Tuesday, March 27, 2012

>S.W.O.T. Analysis & Porter Analysis on Real Estate Sector: SOBHA DEVELOPERS

Sobha is a Bengaluru-focused real estate developer. Like many of its peers, Sobha had overleveraged its balance sheet over 2006-08 in order to buy land. However, Sobha is currently the best placed play in the sector due to:

 A repaired balance sheet: Relative to its peers Sobha follows an aggressive cash collection philosophy. Furthermore, the group has consistently launched new projects of 3msf-4msf each year, delivered more than 11msf over FY08-FY12, and has used its operating cash flows to reduce debt. As a result, net debt:equity ratio has fallen to 0.65x from 1.7x in FY09, debtor days have reduced to around 110 days currently from 173 days in FY09 and advances from customers worth over `2bn on the current liabilities side of the balance sheet are yet to go through the P&L.

■ Strong ongoing cash flows: Despite the tough macro-environment,
Sobha’s ratio of ‘CFO/interest cost related cash outflows’ at 2.0x has been the best amongst leveraged peers for 9MFY12. Also, Sobha has reported 20% YoY growth in sales in 9MFY12 and is on track to launch 9msf-10msf of new projects and complete the delivery of over 2msf during FY12 (FY10 delivery: 1.8msf, FY11 delivery: 4.1msf).

 Development potential: Sobha currently owns a land bank with developable area of 112msf (saleable area of over 200msf) valued on its balance sheet at a cost of `19.5bn (or `175psf of developable area). Based on our discussions with real estate brokers, the current value of this land is at least 4x its cost. Project development on this land bank over the next 15 years generates a DCF value of `57.2bn or `583/share for the land. However, our base case scenario values this land bank at `36.5bn (`372 per share), 2.0x its cost.

Valuation: In our project based DCF model for Sobha, we conservatively push out cash flows by 2-3 years and assume slower-than-expected execution, sales and cash collection. We also assume that the cost of construction will grow at a faster pace compared to appreciation in realization rates. Using a discount rate of 15% for real estate projects under construction, an FY11 P/E multiple of 8x for contractual projects and valuing its land bank at 2.0x cost, our SOTP model generates a fair value of `462 per share, a 54% upside.