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Sobha Developers Ltd.
Disappointing 1Q, Promise of
a Strong F12 Is Still On - OW
Quick Comment – 1Q results below expectation:
SDL reported flat sales yoy (down 8% qoq) and marginal
OPM expansion to 19.3%. Along with higher tax rate,
this caused earnings to decline 10% to Rs0.31 bn (we
estimated Rs0.37 bn). Lower recognition of new projects
and increasing inventory of completed but unsold
projects (0.19 msf in F1Q12 versus 0.12 msf in F4Q11
led to earnings disappointment, we believe. Sequential
increase in net debt by Rs1 bn to Rs13 bn (69% net
gearing) was a key negative in the results (versus SDL’s
guidance of de-leveraging).
Outlook for the year: Management retains its F12 new
sales target of 3-3.5 msf with Rs15 bn sales value
potential (0.67 bn with Rs3 bn sales value in 1Q). It
expects to achieve 20-22% OPM (35% from real estate
and 15%-plus from contract business). Importantly, the
company has set a high target of 50% net gearing (Rs10
bn net debt) by the end of F12, implying Rs3 bn surplus
from operations. It expects new projects to start getting
recognized in the accounts by F3Q12 at the rate of new
sales bookings per quarter (Rs3 bn).
Operational scale up trending nicely, we believe: We
see two broader themes progressing well – 1)
diversification to new city markets (Mysore and Gurgaon
launched; Chennai launch soon) and 2) building a
pipeline of ongoing projects (3.48 msf launched during
the quarter, 11.3 msf target for F12) to ensure
medium-term cash generation. Management expects
stable pricing for its ongoing projects in the months
ahead. Gurgaon township (10msf overall) was launched
(1msf villas) in July and the company has sold 20 units
(75ksf, Rs700 mln, 35% OPM).
Investment thesis: We retain OW rating on SDL in view
of quality land bank (233 msf), end to end capability,
execution scale-up visibility and reasonable valuation.
However, the company needs to focus on higher asset
turnover (75 years land bank at current pace of sales) by
sacrificing some margins to speed up value unlocking.
Management Call Highlights
Entered Mysore in F1Q12: Sobha launched its plotted
development project – Sobha Garden in Mysore (0.22msf of
saleable area). It also launched 3.3msf of residential space in
Bangalore during the quarter.
11.3msf of new launches target for F12: Management has
guided for 11.3msf of new launches during F12, spread across
new locations of Gurgaon [launched first phase (1msf) of
Township development (4.2msf) in July’11], Mysore (already
launched – Sobha Garden) and Chennai (expected to launch in
the current quarter). That’s in addition to the existing locations
of Bangalore (3.3msf launched; 0.2msf proposed), Thrissur,
Coimbatore and Pune (launched in July’11).
3-3.5msf / Rs15bn of new sales guidance for F12: Sobha
sold 0.67msf of space during the current quarter. Sales in the
newly launched Gurgaon villa project are strong (sold 10% of
the first phase till date) while those in other locations are
healthy. Sobha sees no pressure on its pricing across locations
(Rs3k-4.5k psf)- and is confident of achieving Rs15bn in new
sales for F12 (Rs3bn achieved during F1Q12).
Net debt to equity at 69% for F1Q12: Net debt rose 10%
sequentially to Rs12.9bn as of F1Q12. This is due to Rs1bn of
cost incurred towards infrastructure development and
EDC/IDC charges for the Gurgaon projects. Net debt to equity
stood at 69% (up 500bps qoq).
Net debt guidance of Rs10bn for F12: Management has
guided for debt reduction of Rs3bn to bring the net debt to
Rs10bn with a net debt to equity ratio of 0.5 by end of F12. This
it expects to achieve backed by cash flows from its existing
projects as well as a few premium-priced new launches
(Gurgaon Villas, Sobha Signature – Bangalore) during the year.
It has Rs4bn of debt repayment obligation for the balance F12
and Rs5bn of unutilized sanctioned loans.
Improving sales realization: Sales realization increased to
Rs4,547psf during F1Q12 (up 11% from F11). This reflects
higher-priced new launches during the current quarter (Sobha
Signature, Sobha City). Management expects realization to
further improve in the coming quarters (earlier guidance of
Rs4.5kpsf), driven by the Gurgaon Villa project (selling at
Rs9300psf).
Contractual business: It expects contractual business to
remain stable and does not see any significant impact of
general economic slowdown on order flows going forward. It
maintains its earlier guidance of Rs5bn in revenues for F12.
Guidance for tax rate, margins: Effective tax rate for F1Q12
was 31.8%. Management expects it to remain above 30% for
the coming quarters. Operating margins for real estate
business are expected to remain at (30-35)% with the
contractual business at ~15%.
Bangalore market outlook: Bangalore is still the mainstay for
Sobha. Management believes the market is healthy and
expects it to remain stable both in terms of demand and pricing.
It currently does not see nor expects the high interest rate
environment to hurt sales here.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sobha Developers Ltd.
