flows. We are expecting Rs2.8bn of surplus to
drive leverage to a comfortable 0.5x in FY12 from 0.7x currently. The
management is very confident of some of the large project launches coming
through in 1QFY12, especially in Gurgaon and Bangalore.
Expect near term disappointment on volume
We expect the 4Q results to disappoint on volume and cash flow given the delay
in new launches due to lack of approvals. The sharp increase in mortgage rates
by over 100bps since Dec’ 10 have impacted the sales volume in Jan-Feb ‘2011.
We also expect net debt to remain unchanged in 4Q given lower than expected
sales volume and land monetization and investment in forthcoming new launches.
Risk – high interest rates, response in new locations
The Bangalore market remains highly sensitive to price increases and interest
rate changes and thus any further sharp increase in mortgage rates would impact
Sobha’s volume. Also it is looking to expand in new markets – Gurgaon and
Chennai – and the response to its projects would determine the future growth.
Reiterate Buy; PO of Rs390
We reiterate our Buy rating with PO of Rs390 with potential upside of 30%. The
stock has outperformed the broader realty index and we expect the performance
to continue given strong fundamentals in Bangalore market, comfortable liquidity
in the balance sheet and expected strong cash flows as new launches pick up the
pace in FY12. We have cut our PO by 13% to factor in flat prices in FY12 against
our earlier expectation of 10% increase and 10% lower volume in FY11-FY13.
There remains an upside risk to our volume estimate if the response to the
Gurgaon project is stronger then expected.
Our NAV estimate is Rs459/sh which accounts for Rs214/sh from projects
launched and expected to be launched over next three years, Rs39/sh for
construction and manufacturing business and Rs337/sh for the land bank valued
conservatively.
Strong launch pipeline
Sobha is looking to launch more than 6mn sq ft in next 6months which should
help support strong volume growth of more than 25% in FY12/13. Many of these
projects were expected to be launched in 4QFY11, but due to lack of approvals
have now been delayed to FY12. Apart from the new launches, it has 3mn sq ft of
inventory in its current projects where demand should remain good as many of
the projects are in advances stages of construction. Since the new launches are
well spread across locations, we expect the volume to remain strong.
Table 2: Launch pipeline for next 12-15 months
Location Area
Gurgaon 5.77
Bangalore 3.55
Chennai 0.93
Pune 0.36
Coimbatore 0.28
Thrissur 0.19
Mysore 0.24
Total 11.31
Source: BofA Merrill Lynch Global Research
New locations to further aid volume growth
Sobha is looking to add Gurgaon, Chennai and Mysore to its footprint in FY12
with 7mn sq ft of projects expected in these locations. It is also looking to launch
new projects in Pune, Coimbatore and Thrissur. The volume in locations other
than Bangalore has been flat in last 2 years given no significant launches. We
believe this is set to change in FY12 as Sobha gears up to launch ~70% of its
11mn sq ft of its planned projects in locations other than Bangalore with Gurgaon
contributing the most.
Gurgaon – Sobha is looking to launch projects on both its land parcel in Gurgaon
in FY12. Since these are large projects, it should contribute over 0.5mn sq ft per
annum of volume for Sobha for next few years.
Chennai- Sobha has a large land parcel in Chennai and the launch of its median
project should help it establish its foot in the city.
Deleveraging to continue in FY12
We expect Sobha to generate Rs2.8bn of surplus cash from operations in FY12
to help it to deleverage its balance sheet to below 0.5x and net debt to below
Rs10bn. We have seen consistent improvement in Sobha’s cash flow over last
two years with improving sales volume. The large part of the surplus in FY11 was
aided by the sale of land, which Sobha is no longer planning to resort to in FY12,
but we still expect improved cash flow driven by better volume. The management
is comfortable with leverage of 0.5x and may look to invest the surplus cash in
growth opportunities whether investing in commercial assets or attractive land
parcels, nut unlikely before FY13.
Comfortable on debt repayments
Sobha is comfortably placed on debt repayments for FY12 given the expected
cash surplus and debt financing already available to it from the banks. The launch
of new projects will also give Sobha access to construction financing which can
be utilized for repayment of upcoming loan maturities in FY12. Sobha is targeting
to repay 50% of the Rs5bn of debt maturing in FY12 from internal generation
while another Rs2.5bn will be refinanced.
Earnings to mirror volume growth
We expect earnings growth of 30% annual growth over next two years driven by
volume growth and 200bps of margin improvement as Sobha targets higher
launches in luxury to high income segment. We also expect margin to improve
given that the full impact of improved realization in FY11 should start to become
reflected from FY12. But we have lowered our earnings estimate by 8-13% to
factor in lower prices and volume growth over next 2 years compared to our
earlier estimate.
4Q to disappoint
We expect the 4QFY11 results to disappoint both on volumes and earnings given
no new launches by Sobha in 4Q and no land monetization. The debt is also
expected to remain flat QoQ at Rs12bn. We expect 5% drop in earnings and
revenue in 4Q QoQ.
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 Rs390 is
therefore based on our NAV of Rs459. 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 Rs390, the stock would trade at 15x FY12E
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
Best realty play in Bangalore;
Reiterate Buy
Fundamentals strong; Reiterate Buy
We reiterate our Buy rating with PO of Rs390 with potential upside of 30%. The
stock has outperformed the broader realty index and we expect the performance
to continue given strong fundamentals of Bangalore market, comfortable liquidity
in the balance sheet and expected strong cash flows as new launches pick up the
pace in FY12. We have cut our PO by 13% and EPS estimates by 12% for FY12
and 13 to factor in flat prices in FY12 against our earlier expectation of a 10%
increase.
