Sobha Developers: Buy

Continuing strength in the Bangalore realty market, good execution track record and well-recognised brand name make Sobha Developers a strong player in the high-end residential segment.

These positives have buoyed Sobha’s stock price nearly 60 per cent in the last six months, matching the gains in the BSE Realty Index. At the current price of ₹436, the stock trades at 15 times its estimated earnings for 2014-15. The valuation is in line with its historical multiple and is similar to that of peers, such as Oberoi Realty.

Investors with a one-two year perspective can consider buying the Sobha stock, as expected sales growth from new project launches and continuing strength in the contract business should boost earnings.

Last year, when most property developers struggled, Sobha’s revenue grew 16 per cent Y-o-Y and profit was up 8 per cent. Over the next two years, the revenue from home sales, its mainstay, is expected to grow at around 20 per cent annually. Its primary market of Bangalore, where it has over 11 million square feet (msf) of ongoing projects, remains robust. The company plans new residential launches totalling 1.6 msf and commercial space of 2 msf in the city this year.

The company’s foray into Gurgaon in 2011 has not helped revenue as anticipated, since sales remain slow. In the June quarter, sales area dropped 16 per cent Y-o-Y, although average sale price increased 5 per cent. Sobha’s move to change the product offering from villas to apartments could aid sales, but , the company’s outlook for this market remains weak. But other markets, such as Kochi, where the sale price (₹8,600 per sq ft) is high, should boost revenue.

Sobha plans to launch 3.2 msf as a 50-50 joint development with Puravankara, in Kochi. Also, new projects of 3.6 msf this year in cities, including Chennai and Pune, should aid sales.

Sobha also derives revenue from construction contracts. In the June quarter, this segment’s income doubled Y-o-Y to ₹232 crore.

Contracts’ share of total income rost to 40 per cent, from 25 per cent in the same period last year. The company has also been broad-basing its client base, from a single customer (Infosys). Others (including Bosch and Biocon) currently account for 40 per cent of contract revenue.

A higher share of construction contracts, which yield lower margins, impacted Sobha’s profitability in the June quarter.

Operating margin dropped to 27 per cent from 30 per cent in the year-ago period. But the likely pick-up in the property sales segment in the coming quarters should improve the company’s operating margin.

Net margin though could still remain at current levels of 10-11 per cent due to a higher interest burden.

After remaining mostly stable during 2013-14, Sobha’s debt increased to ₹1,654 crore as of June 2014, from ₹1,350 crore in March 2014; this was to fund new land purchases.

Despite higher borrowing, Sobha’s debt-equity ratio is comfortable at 0.65 times; the company expects this to decrease to 0.6 times by the end of the year. It helps that the company’s operations are cash flow-positive, thanks to good collections.

In the June quarter, Sobha’s consolidated revenue and profit increased 30 per cent and 14 per cent, respectively, compared to a year ago.

The company pays regular dividend and for 2013-14 the dividend was ₹7 a share.

COMMENT NOW