Tuesday, December 22, 2009


Sobha’s dominant position in the IT capital of Bangalore, which accounts for 86% of its next 5 year development, makes it one of the key beneficiaries of the expected IT sector recovery. With reduced land-bank, infusion from private & public equity strengthening the balance sheet, Sobha is ideally poised to capitalise on the buoyancy in sales volumes. Contractual business is a steady source of cash generation and our target of 25% discount to Mar’11 NAV offers 25% upside. Reinitiate with a BUY.

IT sector recovery to prop up Southern markets
Real estate market in IT heavy Southern India has taken longer to recover with volumes still c.50%+ lower than 1Q2008 levels (other location c.35% lower). This has resulted in muted pricing action with residential prices recovering only by 10% since trough as against 15-30% in Mumbai and Delhi. But with IT majors stepping up the hiring act and wage hikes being given after a gap of nearly 2 years, we believe that real estate markets in Bangalore will soon play the catch-up game. With Bangalore accounting for 85%+ of the next 3 years cashflows, Sobha will be a key beneficiary.

Partial deleveraging already in place and more to come
Over the last 18 months, Sobha has lowered landbank by 29% to 2,875 acres or 174 m sf. Outstanding land payments are also down 58% to Rs1.8bn. Through a combination of public and private equity, the company has lowered debt to equity from 50% to 0.88x. Sobha plans to reduce its leverage further to 0.5x by FY11. For the same, one of the measures is land sales from where Sobha plans to raise Rs4-5bn over the next 2-4 quarters.

Even a modest recovery in volumes enough to stabilise debt
Sobha’s new booking volumes dipped from 3.5m sf in FY07 to 0.9m sf in FY09. Volumes in 1HFY10 are already up to 0.6m sf as apartment sales volume tripled from 20/month in 1QCY09 to nearly 70/month by November. We project sales volumes to jump to 3.5m sf by FY12 same as FY07, even as Sobha expands to newer locations. We note that most of the other real estate developers are planning FY12 volumes to be 1.5-2x of FY07. We like the company’s conservative nature and highlight that, unpaid component of existing sold inventory is enough to fund the ongoing construction costs.

Initiate with BUY, 25% Upside
Here is the fourth and final paragraph (and chapter). Any more “legs” and the pyramid will lose its “point”. In some reports, even four main points may be too many. Remember – you’re busy, they’re busy: use the facts that matter from an investment point of view. These stories are invitations to readers to call you for more details, or to read your more in-depth research.

To read the full report: SOBHA DEV