Strong launch pipeline to support cash flows in FY12
We expect continued strong sales for third year running in FY12 to lead to
substantial improvement in cash flows. We are expecting Rs2.8bn of surplus to
drive leverage to a comfortable 0.5x in FY12 from 0.7x currently. The
management is very confident of some of the large project launches coming
through in 1QFY12, especially in Gurgaon and Bangalore.
Expect near term disappointment on volume
We expect the 4Q results to disappoint on volume and cash flow given the delay
in new launches due to lack of approvals. The sharp increase in mortgage rates
by over 100bps since Dec’ 10 have impacted the sales volume in Jan-Feb ‘2011.
We also expect net debt to remain unchanged in 4Q given lower than expected
sales volume and land monetization and investment in forthcoming new launches.
Risk – high interest rates, response in new locations
The Bangalore market remains highly sensitive to price increases and interest
rate changes and thus any further sharp increase in mortgage rates would impact
Sobha’s volume. Also it is looking to expand in new markets – Gurgaon and
Chennai – and the response to its projects would determine the future growth.
Reiterate Buy; PO of Rs390
We reiterate our Buy rating with PO of Rs390 with potential upside of 30%. The
stock has outperformed the broader realty index and we expect the performance
to continue given strong fundamentals in Bangalore market, comfortable liquidity
in the balance sheet and expected strong cash flows as new launches pick up the
pace in FY12. We have cut our PO by 13% to factor in flat prices in FY12 against
our earlier expectation of 10% increase and 10% lower volume in FY11-FY13.
There remains an upside risk to our volume estimate if the response to the
Gurgaon project is stronger then expected.
Our NAV estimate is Rs459/sh which accounts for Rs214/sh from projects
launched and expected to be launched over next three years, Rs39/sh for
construction and manufacturing business and Rs337/sh for the land bank valued
conservatively.
Strong launch pipeline
Sobha is looking to launch more than 6mn sq ft in next 6months which should
help support strong volume growth of more than 25% in FY12/13. Many of these
projects were expected to be launched in 4QFY11, but due to lack of approvals
have now been delayed to FY12. Apart from the new launches, it has 3mn sq ft of
inventory in its current projects where demand should remain good as many of
the projects are in advances stages of construction. Since the new launches are
well spread across locations, we expect the volume to remain strong.
Table 2: Launch pipeline for next 12-15 months
Location Area
Gurgaon 5.77
Bangalore 3.55
Chennai 0.93
Pune 0.36
Coimbatore 0.28
Thrissur 0.19
Mysore 0.24
Total 11.31
Source: BofA Merrill Lynch Global Research
New locations to further aid volume growth
Sobha is looking to add Gurgaon, Chennai and Mysore to its footprint in FY12
with 7mn sq ft of projects expected in these locations. It is also looking to launch
new projects in Pune, Coimbatore and Thrissur. The volume in locations other
than Bangalore has been flat in last 2 years given no significant launches. We
believe this is set to change in FY12 as Sobha gears up to launch ~70% of its
11mn sq ft of its planned projects in locations other than Bangalore with Gurgaon
contributing the most.
Gurgaon – Sobha is looking to launch projects on both its land parcel in Gurgaon
in FY12. Since these are large projects, it should contribute over 0.5mn sq ft per
annum of volume for Sobha for next few years.
Chennai- Sobha has a large land parcel in Chennai and the launch of its median
project should help it establish its foot in the city.
Deleveraging to continue in FY12
We expect Sobha to generate Rs2.8bn of surplus cash from operations in FY12
to help it to deleverage its balance sheet to below 0.5x and net debt to below
Rs10bn. We have seen consistent improvement in Sobha’s cash flow over last
two years with improving sales volume. The large part of the surplus in FY11 was
aided by the sale of land, which Sobha is no longer planning to resort to in FY12,
but we still expect improved cash flow driven by better volume. The management
is comfortable with leverage of 0.5x and may look to invest the surplus cash in
growth opportunities whether investing in commercial assets or attractive land
parcels, nut unlikely before FY13.
Comfortable on debt repayments
Sobha is comfortably placed on debt repayments for FY12 given the expected
cash surplus and debt financing already available to it from the banks. The launch
of new projects will also give Sobha access to construction financing which can
be utilized for repayment of upcoming loan maturities in FY12. Sobha is targeting
to repay 50% of the Rs5bn of debt maturing in FY12 from internal generation
while another Rs2.5bn will be refinanced.
Earnings to mirror volume growth
We expect earnings growth of 30% annual growth over next two years driven by
volume growth and 200bps of margin improvement as Sobha targets higher
launches in luxury to high income segment. We also expect margin to improve
given that the full impact of improved realization in FY11 should start to become
reflected from FY12. But we have lowered our earnings estimate by 8-13% to
factor in lower prices and volume growth over next 2 years compared to our
earlier estimate.
4Q to disappoint
We expect the 4QFY11 results to disappoint both on volumes and earnings given
no new launches by Sobha in 4Q and no land monetization. The debt is also
expected to remain flat QoQ at Rs12bn. We expect 5% drop in earnings and
revenue in 4Q QoQ.
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 Rs390 is
therefore based on our NAV of Rs459. 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 Rs390, the stock would trade at 15x FY12E
earnings. Downside risks are lower than expected volume and prices in the
Bangalore residential market.
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