Sobha Developers: Timely change in product mix expected to boost volume growth:: Kotak Sec, report link

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Timely change in product mix expected to boost volume growth. Sobha achieved
about 45% of KIE estimates (lower than its guidance) for FY2015 with 3QFY15E
expected to see flat sales of super-luxury projects. The launch of high-volume units in
4QFY15 may boost Sobha’s volumes in 2015. We expect 2HFY15 debt to fall marginally
on lower land payments. We maintain ADD with a March 2016E target price of `540

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Change in product mix imperative for volume growth
 Although Sobha has been performing well as a developer, its growth has slowed due to the
increase in the proportion of super-luxury projects in its product mix. Nearly half its unsold
area is priced at over `20 mn/unit. Although Sobha has high brand recall in the segment, the
target segment is small. Sobha’s fastest selling segment is priced at under `10 mn/unit (less
than `6 mn/unit in Bangalore).
 Sobha plans to launch a high-volume project in 4QFY15 with ticket size of under `5 mn/unit.
We believe the launch will help Sobha’s volume growth, but it will still miss its guidance.
Sobha will need to launch more such projects from FY2017 to increase volumes—and cash
flow.
Debt peaks for the year; we expect debt to decline marginally in 2HFY15
We expect Sobha to scale down business development in 2HFY15. Debt rose in 2HFY15, mainly
due to high land payments (more than the previous six quarters combined) and slow sales
(hence lower collections). Operating cash flow before land remains positive, but shrank in
1HFY15. Debt may rise again in FY2016E as Sobha will need to pay at least `1.6 bn for
committed land transactions and if capex at the North Bangalore project commences.
We maintain our sales estimates, which are lower than Sobha’s guidance
We maintain our 3.9 mn sq. ft of sales at `24 bn for FY2015E (management guidance of 4.2
mn sq. ft for `26 bn) and 5.4 mn sq. ft in FY2016E for `33.3 bn. Operations are strong and the
balance sheet is comfortable. We await more triggers on growth. Land acquisition with high
investments should be contained until sales gain momentum

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily29122014ap.pdf