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Sobha Developers
Reuters: SOBH.BO Bloomberg: SOBHA IN
Levered play on Bangalore IT
Robust execution momentum and IT sector outlook augur well for Sobha
Unlike its peers, Sobha continued its robust execution momentum in real estate in
FY11, with deliveries > pre-sales > new launches. It now proposes aggressive
launch plans. A robust outlook for the IT sector bodes well for Sobha, as
Bengaluru accounted for ~76% of FY11 pre-sales and ~50% of future land bank.
With ~64% net gearing (March 2011), Sobha remains a levered play on Bangalore
IT. However, with increasing macro headwinds, we cut our estimates by up to
18% and our target price to INR 350. With 34% upside potential, we maintain
Buy.
Sobha’s focus on execution…
Unlike peers, which pre-launch to drive cashflows, Sobha’s focus on execution in
FY11 – deliveries (4.1msf) > pre-sales (2.8msf) > launches (2.0msf) – enhances its
brand franchise. Hence, real estate projects under construction fell from 9.1msf in
FY10 to only 7msf in FY11. It plans aggressive launches of ~11msf in FY12. In the
low gestation contractual segment, projects under construction spiked to 7.4msf
in FY11 (4.2msf in FY10). Land monetization and fresh equity helped reduce net
gearing from 180% in end-FY08 to 65% in end-FY11.
…and robust outlook for IT sector and Bengaluru to drive future growth
With (a) our forecast of ~22% revenue CAGR in FY11-13E for the IT sector, (b)
wage hikes of ~15% in FY11 and (c) increased hiring targets for FY12, the IT
sector continues to drive real estate demand (residential and office) in Bengaluru.
The city accounted for ~76% of Sobha’s FY11 pre-sales and ~50% of its future
land bank. With ~64% net gearing, it remains a leveraged play on Bengaluru IT.
Cut estimates by up to 18% and target price to INR 350, maintain Buy; risks
However, headwinds (tightening liquidity, high inflation, etc.) force us to cut our
estimates for FY12-13 by up to 18% and our DCF-based target price to INR 350
(previously INR 425). With 34% upside potential, we maintain Buy. Risks include
(a) overexposure to IT and Bengaluru, (b) most of the aggressive launch plans for
FY12 are in new geographies, and (c) deteriorating macro environment.
Investment thesis
Outlook
The company has a well-designed business model, in our view: starting from the
development of working-capital-negative mid-end residential and moving into large projects
by undertaking contracting work. The focus on quality and timely delivery through backward
integration helps the company build brand equity in South India. Unlike its peers, we believe
Sobha gives realistic guidance and focuses on execution and quality, which is well-reflected
in annual total deliveries of 5.5msf in each of the past four years. In the real estate division, it
launched only 2msf, despite sequential ramp-up in pre-sales of ~2.8msf and even higher
deliveries of 4.1msf in FY11. Hence, with projects under construction declining to 7msf, it
now plans to aggressively launch 11msf in FY12. Bengaluru, India’s IT hub, accounted for
~76% of its pre-sales in FY11 and for ~50% of its land bank. In addition, the contract and
manufacturing business (19% and 10% of revenues, respectively), most of which is from the
IT sector (mainly Infosys), seems to lag the Bengaluru residential market. However, FY12
launch guidance seems aggressive – more so as a sizeable proportion (63%) is outside
Bengaluru. Sobha, with a high gearing of 64% as of 31 March 2011, is a levered play on
Bengaluru and the IT sector. Buy.
Valuation
We continue to value Sobha on DCF-based NAV. On our assumptions of (a) flat prices and
costs (after the ~3% increase in base prices and ~10% increase in construction costs), (b)
land bank to be developed in ~14 years, (c) WACC of 17.5% (16.5% earlier), (d) cap rate of
~12% and (e) effective tax rate of ~27.5%, we arrive at a DCF-based GAV of INR 591/share.
However, considering the deteriorating macroeconomic factors (tightening liquidity, high
inflation, etc), we increase our discount to DCF-based GAV to 25% (earlier 10%) to arrive at
adjusted GAV of INR 444/share. We reduce this value by INR 153/share for its liabilities (INR
127/share for net debt, INR 16/share for land bank payables and INR 10/share for the advance
received from Purna Partners) to arrive at an NAV of INR 290/share for its real estate
business. We then add INR 60/share for its contract and manufacturing business (based on
an average industry EBITDA multiple of 7x for the contract business and 8x for the
manufacturing business, justified by Sobha’s scale and size in this business), resulting in a
SOTP-based target price of INR 350.
