Sobha Developers - The Southern Architect - Karvy

Over the past 6 months Sobha Developers' (SDL) share price has fallen by 1.3%, owing to (i) generic factors bedeviling the Real Estate sector; (ii) muted FY13 performance and (iii) likely oversupply in the Southern market. In spite of this we initiate coverage with a BUY because of SDL's strong competitive positioning, healthy balance sheet, geographical diversification and upcoming strong launch pipeline.

Best placed v/s Southern peers

Sobha stands out as a leader in our competitive business mapping of the Southern developers. High land bank quality and quantity, superior brand recall and relatively healthy access to finance are the key contributing factors. We expect SDL to capture incremental market share outside home location and deliver above industry average growth.

IT/ITES-centric land bank key value driver

SDL is the largest Southern region real estate developer with 231mn sq ft of saleable area. SDL's land bank is well spread with IT/ITES-driven locations in Bangalore, Chennai, Kochi, Pune and Mysore contributing 78% to the land bank and 84% to the NAV.

Strong balance sheet recovery augurs well for growth

Sobha has de-leveraged its balance sheet from 1.95x net debt/equity end-FY08 to 0.6x end FY13, thanks to a QIP in June 2009 and strong operational cash flows. We expect further reduction in the net debt/equity ratio to 0.5x over FY13-15E as we forecast stable IT/ITES-driven housing demand. This recovery augurs well in terms of funding availability for future growth.

Initiate coverage with BUY: Target price Rs495/share

We initiate on the company with a BUY stance and a SOTP-based target price of Rs495/share. We value the real estate business at Rs466/share using a NAV model and the contracting and manufacturing business (C&M) at Rs29/share. We believe that the near-term catalysts are: (i) strong launch pipeline and (ii) focus on further balance sheet de-leveraging.

Key risks

(i) An oversupply may lead to a 8-10% real estate price; (ii) Sustained liquidity tightening could increase borrowing costs by 150-200bps lowering our NAV by 6%.

Source : Equity Bulls

Keywords