Sobha Developers - One-time expenses impact profitability... - ICICIdirect.com

Sobha Developers' (Sobha) Q1FY14 results were below our expectations due to one-time items (client & labour settlement expenses) worth Rs. 10 crore and higher tax rate. Sales volumes grew 10.2% YoY to 0.92 mn sq ft. In Q1FY14, the company spent Rs. 47 crore on land acquisition and incurred capex of Rs. 28.7 crore mainly on commercial RE, which led to a marginal rise in the net debt at Rs. 1229.5 crore despite healthy operating cash flow. We maintain our HOLD recommendation on the stock as the ramp up in the construction budget, new geographies growth initiatives and investment in commercial RE may keep its FCF negative and widen its discount to its NAV.

One-time write-off, higher tax rate lead to muted Q1FY14 show ...

The net profit grew slower at 11.3% YoY to Rs. 50.1 crore (I-direct estimate: Rs. 57.4 crore). This was due to one-off items (client & labour contractual settlement: Rs. 10.1 crore) impacting EBITDA margin by 220 bps to 30% in Q1FY14 and higher effective tax rate of 40.6% in Q1FY14 due to a hike in surcharge and timing mismatch in consolidation of subsidiaries' profit.

Sales volumes grow 10.2% YoY; NCR volume muted...

Sales volumes grew 10.2% YoY to 0.92 mn sq ft worth Rs. 602.8 crore led by Bengaluru (up 16% YoY to 0.6 mn sq ft). However, the NCR region sales volume has declined significantly to ~36000 sq ft vs. ~0.1 mn sq ft seen in the last few quarters due to large ticket size of the product.

Spends Rs. 47 crore on land acquisition; net debt to equity at 0.56x ...

Sobha generated operating cash flow after interest (OCF) of Rs. 71.3 crore in Q1FY14. Despite healthy OCF, its net debt rose slightly by ~Rs. 10 crore sequentially to Rs. 1229.5 crore (net debt to equity - 0.56x) due to i) land payments towards new acquisition in NCR, Bengaluru and Thrissur aggregating Rs. 47.6 crore ii) incurred capex for commercial RE of Rs. 15.9 crore & general purpose of Rs. 12.8 crore keeping its free cash flow negative.

Maintain HOLD; RE business valued at 0.7x its NAV...

Though Sobha's sales volume has been healthy, we anticipate that with a ramp up in the RE construction budget, the company's strategy will be to grow into new geographies while investment in commercial RE may keep its FCF negative leading to increase in debt, which may widen its discount to NAV. We maintain our HOLD rating on the stock with a target price of Rs. 305/share (RE business: Rs. 266/share at 0.7x its NAV and construction business: Rs. 39/share.

Source : Equity Bulls

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