Disappointing 1Q, Promise of
a Strong F12 Is Still On - OW
Quick Comment – 1Q results below expectation:
SDL reported flat sales yoy (down 8% qoq) and marginal
OPM expansion to 19.3%. Along with higher tax rate,
this caused earnings to decline 10% to Rs0.31 bn (we
estimated Rs0.37 bn). Lower recognition of new projects
and increasing inventory of completed but unsold
projects (0.19 msf in F1Q12 versus 0.12 msf in F4Q11
led to earnings disappointment, we believe. Sequential
increase in net debt by Rs1 bn to Rs13 bn (69% net
gearing) was a key negative in the results (versus SDL’s
guidance of de-leveraging).
Outlook for the year: Management retains its F12 new
sales target of 3-3.5 msf with Rs15 bn sales value
potential (0.67 bn with Rs3 bn sales value in 1Q). It
expects to achieve 20-22% OPM (35% from real estate
and 15%-plus from contract business). Importantly, the
company has set a high target of 50% net gearing (Rs10
bn net debt) by the end of F12, implying Rs3 bn surplus
from operations. It expects new projects to start getting
recognized in the accounts by F3Q12 at the rate of new
sales bookings per quarter (Rs3 bn).
Operational scale up trending nicely, we believe: We
see two broader themes progressing well – 1)
diversification to new city markets (Mysore and Gurgaon
launched; Chennai launch soon) and 2) building a
pipeline of ongoing projects (3.48 msf launched during
the quarter, 11.3 msf target for F12) to ensure
medium-term cash generation. Management expects
stable pricing for its ongoing projects in the months
ahead. Gurgaon township (10msf overall) was launched
(1msf villas) in July and the company has sold 20 units
(75ksf, Rs700 mln, 35% OPM).
Investment thesis: We retain OW rating on SDL in view
of quality land bank (233 msf), end to end capability,
execution scale-up visibility and reasonable valuation.
However, the company needs to focus on higher asset
turnover (75 years land bank at current pace of sales) by
sacrificing some margins to speed up value unlocking.
Management Call Highlights
Entered Mysore in F1Q12: Sobha launched its plotted
development project – Sobha Garden in Mysore (0.22msf of
saleable area). It also launched 3.3msf of residential space in
Bangalore during the quarter.
11.3msf of new launches target for F12: Management has
guided for 11.3msf of new launches during F12, spread across
new locations of Gurgaon [launched first phase (1msf) of
Township development (4.2msf) in July’11], Mysore (already
launched – Sobha Garden) and Chennai (expected to launch in
the current quarter). That’s in addition to the existing locations
of Bangalore (3.3msf launched; 0.2msf proposed), Thrissur,
Coimbatore and Pune (launched in July’11).
3-3.5msf / Rs15bn of new sales guidance for F12: Sobha
sold 0.67msf of space during the current quarter. Sales in the
newly launched Gurgaon villa project are strong (sold 10% of
the first phase till date) while those in other locations are
healthy. Sobha sees no pressure on its pricing across locations
(Rs3k-4.5k psf)- and is confident of achieving Rs15bn in new
sales for F12 (Rs3bn achieved during F1Q12).
Net debt to equity at 69% for F1Q12: Net debt rose 10%
sequentially to Rs12.9bn as of F1Q12. This is due to Rs1bn of
cost incurred towards infrastructure development and
EDC/IDC charges for the Gurgaon projects. Net debt to equity
stood at 69% (up 500bps qoq).
Net debt guidance of Rs10bn for F12: Management has
guided for debt reduction of Rs3bn to bring the net debt to
Rs10bn with a net debt to equity ratio of 0.5 by end of F12. This
it expects to achieve backed by cash flows from its existing
projects as well as a few premium-priced new launches
(Gurgaon Villas, Sobha Signature – Bangalore) during the year.
It has Rs4bn of debt repayment obligation for the balance F12
and Rs5bn of unutilized sanctioned loans.
Improving sales realization: Sales realization increased to
Rs4,547psf during F1Q12 (up 11% from F11). This reflects
higher-priced new launches during the current quarter (Sobha
Signature, Sobha City). Management expects realization to
further improve in the coming quarters (earlier guidance of
Rs4.5kpsf), driven by the Gurgaon Villa project (selling at
Rs9300psf).
Contractual business: It expects contractual business to
remain stable and does not see any significant impact of
general economic slowdown on order flows going forward. It
maintains its earlier guidance of Rs5bn in revenues for F12.
Guidance for tax rate, margins: Effective tax rate for F1Q12
was 31.8%. Management expects it to remain above 30% for
the coming quarters. Operating margins for real estate
business are expected to remain at (30-35)% with the
contractual business at ~15%.
Bangalore market outlook: Bangalore is still the mainstay for
Sobha. Management believes the market is healthy and
expects it to remain stable both in terms of demand and pricing.
It currently does not see nor expects the high interest rate
environment to hurt sales here.
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