Sobha Developers- Entry point for long-term investors :: Macquarie Research,

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Sobha Developers
Entry point for long-term investors
Event
 We came away from Sobha’s conference call reassured about the company’s
prospects. The volume of launches and realisations in 1QFY12 and launch
pipeline for rest of the year look very encouraging. We would urge long-term
investors to consider the current weakness (primarily due to macro concerns)
as an entry opportunity. We reiterate our positive rating and TP of Rs430.
Impact
 Encouraging management commentary – Headline results were mixed with
PAT of Rs309m, coming shy of our estimates by 11.5% due to higher tax
estimates and a slight miss on revenues. However, we do not see this as a
concern, because operating fundamentals remain strong. Despite rising rates,
the company managed to sell 0.67 m sqf at average realisations of ~Rs4,500/
sqf, 11% higher than FY11 average realisations. This is very encouraging.
Importantly, YTD (till August-2011), the company has sold over 1m sqf. This is
~33% of our annual sales estimates.
 Balance sheet strengthening to continue. Headline debt has increased by
Rs1bn QoQ, primarily due to increase in new launches. However, cash flow
remains strong due to successful new launches and strong performance of
construction business. Debt/equity continues to remain at a comfortable level
of 0.69x on a consolidated basis. The management is expecting to achieve a
target debt to equity of 0.5x by FY12-end. This would be a positive surprise,
as our net debt/equity estimate stands at 0.55x by FY12-end.
 Strong launch pipeline providing cash flow visibility. The company plans
to launch over 11m sqf of residential projects in FY12. The company has
already launched 3.5m sqf of area ,out of which ~1.3m sqf has been offered
for sale. Importantly, in the last two months the company has launched
projects outside its core market (in Mysore, Pune and NCR) and seen positive
response. We expect pre-sales led triggers and cash flow to remain strong
over the next two quarters as six new projects are scheduled for launch.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs430.00 based on a Sum of Parts methodology.
 Catalyst: Residential volume/price trends in Bangalore over next 6-12 months
Action and recommendation
 Maintain Outperform: Sobha ticks all boxes if we focus on elimination of key
risks (refer to Selection via elimination dated 13 May 2011). It has a strong
balance sheet, trades at attractive free cash yields, has limited news flow risk,
provides excellent disclosures and is exposed to the right micro-markets.
Given Sobha’s relatively low liquidity, we recommend a basket approach to
play the attractive Bangalore market. A market cap-weighted basket of Sobha
and Prestige (PEPL IN, Rs115, OP, TP: Rs210) would work well, in our view.