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Sobha Developers (SOBHA)
Property
Sales soar but stock remains weak. Sobha’s 2QFY12E sales at 0.9 mn sq. ft are the
highest over the past 10 quarters despite concerns of a demand slowdown. The stock
though trades at 1XFY2012E book value and factors in only the carrying cost of land
holdings. Potential triggers: meeting the sales target of 3-3.5 mn sq. ft in FY2012E and
further evidence of a steady Bengaluru market; meanwhile, any softening in global IT
services demand would impact sales. Retain BUY with target price of Rs370/share.
2QFY12 sales fairly robust for Sobha and likely for Bengaluru market
Sobha has sold 0.94 mn sq. ft in 2QFY12E which is the highest in 10 quarters which have
otherwise had a range of 0.25-0.74 mn sq. ft. Sobha has launched projects in two new locations –
Mysore and Gurgaon, with sales of 0.12 mn sq. ft in 2QFY12E. Sobha’s FY2012E sales guidance
of 3-3.5 mn sq. ft now appears more plausible, having sold 1.6 mn sq. ft in 1HFY12E.
Launches also as per calendar with 3.3 mn sq. ft launched in 1HFY12E
Sobha has launched 8 mn sq. ft of projects in 1HFY12E, of which 3.3 mn sq. ft is available for sales
and the company seems within range of its launch guidance of 11.3 mn sq. ft in FY2012E. Projects
launched are across the pricing spectrum and include 0.4 mn sq. ft of plotted development, 0.2
mn sq. ft of presidential apartments, 0.1 mn sq. ft of row houses, 1.4 mn sq. ft of luxury and
super luxury projects and 1.1 mn sq. ft of township development.
Bengaluru market continues to witness steady growth
Absorption in the Bengaluru residential market (Sobha’s primary market) remains stable with
monthly absorption (based on 3-month rolling averages) of 4 – 4.9 mn sq. ft since October 2010.
Inventory is in line with the trend (16-17 months) and prices have also remained stable though we
see a possible marginal increase. We expect Bengaluru demand to continue to remain robust given
(1) the positive outlook on IT services demand which indicates a robust hiring trend and (2) a lack
of evidence of any significant speculative element built into either volumes or prices.
But stock refuses to budge despite trading at 1XFY2012E book value
We find Sobha attractive at current price levels as (1) Sobha is trading at FY2012E BV with an RoE
of 10% and (2) All of Sobha’s current EV is accounted for only by the PV of expected net cash
flows from current projects + book value of land + value of the contracting business. Our target
price is Rs370/share based on March 2013 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.
Fairly healthy demand in 2QFY12E for Bengaluru developers
Sobha has sold 1.6 mn sq. ft in 1HFY12E (0.94 mn sq. ft in 2QFY12E versus 0.67 mn sq. ft in
1QFY12 and 0.74 mn sq. ft in 2QFY11) and the company now seems to be on track to meet
its sales guidance of 3-3.5 mn sq. ft in FY2012E. Of the 1.6 mn sq. ft of sales in 1HFY12E,
0.18 mn sq. ft has come from new areas of Mysore and Gurgaon which the company
entered in FY2012. Sobha has plans to launch 6 mn sq. ft in Gurgaon and this region has to
perform is Sobha has to meet/exceed its sales guidance. Average realization improved qoq
to Rs 5,196/sq. ft versus Rs 4,547/sq. ft possibly due to its Gurgaon launch which had sold at
Rs 9,500/sq. ft on average in July 2011. Average realization came in at Rs 4,926/sq. ft in
1HFY12 versus Rs 3,767/sq. ft in 1HFY11.
Launches as per guidance
In 2QFY12E, Sobha has launched 4.5 mn sq. ft (2 mn sq. ft for sale) versus 3.5 mn sq. ft in
1QFY2012 (1.3 mn sq. ft for sale). Projects launched in 2QFY12 are – (1) International City
(NCR, 4.4 mn sq. ft), (2) Sobha Garnet (Pune, 0.4 mn sq. ft), (3) Sobha Canvas (Bengaluru,
0.2 mn sq. ft) and (4) Sobha Pristine (Bengaluru, 0.2 mn sq. ft). Overall Sobha has launched
8 mn sq. ft in 1HFY12 of which 3.3 mn sq. ft is available for sales and the company seems
within range of its launch guidance of 11.3 mn sq. ft in FY2012E. Note: The operational
update indicates 7.98 mn sq. ft of launches in 1HFY12, however, summing individual
launches gives 8.6 mn sq. ft. We have taken 7.98 mn sq. ft as the correct value in this note.
Bengaluru market has been holding up
�� As per press reports, Prestige (Rs91, NR), Sobha’s peer in Bengaluru, has also had sales
worth Rs7.4 bn in 2QFY12E (versus Rs2.1 bn in 1QFY12E), which would indicate sales of
1.5-2 mn sq. ft from a launched area of 4.7 mn sq. ft.
