>SOBHA DEVELOPERS: High visibility, improved cashflow to drive valuations; CL Buy

What's changed
In 4Q, Sobha has launched two projects in Chennai and is on track to launch another residential project in Bangalore. With these, Sobha will have launched 11 mn sqft of residential projects in the last 6 quarters and is in the process of launching 8 mn sqft in FY13. These projects provide sales visibility of Rs78 bn or 16 quarters worth based on the recent quarterly run rate. We expect Sobha to pre-sell residential real estate of Rs16.5-17 bn in FY12 compared to Rs11.2 bn in FY11. This growth of more than 45% yoy is in contrast to the declines seen at most developers in FY12 ytd. We expect this large operational outperformance to be reflected in stock performance as well.


Implications
We see a significant jump in operating cashflow in FY13 on increased customer payments and stable/declining interest payments. Based on recent quarterly results, Sobha offers attractive cashflow yield of 12%. We expect operating cashflow to further increase to Rs3.7 bn in FY13 (operating cashflow yield of 14%), as (1) pre-sales momentum remains robust; (2) interest payments will decrease on lower debt level and interest cost, and (3) a large number of launches are planned. Key stock price catalysts include continued improvement in growth visibility as well as cash flow. In addition, our view of affordability and current property pricing levels in Bangalore is constructive.


Valuation
We reiterate our Buy rating (on CL).Our 12-m NAV based TP of Rs353 is unchanged. Sobha is trading at a 37% discount to our Mar-13 RNAV of Rs392. Ongoing and forthcoming projects provide post-tax cashflow visibility of Rs32 bn against current EV of Rs37 bn.


Key risks
Key risks are lower-than-expected volumes sold and slower execution.
RISH TRADER