>SOBHA DEVELOPERS (ICICI SECURITIES)

STRIDING AHEAD

Sobha Developers’ (Sobha) has seen significant pick-up in residential volumes, which have increased >50% from ~0.3mn sqft/quarter run rate over the past five quarters. Also, prices in Bangalore have firmed up, with risk being higher on the upside than downside. Based on this, we expect Sobha to witness sales of 3mn sqft in FY10E, and reaching ~7mnsqft by FY12E. Post capital infusion of Rs5.3bn via QIP (at Rs209/share) and Rs5bn through land liquidation (Rs2.25bn already raised via private equity), we expect gross D/E to reduce from the peak of 1.8x to 0.6x by end-FY10E. Sobha has 9.3mn sqft under development and is expected to launch another 3-4mn sqft in FY10. Given cashflow visibility from operations and asset sales, we remain confident about the company’s long-term potential. We raise our target price to Rs314/share from Rs288/share; given Sobha’s discounted valuations, we maintain BUY. The stock is trading at 1.2xFY11E P/BV
of Rs202/share.

■ 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.

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