Last year, tough market conditions and high interest rates have taken a toll on the real estate sector, with the BSE Realty Index losing 25 per cent over this period.
The Bangalore-based property developer Sobha Developers (Sobha) saw a 12 per cent drop in its stock price over the year. The stock touched a low of Rs 218 in early September, after the RBI banned early loan disbursal by banks (popularly called 80:20 schemes). It has since recovered and now trades at Rs 317.
We recommend investors hold the stock as it seems fairly valued at current prices, with concerns priced in.
The stock trades at a multiple of 16 times its consolidated earnings for FY13, the mid-end of its historic average. Assuming 15 per cent earnings growth, the one-year forward multiple is around 13 times, comparable to that of its peer Prestige Estates.
Growth challenges
Though Sobha’s sales in its primary market of Bangalore has been robust, it faces pressures in other markets.
The overall new sales area in the first half of this fiscal increased eight per cent over the same period last year, to 1.92 million sq. ft. Bangalore notched up sequential growth of 12 per cent, but sales in other large markets such as Thrissur, Chennai, NCR and Pune fell sequentially (see Table). Most of these markets also saw sales fall, year on year.
Bangalore accounted for around 0.67 million sq. ft. of the 1 million sq. ft. sold in the September quarter.
The property market in Bangalore has been robust compared to other metros such as Mumbai. Data from the National Housing Board’s (NHB) Residex index for Bangalore show that in the June quarter prices increased around 8 per cent, year over year. Prices have been on an upswing in the last three quarters, after staying low for over two years.
Besides residential projects, Sobha also develops commercial property. Overall, around 19 million sq. ft. of property development was ongoing as of June. The company’s annual sales target is 4.2 million sq. ft, valued at around Rs 2,600 crore — a 10 per cent growth in volume and 20 per cent increase in value year-on-year.
While the volume growth of 10 per cent may be achievable, the expected 20 per cent higher value may be hit by weakness in sale price. In the September quarter, the average sale price per sq. ft. was Rs 6,304 — lower than the June quarter’s Rs 6,548.
This is still a 13 per cent increase from the year-ago realisation of Rs 5,737 a sq. ft. The sequential dip is likely due to poor sales in the NCR region, where realisations average Rs 10,000 per sq. ft. Sales in this market fell 80 per cent to around 31,000 sq. ft. in the September quarter, from over 137,000 sq. ft. last year.
Margin pressure
Sobha also undertakes construction contracts for corporates such as Infosys. This is a low-margin business. Sobha is currently constructing around 11.4 million sq. ft., up 24 per cent from 9.2 million sq. ft. in the same period last year. The unbilled value of this segment is around Rs 728 crore.
Contract revenue grew 19 per cent year-over-year and accounted for 25 per cent of the June quarter income — up from its 23 per cent share last year.
The company’s overall operating margins fell three percentage points in FY13, to under 30 per cent. Its profits after tax grew just three per cent to Rs 217 crore in FY13, while its consolidated revenues grew 32 per cent to around Rs 18,700 crore.
Margin pressure is likely to continue, given the high interest rates and inflation, as input costs rise and cash-flows are delayed. Also, around half its inventory of 7.7 million sq ft (as of June) was priced at over Rs 2 crore.
The luxury segment in most markets faces low demand and Sobha may be forced to cut prices, impacting margins further.
Stable finances
Sobha’s net debt as of June 2013 was Rs 1,230 crore — around the same levels as on March 2013. Its debt-equity ratio has been stable at a reasonable level of around 0.56 times.
The company has a land bank of around 2,500 acres. The low acquisition price will likely help reduce future project costs.
Sobha’s cost of borrowing has been decreasing, from 13.7 per cent last year to 12.9 per cent in the June quarter, thanks to lower interest rate bank loans. Interest cost fell 10 per cent sequentially to Rs 170 crore in the June quarter.
For the June quarter, Sobha’s revenue was around Rs 461 crore and profit-after-tax was Rs 50 crore — up 7 per cent and 11 per cent (Y-o-Y) respectively.
The company pays dividend regularly and the current yield is 2.2 per cent. Sobha’s operating cashflows have been positive, thanks to regular inflows from the contracting segment and better collections from development projects.