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S obha Developers
Headwinds getting chillier;
Downgrade to underperform
Bangalore to disappoint; lowering PO to Rs190
We downgrade Sobha Developers to Underperform with a reduced PO of Rs190
(earlier Rs375) – offering 10% downside from the current levels – based on a
20% discount to our NAV. We have cut our NAV estimate to factor in subdued
volume and a 5-10% correction in prices in Bangalore. We expect the headwinds
in the Bangalore residential market to get chillier as global macro uncertainty
increases, while interest rates continue to remain high. We believe the market’s
expectations are very high on Sobha’s volume and realizations for FY12 and that
they are likely to be disappointed in 2HFY12, leading to downgrades.
Likely to miss guidance on volume and cash flows
We expect Sobha to miss its guidance on sales volume of 3.3 to 3.5mn sq ft by
almost 30% in FY12, leading to earnings disappointment. Our earnings estimates
for FY12 and FY13 are 19% and 30% lower than consensus. Slower volume offtake
will also lead to disappointment on its debt reduction target of Rs3bn. It has
over Rs4.5bn of debt repayment, with an expected surplus of just Rs1.35bn.
Diversification helpful, but Bangalore remains key
While we do acknowledge that Sobha’s diversification in recent times into new
markets will help it to weather the storm better this time around, the key to its
performance will continue to be Bangalore. In the last cycle, we saw that volume
recovery in Bangalore lagged other markets by 6 months. Further, we expect the
volume contribution from the Gurgaon project to be low, given its super premium
pricing and not-so-great location.
Trading at premium to peers on P/B; Unjustified
Sobha is trading at a premium to its peers, which we believe is unjustified, given
the headwinds and expected slower recovery in volumes in Bangalore. We
believe it should trade closer to one standard deviation lower than its 3-year
average P/B multiple.
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