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Sobha Developers (SOBHA)
Property
1QFY12 with puts and takes; Sobha remains well-positioned. Sobha’s 1QFY12
financials were lower than expected due to lower revenue recognition though sales and
launches remained healthy. We retain BUY, reduce our FY2012E-14E revenues and net
profit by 06% and 0-12%, respectively and revise our target price (adjusting for higher
debt assumption) to Rs370/share (Rs385/share earlier) at par with March 2013E NAV.
At current market price, we find minimal value being ascribed to either (1) development
more than ongoing projects, (2) brand and (3) Sobha operating as a going concern.
Healthy sales and launches with stable prices is positive
Sobha launched 3.5 mn sq. ft for sale in 1QFY12 (> sales in full-year FY2011), though 1.3 mn sq.
ft is what is being offered for sale at present. The launches included Sobha City (0.85 mn sq. ft for
sale) In Bangalore which had been delayed and 0.22 mn sq. ft in Mysore. Sobha has also launched
their Gurgaon township project in July and intends to launch its Chennai project in 2QFY12E
entering three new locations in four months.
Sobha sold 665,650 sq. ft across five locations which is similar to sales in 4QFY11 of 656,222 sq.
ft. Management commentary indicated that June and July have been better than April and May
indicating a stabilizing demand environment. Prices remained stable - though average prices
moved up by10%, it is more due to portfolio mix versus price increases in specific projects.
Slower-than-expected revenue recognition and debt increase are key negatives
Sobha reported revenues of Rs3.2 bn (+2% yoy, -6% qoq and 18% below expectation) due to
lower revenue recognition than expected as (1) a few ongoing projects (e.g. Sobha Forest View)
did not cross revenue recognition threshold and (2) sales in 1QFY12 were skewed towards newly
launched which means revenue recognition for them is some time away. Contractual revenues
grew 38% yoy and share of non-Infosys projects fell to 78% of total ongoing projects.
Gross debt increased by Rs1.2 bn qoq - Sobha indicated this was due to paying EDC / IDC charges
of Rs940 mn for the Gurgaon project; we believe it was also led by the skewed sales mix towards
new projects which meant advances were likely lower than expected.
Current stock price implies minimal value beyond ongoing projects and book value
Almost all 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. We are cutting FY2012E revenue/net
profit estimates by 6/12% due to lowering our land sale assumption and increasing tax rate to
1QFY12. Key risks include (1) delay in project launches beyond 2QFY12E and (2) a slowdown in
demand for IT services which could impact residential demand in Bangalore.
Revenue recognition and margins lower than expected
Sobha reported revenues of Rs 3.2 bn (+2% yoy, -6% qoq and 18% below expectation) as
(1) sales mix in the quarter was skewed towards new projects which meant they did not
contribute to revenues, (2) projects launched in 3QFY11 (e.g. Sobha Forest View) will now
start contributing to revenues only from 2QFY12E/3QFY12E onwards and (3) absence of any
land sales in this quarter (Rs54 mn in 1QFY11).
EBITDA was Rs623 mn (+4% yoy, -7% qoq and 26% below expectations) and EBITDA
margin declined 30 bps qoq and was 200 bps lower than our expectation. Even adjusting for
a higher proportion of contractual revenues, EBITDA margins would have been weaker than
expected.
PAT at Rs 0.3 bn (-10% yoy, -23% qoq and 31% below expectation), the qoq and yoy
decline coming due to a higher tax rate of 31.8% versus 24.9% in 4QFY11 and 21.1% in
1QFY11. The company did not do any land sales nor any land purchases in the quarter.
Gross debt increased qoq by Rs1.2 bn to Rs13.4 bn due to a recoverable Rs0.9 bn payout for
IDC and EDC charges for the Gurgaon launch. At end-1QFY11, net-D/E stood at 0.7 at end-
1QFY12 versus 0.6 at end-4QFY11.
