>SOBHA DEVELOPERS (CENTRUM)

Liquidity easing but valuations stretched

■ Lacklustre results: Q4 revenues plunged 68% YoY to Rs1,545mn and PAT declined 90% to Rs72mn owing to a halt in new transactions and higher tax rate.

■ Volumes thin due to unaffordability of premium flats: Most of the company's ongoing projects consist of apartments with more than 1,500 sq ft saleable area, targeted at the premium segment. This has resulted in stagnant sales off take due to apartments being priced over Rs5mn.

■ Estimates lowered: We cut our revenue estimates by 22.1% for FY10 and 20.7% for FY11 due to slower-than-anticipated volume off take in core real estate business. However, PAT estimates have been raised by 17%, assuming that there would be no further correction in prices in FY11 and reduced interest burden.

■ Possible QIP issue a trigger for the stock: Sobha continues to have a high D/E of 1.7x with ~25% of its Rs18.75bn debt maturing in FY10. However, with liquidity concerns easing in the sector, Sobha may raise upto Rs7.5bn in FY10 through QIP issue.

■ Spin-off of non-core businesses may provide upside: Sobha’s plans to spin-off its non-core manufacturing and interiors businesses may provide further upside to the stock.

■ Upgraded to Hold: We have raised our target price to Rs150 from Rs56 due to upgrade in SOTP NAV from Rs140 to Rs200. We have provided 25% discount to NAV vs 60% earlier owing to liquidity concerns easing for the sector. However, Sobha’s minimal presence in affordable housing and questionable accounting practices makes us cautious on the stock and we recommend a Hold on the stock.

To see full report: SOBHA DEVELOPERS