Bengaluru remains the saving grace-- Sobha Developers ::HDFC Securities

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Bengaluru remains the saving grace
Sobha Developers (Sobha) delivered a muted
operating performance in 3QFY15 in line with
expectations with pre-sales of ~0.66msf worth Rs
4.3bn. Bengaluru continues to be the only stable
market on account of smooth approvals with a
quarterly sales run-rate of over 0.5msf. However,
lack of approvals in Chennai and a tepid demand
environment in Kochi (NRI demand from Middle East
becoming uncertain owing to falling oil prices) will
remain an overhang on volumes for at least the next
two quarters.
Although Sobha had given guidance for volumes of
~4msf worth Rs 27bn in FY15E, the company has
achieved only Rs 14.7bn of bookings in 9MFY15.We
expect Sobha to clock FY15E sales bookings of Rs 21-
23bn in FY15E, i.e. Rs 6-8bn in 4QFY15e. Achieving
this target will largely hinge on the launch of the
budget housing project in Bengaluru in 4QFY15E
across 81acres (saleable area of 7.6msf in the Rs 4-
10mn ticket size) that may spur volumes. Although
Sobha continues to face issues with approvals and
demand outside Bengaluru, we expect these issues to
be resolved over the medium term. We maintain BUY
with FY16E NAV of Rs 540/sh. However, Sobha will
need to be prudent in giving annual sales guidance
going forward, taking into account the approval and
demand environment ex-Bengaluru.
 Volume revival hinges on new launches : Sobha
has seen quarterly aberrations in volumes over the last
five quarters owing to approval delays and dependence
on few launches to drive volumes. However, the
company is hopeful of reversing this trend in the
remainder of FY15 through 7-8 launches across South
India and Pune. The imminent launch of two large
projects at Bengaluru and Chennai in CY15E across
10msf will be the key volume driver for Sobha over the
next four to six quarters.
 Net debt levels to rise over FY15-17E : With the
Kochi land acquisition of Rs 3.3bn in FY15E and capex
of Rs 9bn (on APMC and other commercial assets), we
expect Sobha to see cash flow deficit of Rs 5.8bn over
FY15-17E (pls refer Pg 3 for detailed cash flows over
FY12-17E).