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Buy
Sobha Developers (SOBH.BO)
Return Potential: 38% Equity Research
Recent correction offers opportunity as product visibility improves
Source of opportunity
Sobha has upcoming launches in Bangalore and Gurgaon, scheduled for June
2011. We believe these launches, along with other upcoming launches in the
next few quarters and unsold inventory represent a revenue and cashflow
potential of about Rs65bn and Rs24bn, respectively. In addition, we value the
company’s contractual and manufacturing business at Rs4bn. This compares
favorably with Sobha’s current EV of Rs34bn. Sobha generated operating
cash of Rs2.4bn in FY11, repaying debt of Rs2.1bn and a dividend of Rs0.3bn.
Sobha debt has consistently been reduced over the past 7 quarters, largely
driven by operating cash flows.
Catalyst
We believe large upcoming launches in Bangalore (Sobha City, 2.93mn
sqft) and Gurgaon (Sobha International City, 4.14mn sqft) will unlock value
and offer significant revenue and cash flow visibility. We also note that
Sobha has diversified its operations beyond Bangalore into cities like
Coimbatore, Pune and Thrissur. Upcoming launches in Gurgaon, Chennai
and Mysore will reduce geographical risk, although Bangalore contributes
62% to our residential RNAV.
Valuation
Sobha currently trades at 1.1X FY13E BVPS of Rs233 and 8.1X FY13E EPS, vs a
sector average of 1.2X and 9.4X respectively. On a 12-m fwd P/E, Sobha trades
at a 19% discount to average P/B (since Jan 2009). We forecast a 14% ROE for
Sobha in FY13E vs a sector average of 11%. We maintain our Buy rating (on
CL) and 12-m target price for Sobha of Rs340. Our target price is set at a 10%
discount to RNAV of Rs377/share. We have made minor tweaks to our EPS
estimates for FY12E-FY14E as we adjust for details in annual report.
Key risks
(1) Slowdown in residential demand in Bangalore, (2) further increase in
interest rates, (3) volatility in input costs, (4) Significant delay in launches.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Coverage View: Attractive
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Buy
Sobha Developers (SOBH.BO)
Return Potential: 38% Equity Research
Recent correction offers opportunity as product visibility improves
Source of opportunity
Sobha has upcoming launches in Bangalore and Gurgaon, scheduled for June
2011. We believe these launches, along with other upcoming launches in the
next few quarters and unsold inventory represent a revenue and cashflow
potential of about Rs65bn and Rs24bn, respectively. In addition, we value the
company’s contractual and manufacturing business at Rs4bn. This compares
favorably with Sobha’s current EV of Rs34bn. Sobha generated operating
cash of Rs2.4bn in FY11, repaying debt of Rs2.1bn and a dividend of Rs0.3bn.
Sobha debt has consistently been reduced over the past 7 quarters, largely
driven by operating cash flows.
Catalyst
We believe large upcoming launches in Bangalore (Sobha City, 2.93mn
sqft) and Gurgaon (Sobha International City, 4.14mn sqft) will unlock value
and offer significant revenue and cash flow visibility. We also note that
Sobha has diversified its operations beyond Bangalore into cities like
Coimbatore, Pune and Thrissur. Upcoming launches in Gurgaon, Chennai
and Mysore will reduce geographical risk, although Bangalore contributes
62% to our residential RNAV.
Valuation
Sobha currently trades at 1.1X FY13E BVPS of Rs233 and 8.1X FY13E EPS, vs a
sector average of 1.2X and 9.4X respectively. On a 12-m fwd P/E, Sobha trades
at a 19% discount to average P/B (since Jan 2009). We forecast a 14% ROE for
Sobha in FY13E vs a sector average of 11%. We maintain our Buy rating (on
CL) and 12-m target price for Sobha of Rs340. Our target price is set at a 10%
discount to RNAV of Rs377/share. We have made minor tweaks to our EPS
estimates for FY12E-FY14E as we adjust for details in annual report.
Key risks
(1) Slowdown in residential demand in Bangalore, (2) further increase in
interest rates, (3) volatility in input costs, (4) Significant delay in launches.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List
Coverage View: Attractive
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