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Sobha Developers Ltd.
In Line 4Q; Gradual Scale Up
Will Continue – Staying OW
Quick Comment: SDL reported in line 4Q results.
Excluding land sales, income was up 26% YoY (up 4.7%
QoQ), operating margins compressed 174bps (421bps
QoQ) to 18.7% due to high contribution from contractual
business. Together this led to a 39% YoY rise (9% QoQ
fall) in net profit to Rs402 mn (MSe – Rs395 mn). The
quarter did not include any one-offs (such as land sales).
For the full year F2011, SDL capitalized Rs1.4 bn
interest cost (versus Rs1.8 bn net profit), which we
expect to gradually reduce given ongoing de-leveraging
and small but increasing expensing of prior year
capitalized interest cost (as COGS). SDL achieved 2.78
msf of new sales in F2011 versus its 3 msf target.
Outlook for F2012: New sales target for real estate
business is set for 3-3.5 msf (3msf from existing markets
and 0.5msf from new markets). SDL plans to lower net
gearing from 64% as of March 2011 to 50–60% by
March 2012. It plans roughly 4-5msf of new launches
(11 msf including later phases of 2 large projects) in
F2012, which includes entry into three new city markets
– Gurgaon, Chennai and Mysore – taking the overall
tally to 7 cities. Development work may start in Kochi in
F2013, while Hosur may wait longer. SDL has Rs5.5 bn
re-payment obligation in F2012, which the company is
confident of meeting given its Rs8 bn plus unutilized
sanctioned loans at 13% interest cost
What is disappointing: SDL as several other players in
the sector, appears to be (wrongly) compromising asset
turnover to increase/maintain margins. For instance, it
plans to launch villa project in Gurgaon at Rs8-8.5k psf
and targets to sell just 200-300ksf in F12 versus 4-6msf
overall project size. We believe this strategy would slow
the volume scale up story and delay ROE recovery.
Investment thesis: We retain our Overweight rating in
view of steadily improving fundamentals, geographic
diversification, leverage to healthy Bangalore market
and inexpensive valuations (38% discount to NAV, 13x
F12e EPS).
F4Q11 Management Call
Highlights
Sobha missed 3msf of F2011 sales target because of
slower pace (3-4 month delay) of new launches. Management
attributed this delay to issues related to land and project
approvals.
Hyderabad Land Exit: Sobha exited the JDA for its
Hyderabad land parcel (5msf of developable area; Sobha’s
share of 1.2msf) during the quarter, while increasing its
acreage in Coimbatore by 61 acres (increase in developable
area from 3.4msf to 7.4msf). It has paid to date Rs70mn for this
Coimbatore land purchase, while the rest is to be paid over
coming two years.
Sales guidance for F2012: Management guided for
3-3.5msf of new sales in F2012. This would comprise of ~3msf
from its projects in current location (ongoing projects and new
launches; 10% rise over F11 sales) and the remainder from
forthcoming launches in new locations – Gurgaon, Mysore and
Chennai.
Improving realisation: Average realization of Rs4082psf for
F2011 is an increase of 40% from F2010. This growth is
primarily driven by better product and revenue mix (25%) and
price increase (15%). Management expects F2012 realisation
of ~ Rs4,500psf (12% YoY rise).
Debt reduction to continue: Sobha repaid Rs6.4bn of debt
during F2011. Net gearing now stands at 64% (80% at the end
of F2010). It expects further reduction in net debt for F2012
with target net gearing of (50-60)%. It has unutilized sanctioned
loans of Rs8bn at 13% interest.
Land sale to be muted: Management expects to meet the
debt reduction target with operational cash flows generated.
However, it may consider land sales opportunities at good
price and margins. There are no plans for significant land bank
augmentation.
Contractual business: Management has guided for 25%
growth in revenue from contractual business (~Rs5bn in
F2012). In addition to its mainstay client Infosys, Sobha
captured orders from other corporates as well — ITC, Biocon,
Hotel Leela Venture and GMR to name a few. It received
orders worth Rs1.3bn during F2H11 from clients other than
Infosys. It expects Infosys to now contribute ~50% of its
revenue from contractual business.
Bangalore market outlook: Sobha sees Bangalore
residential property market to remain stable with affordable
prices and strong demand, driven by employment growth in
IT/ITES sector. It expects Bangalore to remain a significant
contributor to the top line in the coming quarters.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sobha Developers Ltd.