Other highlights
Completed and handed over one residential project of 0.3 mn sq. ft versus 11 projects
with area of 4.1 mn sq. ft in FY2011.
Completed and delivered two contractual projects aggregating to 0.24 mn sq. ft and
received fresh committed orders of Rs450 mn other than Infosys.
Sobha bought 40.5% in the SPV (Sobha Developers (Pune) Private Ltd) developing Sobha
Forest View from Pan Atlantic Investments, its JV partner in the project. After this
purchase, Sobha now holds 59.5% stake in the SPV which has now become its subsidiary.
Aggressive project launches in 1QFY12
Sobha launched 3.5 mn sq. ft across Sobha Garden, its first project in Mysore (0.22 mn sq.
ft), Sobha Signature in Bengaluru (0.22 mn sq. ft) and four apartment blocks in Sobha City
in Bengaluru (0.85 mn sq. ft). In addition to this in July 2011, the company launched Sobha
Garnet in Pune (0.35 mn sq. ft) and phase 1 of its Gurgaon Township (1 mn. sq ft). The
performance of the Gurgaon Township (4.16 mn sq. ft in total) is a key stock trigger and the
company has managed to sell 75,000 sq. ft at an average realization of about Rs9,500/sq. ft.
In the next few quarters, the company has plans to launch 3.3 mn sq. ft excluding its July
2011 launches.
Retain BUY with target price of Rs370 / share (Rs385 earlier)
We make the following changes to our earnings and valuation model
Reduce revenues by 6% for FY2012E as we reduce our expectation of land sales in
FY2012E.
Reduce net income by 12% and 2% and 1% for FY2012E, FY2013E and FY2014E as we
increase FY2012E net debt to Rs12.8 bn (Rs9.5 bn earlier) and FY2013E net debt to
Rs11.5 bn (Rs10 bn earlier).
We had already removed Hyderabad from the land bank (1.2 mn sq. ft) developable area
as Sobha had decided not to develop this JDA land and had added 4 mn sq. ft
development potential for Coimbatore based on new land acquisition
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sobha Developers (SOBHA)
Property
1QFY12 with puts and takes; Sobha remains well-positioned. Sobha’s 1QFY12
financials were lower than expected due to lower revenue recognition though sales and
launches remained healthy. We retain BUY, reduce our FY2012E-14E revenues and net
profit by 06% and 0-12%, respectively and revise our target price (adjusting for higher
debt assumption) to Rs370/share (Rs385/share earlier) at par with March 2013E NAV.
At current market price, we find minimal value being ascribed to either (1) development
more than ongoing projects, (2) brand and (3) Sobha operating as a going concern.
Healthy sales and launches with stable prices is positive
Sobha launched 3.5 mn sq. ft for sale in 1QFY12 (> sales in full-year FY2011), though 1.3 mn sq.
ft is what is being offered for sale at present. The launches included Sobha City (0.85 mn sq. ft for
sale) In Bangalore which had been delayed and 0.22 mn sq. ft in Mysore. Sobha has also launched
their Gurgaon township project in July and intends to launch its Chennai project in 2QFY12E
entering three new locations in four months.
Sobha sold 665,650 sq. ft across five locations which is similar to sales in 4QFY11 of 656,222 sq.
ft. Management commentary indicated that June and July have been better than April and May
indicating a stabilizing demand environment. Prices remained stable - though average prices
moved up by10%, it is more due to portfolio mix versus price increases in specific projects.
Slower-than-expected revenue recognition and debt increase are key negatives
Sobha reported revenues of Rs3.2 bn (+2% yoy, -6% qoq and 18% below expectation) due to
lower revenue recognition than expected as (1) a few ongoing projects (e.g. Sobha Forest View)
did not cross revenue recognition threshold and (2) sales in 1QFY12 were skewed towards newly
launched which means revenue recognition for them is some time away. Contractual revenues
grew 38% yoy and share of non-Infosys projects fell to 78% of total ongoing projects.
