Sobha Developers - Building on a strong foundation - Edelweiss

We like Sobha Developers for its strong execution, consistent sales and strong corporate governance. Commencing its real estate business from Bengaluru, the company has steadily expanded its presence from 5 cities in 2008 to 7 cities currently. It is expected to reach 10 cities in the next 2-3 years. We expect Sobha to generate net operating cash flows of INR10bn over FY14-15E from ongoing projects of 17msf and new launches of ~12msf. We estimate Sobha's NAV/TP at INR501. At CMP of INR348, the stock presents an attractive upside of 44%. We initiate coverage with a 'BUY/Sector Outperformer' rating on the stock.

Robust operating cashflows

We expect Sobha to generate net operating cash flows of INR10bn over FY14-15E from its ongoing projects of 17msf and new launches of ~12msf. Our estimates do not include any potential new project acquisitions (as guided by management) and the same provides upsides to our estimates. Post capex estimate of INR3.9bn over the period we arrive at a FCFF of INR6.3bn over FY14-15E.

Consistent sales performance and strong execution capabilities

We expect Sobha to maintain its sales momentum and sell 8.5msf over FY14-15e driven by consistent sales performance in Bengaluru and expansion to other cities. Sobha's foray into additional cities will provide further upsides to our estimates. Its steady sales run rate is backed by robust execution ability. The company has delivered over 307 projects, comprising a total saleable area of 49.3msf since inception, at an average delivery rate of 5.3msf over the past 3 years.

Outlook and valuations: Robust upside; Initiate with 'BUY'

We value Sobha's ongoing/forthcoming projects at ~INR19.9bn, contractual projects at INR2.7bn, rental assets at INR2.7bn and residual land bank at INR36.5bn on a DCF basis. Adjusting for FY14E net debt of ~INR11.2bn and unpaid land cost of INR1.4bn, we arrive at FY14E NAV of INR49.2bn or INR501/share, implying a 44% upside to CMP of INR348/share. We initiate coverage with 'BUY/Sector Outperformer'.

Source : Equity Bulls

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