In Line 4Q; Gradual Scale Up
Will Continue – Staying OW
Quick Comment: SDL reported in line 4Q results.
Excluding land sales, income was up 26% YoY (up 4.7%
QoQ), operating margins compressed 174bps (421bps
QoQ) to 18.7% due to high contribution from contractual
business. Together this led to a 39% YoY rise (9% QoQ
fall) in net profit to Rs402 mn (MSe – Rs395 mn). The
quarter did not include any one-offs (such as land sales).
For the full year F2011, SDL capitalized Rs1.4 bn
interest cost (versus Rs1.8 bn net profit), which we
expect to gradually reduce given ongoing de-leveraging
and small but increasing expensing of prior year
capitalized interest cost (as COGS). SDL achieved 2.78
msf of new sales in F2011 versus its 3 msf target.
Outlook for F2012: New sales target for real estate
business is set for 3-3.5 msf (3msf from existing markets
and 0.5msf from new markets). SDL plans to lower net
gearing from 64% as of March 2011 to 50–60% by
March 2012. It plans roughly 4-5msf of new launches
(11 msf including later phases of 2 large projects) in
F2012, which includes entry into three new city markets
– Gurgaon, Chennai and Mysore – taking the overall
tally to 7 cities. Development work may start in Kochi in
F2013, while Hosur may wait longer. SDL has Rs5.5 bn
re-payment obligation in F2012, which the company is
confident of meeting given its Rs8 bn plus unutilized
sanctioned loans at 13% interest cost
What is disappointing: SDL as several other players in
the sector, appears to be (wrongly) compromising asset
turnover to increase/maintain margins. For instance, it
plans to launch villa project in Gurgaon at Rs8-8.5k psf
and targets to sell just 200-300ksf in F12 versus 4-6msf
overall project size. We believe this strategy would slow
the volume scale up story and delay ROE recovery.
Investment thesis: We retain our Overweight rating in
view of steadily improving fundamentals, geographic
diversification, leverage to healthy Bangalore market
and inexpensive valuations (38% discount to NAV, 13x
F12e EPS).
F4Q11 Management Call
Highlights
Sobha missed 3msf of F2011 sales target because of
slower pace (3-4 month delay) of new launches. Management
attributed this delay to issues related to land and project
approvals.
Hyderabad Land Exit: Sobha exited the JDA for its
Hyderabad land parcel (5msf of developable area; Sobha’s
share of 1.2msf) during the quarter, while increasing its
acreage in Coimbatore by 61 acres (increase in developable
area from 3.4msf to 7.4msf). It has paid to date Rs70mn for this
Coimbatore land purchase, while the rest is to be paid over
coming two years.
Sales guidance for F2012: Management guided for
3-3.5msf of new sales in F2012. This would comprise of ~3msf
from its projects in current location (ongoing projects and new
launches; 10% rise over F11 sales) and the remainder from
forthcoming launches in new locations – Gurgaon, Mysore and
Chennai.
Improving realisation: Average realization of Rs4082psf for
F2011 is an increase of 40% from F2010. This growth is
primarily driven by better product and revenue mix (25%) and
price increase (15%). Management expects F2012 realisation
of ~ Rs4,500psf (12% YoY rise).
Debt reduction to continue: Sobha repaid Rs6.4bn of debt
during F2011. Net gearing now stands at 64% (80% at the end
of F2010). It expects further reduction in net debt for F2012
with target net gearing of (50-60)%. It has unutilized sanctioned
loans of Rs8bn at 13% interest.
Land sale to be muted: Management expects to meet the
debt reduction target with operational cash flows generated.
However, it may consider land sales opportunities at good
price and margins. There are no plans for significant land bank
augmentation.
Contractual business: Management has guided for 25%
growth in revenue from contractual business (~Rs5bn in
F2012). In addition to its mainstay client Infosys, Sobha
captured orders from other corporates as well — ITC, Biocon,
Hotel Leela Venture and GMR to name a few. It received
orders worth Rs1.3bn during F2H11 from clients other than
Infosys. It expects Infosys to now contribute ~50% of its
revenue from contractual business.
Bangalore market outlook: Sobha sees Bangalore
residential property market to remain stable with affordable
prices and strong demand, driven by employment growth in
IT/ITES sector. It expects Bangalore to remain a significant
contributor to the top line in the coming quarters.
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