Gross debt increased by Rs1.2 bn qoq - Sobha indicated this was due to paying EDC / IDC charges
of Rs940 mn for the Gurgaon project; we believe it was also led by the skewed sales mix towards
new projects which meant advances were likely lower than expected.
Current stock price implies minimal value beyond ongoing projects and book value
Almost all 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. We are cutting FY2012E revenue/net
profit estimates by 6/12% due to lowering our land sale assumption and increasing tax rate to
1QFY12. Key risks include (1) delay in project launches beyond 2QFY12E and (2) a slowdown in
demand for IT services which could impact residential demand in Bangalore.
Revenue recognition and margins lower than expected
Sobha reported revenues of Rs 3.2 bn (+2% yoy, -6% qoq and 18% below expectation) as
(1) sales mix in the quarter was skewed towards new projects which meant they did not
contribute to revenues, (2) projects launched in 3QFY11 (e.g. Sobha Forest View) will now
start contributing to revenues only from 2QFY12E/3QFY12E onwards and (3) absence of any
land sales in this quarter (Rs54 mn in 1QFY11).
EBITDA was Rs623 mn (+4% yoy, -7% qoq and 26% below expectations) and EBITDA
margin declined 30 bps qoq and was 200 bps lower than our expectation. Even adjusting for
a higher proportion of contractual revenues, EBITDA margins would have been weaker than
expected.
PAT at Rs 0.3 bn (-10% yoy, -23% qoq and 31% below expectation), the qoq and yoy
decline coming due to a higher tax rate of 31.8% versus 24.9% in 4QFY11 and 21.1% in
1QFY11. The company did not do any land sales nor any land purchases in the quarter.
Gross debt increased qoq by Rs1.2 bn to Rs13.4 bn due to a recoverable Rs0.9 bn payout for
IDC and EDC charges for the Gurgaon launch. At end-1QFY11, net-D/E stood at 0.7 at end-
1QFY12 versus 0.6 at end-4QFY11.
Other highlights
Completed and handed over one residential project of 0.3 mn sq. ft versus 11 projects
with area of 4.1 mn sq. ft in FY2011.
Completed and delivered two contractual projects aggregating to 0.24 mn sq. ft and
received fresh committed orders of Rs450 mn other than Infosys.
Sobha bought 40.5% in the SPV (Sobha Developers (Pune) Private Ltd) developing Sobha
Forest View from Pan Atlantic Investments, its JV partner in the project. After this
purchase, Sobha now holds 59.5% stake in the SPV which has now become its subsidiary.
Aggressive project launches in 1QFY12
Sobha launched 3.5 mn sq. ft across Sobha Garden, its first project in Mysore (0.22 mn sq.
ft), Sobha Signature in Bengaluru (0.22 mn sq. ft) and four apartment blocks in Sobha City
in Bengaluru (0.85 mn sq. ft). In addition to this in July 2011, the company launched Sobha
Garnet in Pune (0.35 mn sq. ft) and phase 1 of its Gurgaon Township (1 mn. sq ft). The
performance of the Gurgaon Township (4.16 mn sq. ft in total) is a key stock trigger and the
company has managed to sell 75,000 sq. ft at an average realization of about Rs9,500/sq. ft.
In the next few quarters, the company has plans to launch 3.3 mn sq. ft excluding its July
2011 launches.
Retain BUY with target price of Rs370 / share (Rs385 earlier)
We make the following changes to our earnings and valuation model
Reduce revenues by 6% for FY2012E as we reduce our expectation of land sales in
FY2012E.
Reduce net income by 12% and 2% and 1% for FY2012E, FY2013E and FY2014E as we
increase FY2012E net debt to Rs12.8 bn (Rs9.5 bn earlier) and FY2013E net debt to
Rs11.5 bn (Rs10 bn earlier).
We had already removed Hyderabad from the land bank (1.2 mn sq. ft) developable area
as Sobha had decided not to develop this JDA land and had added 4 mn sq. ft
development potential for Coimbatore based on new land acquisition
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