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Sobha Developers (SOBHA)
Property
Recent correction is opportunity to buy. At current market price, we find minimal
value being ascribed to either (1) development more than ongoing projects or (2) brand
and (3) Sobha operating as a going concern. We retain our BUY rating with target price
of Rs370 at par with March 2013E NAV assuming a WACC of 15%. Meeting their sales
target of 3-3.5 mn sq. ft in FY2012E and further evidence of a steady Bengaluru market
are potential triggers while softening global IT services demand is the key risk.
Sobha’s performance remains steady
In 2QFY12, Sobha has already launched 1.8 mn sq. ft comprising (1) International City, Gurgaon
(villas,1.2 mn sq. ft), (2) Garnet, Pune (area 0.4 mn sq. ft) and (3) Pristine, Bangalore (0.4 mn sq.
ft). Sobha intends to launch (1) HillView, Coimbatore (0.3 mn sq. ft) and (2) Sunshine, Chennai
(0.3 mn sq. ft) making a total launch of 2.5 mn sq. ft. In their earnings call, Sobha mentioned that
July was an exceptional month for sales and though we would expect August to be a more
modest month, we believe 2QFY12E would likely have flat sales versus 1QFY12 (0.7 mn sq. ft).
Bengaluru market remains healthy
Absorption in the Bengaluru residential market (Sobha’s primary market) remains stable with
annual absorption of over 40 mn sq. ft (versus all-time high of approximate 50 mn sq. ft).
Inventory is in line with trend (16 months) and prices have also remained stable though we see
marginally probability of an increase. We expect Bengaluru demand to continue to remain 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
While Sobha has corrected in line with the sector over the past one month (23% versus 25%for
BSE Realty index), we believe this is an attractive entry point as (1) Sobha is trading at 1.1X/1X
FY2011/12E book value with RoE of 10% in FY2012E and (2) all of Sobha’s current EV is
accounted by (1) PV of expected net cash flows from current projects + (2) book value of land +
(3) value of the contracting business. 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. Our target price is Rs370/share based on March 2013E NAV assuming a WACC of 15%.
Key triggers include meeting their sales target of 3-3.5 mn sq. ft in FY2012E and further evidence
of a steady Bengaluru market. Softening global IT services demand is the key risk as 35% of
Sobha’s customers are IT/ITES employees and around 60% take out a mortgage to buy Sobha’s
apartments.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sobha Developers (SOBHA)
Property
Recent correction is opportunity to buy. At current market price, we find minimal
value being ascribed to either (1) development more than ongoing projects or (2) brand
and (3) Sobha operating as a going concern. We retain our BUY rating with target price
of Rs370 at par with March 2013E NAV assuming a WACC of 15%. Meeting their sales
target of 3-3.5 mn sq. ft in FY2012E and further evidence of a steady Bengaluru market
are potential triggers while softening global IT services demand is the key risk.
Sobha’s performance remains steady
In 2QFY12, Sobha has already launched 1.8 mn sq. ft comprising (1) International City, Gurgaon
(villas,1.2 mn sq. ft), (2) Garnet, Pune (area 0.4 mn sq. ft) and (3) Pristine, Bangalore (0.4 mn sq.
ft). Sobha intends to launch (1) HillView, Coimbatore (0.3 mn sq. ft) and (2) Sunshine, Chennai
(0.3 mn sq. ft) making a total launch of 2.5 mn sq. ft. In their earnings call, Sobha mentioned that
July was an exceptional month for sales and though we would expect August to be a more
modest month, we believe 2QFY12E would likely have flat sales versus 1QFY12 (0.7 mn sq. ft).
Bengaluru market remains healthy
Absorption in the Bengaluru residential market (Sobha’s primary market) remains stable with
annual absorption of over 40 mn sq. ft (versus all-time high of approximate 50 mn sq. ft).
Inventory is in line with trend (16 months) and prices have also remained stable though we see
marginally probability of an increase. We expect Bengaluru demand to continue to remain 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
While Sobha has corrected in line with the sector over the past one month (23% versus 25%for
BSE Realty index), we believe this is an attractive entry point as (1) Sobha is trading at 1.1X/1X
FY2011/12E book value with RoE of 10% in FY2012E and (2) all of Sobha’s current EV is
accounted by (1) PV of expected net cash flows from current projects + (2) book value of land +
(3) value of the contracting business. 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. Our target price is Rs370/share based on March 2013E NAV assuming a WACC of 15%.
Key triggers include meeting their sales target of 3-3.5 mn sq. ft in FY2012E and further evidence
of a steady Bengaluru market. Softening global IT services demand is the key risk as 35% of
Sobha’s customers are IT/ITES employees and around 60% take out a mortgage to buy Sobha’s
apartments.
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