Overall absorption in the Bengaluru residential market (Sobha’s primary market) remains
stable with monthly absorption (based on 3 month rolling averages) of 4 – 4.9 mn sq. ft
since October 2010. Inventory is in line with trend (16-17 months) and prices have also
remained stable though we see the probability of a marginal increase. We expect Bengaluru
demand to continue to remain robust given (1) positive outlook on IT services demand and
hence hiring trend remaining robust, (2) no evidence of any significant speculative element
built into either volumes or prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sobha Developers (SOBHA)
Property
Sales soar but stock remains weak. Sobha’s 2QFY12E sales at 0.9 mn sq. ft are the
highest over the past 10 quarters despite concerns of a demand slowdown. The stock
though trades at 1XFY2012E book value and factors in only the carrying cost of land
holdings. Potential triggers: meeting the sales target of 3-3.5 mn sq. ft in FY2012E and
further evidence of a steady Bengaluru market; meanwhile, any softening in global IT
services demand would impact sales. Retain BUY with target price of Rs370/share.
2QFY12 sales fairly robust for Sobha and likely for Bengaluru market
Sobha has sold 0.94 mn sq. ft in 2QFY12E which is the highest in 10 quarters which have
otherwise had a range of 0.25-0.74 mn sq. ft. Sobha has launched projects in two new locations –
Mysore and Gurgaon, with sales of 0.12 mn sq. ft in 2QFY12E. Sobha’s FY2012E sales guidance
of 3-3.5 mn sq. ft now appears more plausible, having sold 1.6 mn sq. ft in 1HFY12E.
Launches also as per calendar with 3.3 mn sq. ft launched in 1HFY12E
Sobha has launched 8 mn sq. ft of projects in 1HFY12E, of which 3.3 mn sq. ft is available for sales
and the company seems within range of its launch guidance of 11.3 mn sq. ft in FY2012E. Projects
launched are across the pricing spectrum and include 0.4 mn sq. ft of plotted development, 0.2
mn sq. ft of presidential apartments, 0.1 mn sq. ft of row houses, 1.4 mn sq. ft of luxury and
super luxury projects and 1.1 mn sq. ft of township development.
Bengaluru market continues to witness steady growth
Absorption in the Bengaluru residential market (Sobha’s primary market) remains stable with
monthly absorption (based on 3-month rolling averages) of 4 – 4.9 mn sq. ft since October 2010.
Inventory is in line with the trend (16-17 months) and prices have also remained stable though we
see a possible marginal increase. We expect Bengaluru demand to continue to remain robust given
(1) the positive outlook on IT services demand which indicates a robust hiring trend and (2) a lack
of evidence of any significant speculative element built into either volumes or prices.
But stock refuses to budge despite trading at 1XFY2012E book value
We find Sobha attractive at current price levels as (1) Sobha is trading at FY2012E BV with an RoE
of 10% and (2) All of Sobha’s current EV is accounted for only by the PV of expected net cash
flows from current projects + book value of land + value of the contracting business. Our target
price is Rs370/share based on March 2013 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.
Fairly healthy demand in 2QFY12E for Bengaluru developers
Sobha has sold 1.6 mn sq. ft in 1HFY12E (0.94 mn sq. ft in 2QFY12E versus 0.67 mn sq. ft in
1QFY12 and 0.74 mn sq. ft in 2QFY11) and the company now seems to be on track to meet
its sales guidance of 3-3.5 mn sq. ft in FY2012E. Of the 1.6 mn sq. ft of sales in 1HFY12E,
0.18 mn sq. ft has come from new areas of Mysore and Gurgaon which the company
entered in FY2012. Sobha has plans to launch 6 mn sq. ft in Gurgaon and this region has to
perform is Sobha has to meet/exceed its sales guidance. Average realization improved qoq
to Rs 5,196/sq. ft versus Rs 4,547/sq. ft possibly due to its Gurgaon launch which had sold at
Rs 9,500/sq. ft on average in July 2011. Average realization came in at Rs 4,926/sq. ft in
1HFY12 versus Rs 3,767/sq. ft in 1HFY11.
Launches as per guidance
In 2QFY12E, Sobha has launched 4.5 mn sq. ft (2 mn sq. ft for sale) versus 3.5 mn sq. ft in
1QFY2012 (1.3 mn sq. ft for sale). Projects launched in 2QFY12 are – (1) International City
(NCR, 4.4 mn sq. ft), (2) Sobha Garnet (Pune, 0.4 mn sq. ft), (3) Sobha Canvas (Bengaluru,
0.2 mn sq. ft) and (4) Sobha Pristine (Bengaluru, 0.2 mn sq. ft). Overall Sobha has launched
8 mn sq. ft in 1HFY12 of which 3.3 mn sq. ft is available for sales and the company seems
within range of its launch guidance of 11.3 mn sq. ft in FY2012E. Note: The operational
update indicates 7.98 mn sq. ft of launches in 1HFY12, however, summing individual
launches gives 8.6 mn sq. ft. We have taken 7.98 mn sq. ft as the correct value in this note.
Bengaluru market has been holding up
�� As per press reports, Prestige (Rs91, NR), Sobha’s peer in Bengaluru, has also had sales
worth Rs7.4 bn in 2QFY12E (versus Rs2.1 bn in 1QFY12E), which would indicate sales of
1.5-2 mn sq. ft from a launched area of 4.7 mn sq. ft.
Overall absorption in the Bengaluru residential market (Sobha’s primary market) remains
stable with monthly absorption (based on 3 month rolling averages) of 4 – 4.9 mn sq. ft
since October 2010. Inventory is in line with trend (16-17 months) and prices have also
remained stable though we see the probability of a marginal increase. We expect Bengaluru
demand to continue to remain robust given (1) positive outlook on IT services demand and
hence hiring trend remaining robust, (2) no evidence of any significant speculative element
built into either volumes or prices.
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