Bangalore-based Sobha Developers Ltd has displayed resilience in challenging times for the realty market. Even when pan-India developers are struggling with high inventory levels and weak demand, Sobha appears on the road to achieving its guided sales of 4.2 million sq. ft for fiscal year 2014. In fact, between fiscal years 2010 and 2013, the area sold by the company quadrupled and net revenue grew at a compounded growth rate of 22%.
The company, which has good brand equity, is generating healthy cash flows from operations. When the realty sector is reeling under huge debt and a massive interest burden, Sobha’s debt equity ratio has been steadily trimmed and is at a reasonable 0.6, with growth plans aimed at containing the same.
According to a Citi Research report in October, Sobha’s operating cash flows exceed gross interest outgo by a factor of 1.3 to 2.5 times, indicating that profits generated are sufficient to take care of interest outflows. What goes down well with retail investors is its judicious allocation of cash flows to service debt and distribute dividends to minority shareholders and to capex.
Meanwhile, its strategy to buy land has paid off well as the firm is well-poised to handle growth as the realty market recovers. Most of its reported 2,600 acres of land being acquired before the new Land Acquisition Bill (which increases acquisition cost) will help sustain profitability in the future.
Sobha’s ability to sustain growth in spite of negligible contribution from the high-realization Gurgaon market is attributable to its cautious growth in smaller markets like Kozhikode and Chennai. Also, that 25% of its clients are non-resident Indians and around a third are from the information technology and services sector, gives the firm an edge over other companies in maintaining sales and cash flows.
Not surprisingly, the stock has outperformed the BSE realty index, more importantly after September. In the near term, the realty sector is expected to remain lacklustre but financial discipline and strong brand equity along with shareholder focus makes it one of the preferred realty stocks
Revenues on the rise. Sobha is witnessing sales run-rate of Rs500mn/month visà- vis Rs50-100mn/month at lowest levels as well as half of the peak run-rate of Rs1bn/month. Volumes have picked up across projects to over 0.5mn sqft at present from ~0.3mn sqft/quarter over the past five quarters. Sobha is developing 9.3mn sqft across 31 projects (7mn sqft in Bangalore) and has aggressive plans to launch 3-4mn sqft projects in FY10E across Bangalore, Mysore, National Capital Region (NCR), Pune and Trissur.
■ Land liquidation value accretive. Sobha has sold ~5mn sqft to private equity players in Bangalore for Rs2.25bn, of which Rs1bn has been received. Further, Sobha is looking to sell land in Bangalore, Pune and other cities to raise additional capital of Rs2.5bn. These asset sales will further de-stress the balance sheet, resulting in faster execution and new residential launches for the company.
■ We raise target price to Rs314/share from Rs288/share based on 20% discount to one-year forward NAV of Rs393/share to account for volume uptrend and better price realisation in real estate projects. The stock trades at FY11E P/BV of 1.2x vis-à-vis 2x for the sector. Sobha’s land bank’s value at cost is Rs132/share, with FY11 BV of Rs202/share. The stock has outperformed the broader markets and we expect the trend to continue, given the re-rating led by deleveraging and volume build-up in residential sales. Maintain BUY.