Risks
Risks: 1) execution, given its proposed aggressive launches of 11msf for FY12E, 63% of
which is in new geographies; 2) overexposure of its land bank to Bengaluru; and 3)
deterioration in macroeconomic fundamentals (deterioration in demand due to spike in prices,
increase in interest rates, property prices; worsening liquidity in financial markets) compared
to expectations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sobha Developers
Reuters: SOBH.BO Bloomberg: SOBHA IN
Levered play on Bangalore IT
Robust execution momentum and IT sector outlook augur well for Sobha
Unlike its peers, Sobha continued its robust execution momentum in real estate in
FY11, with deliveries > pre-sales > new launches. It now proposes aggressive
launch plans. A robust outlook for the IT sector bodes well for Sobha, as
Bengaluru accounted for ~76% of FY11 pre-sales and ~50% of future land bank.
With ~64% net gearing (March 2011), Sobha remains a levered play on Bangalore
IT. However, with increasing macro headwinds, we cut our estimates by up to
18% and our target price to INR 350. With 34% upside potential, we maintain
Buy.
Sobha’s focus on execution…
Unlike peers, which pre-launch to drive cashflows, Sobha’s focus on execution in
FY11 – deliveries (4.1msf) > pre-sales (2.8msf) > launches (2.0msf) – enhances its
brand franchise. Hence, real estate projects under construction fell from 9.1msf in
FY10 to only 7msf in FY11. It plans aggressive launches of ~11msf in FY12. In the
low gestation contractual segment, projects under construction spiked to 7.4msf
in FY11 (4.2msf in FY10). Land monetization and fresh equity helped reduce net
gearing from 180% in end-FY08 to 65% in end-FY11.
…and robust outlook for IT sector and Bengaluru to drive future growth
With (a) our forecast of ~22% revenue CAGR in FY11-13E for the IT sector, (b)
wage hikes of ~15% in FY11 and (c) increased hiring targets for FY12, the IT
sector continues to drive real estate demand (residential and office) in Bengaluru.
The city accounted for ~76% of Sobha’s FY11 pre-sales and ~50% of its future
land bank. With ~64% net gearing, it remains a leveraged play on Bengaluru IT.
Cut estimates by up to 18% and target price to INR 350, maintain Buy; risks
However, headwinds (tightening liquidity, high inflation, etc.) force us to cut our
estimates for FY12-13 by up to 18% and our DCF-based target price to INR 350
(previously INR 425). With 34% upside potential, we maintain Buy. Risks include
(a) overexposure to IT and Bengaluru, (b) most of the aggressive launch plans for
FY12 are in new geographies, and (c) deteriorating macro environment.
Investment thesis
Outlook
The company has a well-designed business model, in our view: starting from the
development of working-capital-negative mid-end residential and moving into large projects
by undertaking contracting work. The focus on quality and timely delivery through backward
integration helps the company build brand equity in South India. Unlike its peers, we believe
Sobha gives realistic guidance and focuses on execution and quality, which is well-reflected
in annual total deliveries of 5.5msf in each of the past four years. In the real estate division, it
launched only 2msf, despite sequential ramp-up in pre-sales of ~2.8msf and even higher
deliveries of 4.1msf in FY11. Hence, with projects under construction declining to 7msf, it
now plans to aggressively launch 11msf in FY12. Bengaluru, India’s IT hub, accounted for
~76% of its pre-sales in FY11 and for ~50% of its land bank. In addition, the contract and
manufacturing business (19% and 10% of revenues, respectively), most of which is from the
IT sector (mainly Infosys), seems to lag the Bengaluru residential market. However, FY12
launch guidance seems aggressive – more so as a sizeable proportion (63%) is outside
Bengaluru. Sobha, with a high gearing of 64% as of 31 March 2011, is a levered play on
Bengaluru and the IT sector. Buy.
Valuation
We continue to value Sobha on DCF-based NAV. On our assumptions of (a) flat prices and
costs (after the ~3% increase in base prices and ~10% increase in construction costs), (b)
land bank to be developed in ~14 years, (c) WACC of 17.5% (16.5% earlier), (d) cap rate of
~12% and (e) effective tax rate of ~27.5%, we arrive at a DCF-based GAV of INR 591/share.
However, considering the deteriorating macroeconomic factors (tightening liquidity, high
inflation, etc), we increase our discount to DCF-based GAV to 25% (earlier 10%) to arrive at
adjusted GAV of INR 444/share. We reduce this value by INR 153/share for its liabilities (INR
127/share for net debt, INR 16/share for land bank payables and INR 10/share for the advance
received from Purna Partners) to arrive at an NAV of INR 290/share for its real estate
business. We then add INR 60/share for its contract and manufacturing business (based on
an average industry EBITDA multiple of 7x for the contract business and 8x for the
manufacturing business, justified by Sobha’s scale and size in this business), resulting in a
SOTP-based target price of INR 350.
Risks
Risks: 1) execution, given its proposed aggressive launches of 11msf for FY12E, 63% of
which is in new geographies; 2) overexposure of its land bank to Bengaluru; and 3)
deterioration in macroeconomic fundamentals (deterioration in demand due to spike in prices,
increase in interest rates, property prices; worsening liquidity in financial markets) compared
to expectations.
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