SOBHA DEVELOPERS:: Momentum intact :: Edelweiss

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􀂃 Land sale boosts revenues, operating margins disappoint
Sobha Developers (Sobha) reported revenues of INR 4,308 mn, EBITDA of 971
mn (EBITDA margin of 22.5%) and PAT of INR 589 mn, against our estimates of
INR 3,534 mn, INR 813 mn and INR 424 mn, respectively. Revenues were
higher than estimates due to sale of a land parcel in Pune (~50 acres) for 1.14
bn at EBITDA margin of 30%. Ex-land sales, Sobha reported revenues of ~INR
3.2 bn with core EBITDA margin of 20% (flat Q-o-Q), reflecting cost pressures;
in the previous quarter, margins were dented due to a one-time charge of INR
150 mn related to pre-launch expenses.
􀂃 Momentum intact in sales volume; marginal price appreciation
During the quarter, Sobha sold 364 units for a total area of ~0.75 msf at an
average realisation of INR 3,750/sf with Bangalore contributing majority of sales
(over 0.5 msf). The company has already achieved cumulative sales of ~1.4 msf
in H1FY11 (~0.65 msf in H1FY10) and is on its way to attain its FY11 guidance of
3 msf. We believe that sustained hiring and salary hikes in the IT/ITEs segment
in South India will enable Sobha to continue sales momentum. As per the
company, there have been marginal price increases of up to ~5% across
projects in South India. Management expects prices to remain stable, going
forward.
􀂃 Net D/E currently at 0.7x; likely to reduce to 0.4x by FY12E
Net debt has reduced from ~INR 14.2 bn in Q1FY11 to ~INR 12.4 bn in the
quarter. Net D/E currently stands at 0.7x and is estimated to reduce further to
0.4x by FY12E on the back of positive operating cash flows over FY11-12E.
􀂃 Outlook and valuations: Positives priced in; maintain ‘HOLD’
Our previous NAV estimate for Sobha stood at INR 326/share. However, after
factoring in net impact of lower-than-expected EBITDA margins in FY11E (owing
to cost pressures), higher sales volumes (~3 msf in FY11 against earlier
estimated ~2.7 msf) and balance sheet adjustments, we increase our NAV
estimate for Sobha to INR 333/share. At CMP of INR 371/share, the stock is
trading at ~12% premium to NAV. We maintain our ‘HOLD/Sector
Underperformer’ recommendation on the stock.