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Ticks all the right boxes
Having de-leveraged its balance sheet over the past three years,
Sobha is now accelerating the pace of its new launches, execution and
cash collection. With a strong brand built around quality and speed of
execution in a relatively stable real estate market like Bengaluru,
Sobha is well placed to monetize its land bank of 2,500 acres over the
next 15-20 years. At current land prices, the land bank is worth at
least 4x cost. Our base case DCF model values this land bank at 2x cost
and generates a fair value of `462/share, 54% upside.
Sobha is a Bengaluru-focused real estate developer. Like many of its peers,
Sobha had overleveraged its balance sheet over 2006-08 in order to buy land.
However, Sobha is currently the best placed play in the sector due to:
A repaired balance sheet: Relative to its peers Sobha follows an
aggressive cash collection philosophy. Furthermore, the group has
consistently launched new projects of 3msf-4msf each year, delivered
more than 11msf over FY08-FY12, and has used its operating cash flows
to reduce debt. As a result, net debt:equity ratio has fallen to 0.65x from
1.7x in FY09, debtor days have reduced to around 110 days currently from
173 days in FY09 and advances from customers worth over `2bn on the
current liabilities side of the balance sheet are yet to go through the P&L.
Strong ongoing cash flows: Despite the tough macro-environment,
Sobha’s ratio of ‘CFO/interest cost related cash outflows’ at 2.0x has been
the best amongst leveraged peers for 9MFY12. Also, Sobha has reported
20% YoY growth in sales in 9MFY12 and is on track to launch 9msf-10msf
of new projects and complete the delivery of over 2msf during FY12 (FY10
delivery: 1.8msf, FY11 delivery: 4.1msf).
Development potential: Sobha currently owns a land bank with
developable area of 112msf (saleable area of over 200msf) valued on its
balance sheet at a cost of `19.5bn (or `175psf of developable area).
Based on our discussions with real estate brokers, the current value of this
land is at least 4x its cost. Project development on this land bank over the
next 15 years generates a DCF value of `57.2bn or `583/share for the
land. However, our base case scenario values this land bank at `36.5bn
(`372 per share), 2.0x its cost.
Valuation: In our project based DCF model for Sobha, we conservatively push
out cash flows by 2-3 years and assume slower-than-expected execution, sales
and cash collection. We also assume that the cost of construction will grow at
a faster pace compared to appreciation in realization rates. Using a discount
rate of 15% for real estate projects under construction, an FY11 P/E multiple of
8x for contractual projects and valuing its land bank at 2.0x cost, our SOTP
model generates a fair value of `462 per share, a 54% upside.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ticks all the right boxes
Having de-leveraged its balance sheet over the past three years,
Sobha is now accelerating the pace of its new launches, execution and
cash collection. With a strong brand built around quality and speed of
execution in a relatively stable real estate market like Bengaluru,
Sobha is well placed to monetize its land bank of 2,500 acres over the
next 15-20 years. At current land prices, the land bank is worth at
least 4x cost. Our base case DCF model values this land bank at 2x cost
and generates a fair value of `462/share, 54% upside.
Sobha is a Bengaluru-focused real estate developer. Like many of its peers,
Sobha had overleveraged its balance sheet over 2006-08 in order to buy land.
However, Sobha is currently the best placed play in the sector due to:
A repaired balance sheet: Relative to its peers Sobha follows an
aggressive cash collection philosophy. Furthermore, the group has
consistently launched new projects of 3msf-4msf each year, delivered
more than 11msf over FY08-FY12, and has used its operating cash flows
to reduce debt. As a result, net debt:equity ratio has fallen to 0.65x from
1.7x in FY09, debtor days have reduced to around 110 days currently from
173 days in FY09 and advances from customers worth over `2bn on the
current liabilities side of the balance sheet are yet to go through the P&L.
Strong ongoing cash flows: Despite the tough macro-environment,
Sobha’s ratio of ‘CFO/interest cost related cash outflows’ at 2.0x has been
the best amongst leveraged peers for 9MFY12. Also, Sobha has reported
20% YoY growth in sales in 9MFY12 and is on track to launch 9msf-10msf
of new projects and complete the delivery of over 2msf during FY12 (FY10
delivery: 1.8msf, FY11 delivery: 4.1msf).
Development potential: Sobha currently owns a land bank with
developable area of 112msf (saleable area of over 200msf) valued on its
balance sheet at a cost of `19.5bn (or `175psf of developable area).
Based on our discussions with real estate brokers, the current value of this
land is at least 4x its cost. Project development on this land bank over the
next 15 years generates a DCF value of `57.2bn or `583/share for the
land. However, our base case scenario values this land bank at `36.5bn
(`372 per share), 2.0x its cost.
Valuation: In our project based DCF model for Sobha, we conservatively push
out cash flows by 2-3 years and assume slower-than-expected execution, sales
and cash collection. We also assume that the cost of construction will grow at
a faster pace compared to appreciation in realization rates. Using a discount
rate of 15% for real estate projects under construction, an FY11 P/E multiple of
8x for contractual projects and valuing its land bank at 2.0x cost, our SOTP
model generates a fair value of `462 per share, a 54% upside.
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