Sobha Developers’ stock was up three per cent on the National Stock Exchange (NSE) after posting in-line results for the September quarter. Except margins that fell significantly, the company beat analysts’ expectations on most parameters.
Recurring cash flows after interest and taxes remained positive for the fifth successive quarter, at Rs 46 crore in the second quarter of FY14, which is encouraging, according to Jefferies analysts Anand Agarwal and Swagato Souryo Ghosh.
Steady operational cash flows and a strong pipeline of projects is leading the Street to remain positive on the stock.
According to analysts, the company, which achieved 1.92 million sq ft during the first half of the current financial year, will be able to reach its FY14 target of 4.2 million sq ft. In FY15, the firm has plans to launch 12.34 million sq ft, which includes its first project in Kochi and over the next three years it is targeting 21 million sq ft from its existing land bank. The management has indicated the run rate of launches, 3.75 million sq ft at the end of FY13, would double to 7.5 million sq ft over the next five years.
While the net debt has gone up by Rs 38.6 crore on a sequential basis to Rs 1,268 crore owing to land acquisition and dividend payout, the company has maintained that net debt-to-equity ratio will remain in the 0.5 to 0.6 times band. Jefferies analysts believe gearing levels are likely to remain under 0.6 times, given operating cash flows, which could improve further on the back of growing pre-sales which were up 20 per cent year-on-year (y-o-y). Another positive is the cost of debt has come down by 20 basis points (bps) to 12.73 per cent over the past six months, partly aided by a rating upgrade by ICRA to A- from BBB+.
Given the large land bank (2,500 acres, 232 million sq ft developable area), strong cash flows and low leverage, most analysts have a ‘buy’ on the stock. Goldman Sachs analysts say Sobha Developers recent launches and its strong pipeline will help it improve its return on equity (RoE) by 630 bps over FY13-16. The analysts also believe valuations at a 47 per cent discount to net asset value (NAV), compared with the five-year average discount of 32 per cent, are also attractive. At current levels, it is trading nine times its FY15 earnings. Most analysts have a target price ranging Rs 420-460, indicating potential upside of 30-45 per cent.
Strong revenue growth, disappointing margins
The Bangalore-based developer recorded a revenue growth of 30 per cent at Rs 540 crore, above expectations. The contractual segment (32 per cent of sales) grew 74 per cent y-o-y to Rs 98 crore and boosted the overall revenues. Thanks to this growth, earnings before interest, taxes, depreciation and amortisation (Ebidta), too, improved by 12 per cent y-o-y to Rs 140 crore. Net profit was up 13 per cent to Rs 50 crore.
The Ebidta margins at 27 per cent disappointed. These were down 450 bps, y-o-y, and were below analysts’ estimates of 30 per cent. The management explained that product mix and sale of a villa property (Rs 40 crore) were the primary reasons why margins took a tumble. A higher proportion of contractual projects segment (32 per cent against the normal 23-24 per cent) also contributed to the margin fall. This segment fetches about 20 per cent margins compared with property development business’ 35 per cent.
According to the management, margins are likely to revert to the 30 per cent levels as more property development projects come up for revenue recognition.
Steady volumes
The company registered sales volumes of one million sq ft in the September quarter, up six per cent y-o-y. Sales were up 20 per cent, y-o-y, and five per cent, sequentially, at Rs 632 crore. The firm had two launches in the quarter, one each in Bangalore and Kozhikode, with a total saleable area of 1.13 million sq ft. While realisations were up 13 per cent, y-o-y, at Rs 6,304 a sq ft, they were down sequentially.
The company says the fall is due to higher unit prices and volumes from its Bangalore Indraprastha project in the June quarter. Sales to non-resident Indians (NRIs) were up over the past two quarters due to rupee depreciation. NRIs accounted for 28 per cent of sales in the first half of FY14 against the normal 20 per cent.
Recurring cash flows after interest and taxes remained positive for the fifth successive quarter, at Rs 46 crore in the second quarter of FY14, which is encouraging, according to Jefferies analysts Anand Agarwal and Swagato Souryo Ghosh.
Steady operational cash flows and a strong pipeline of projects is leading the Street to remain positive on the stock.
According to analysts, the company, which achieved 1.92 million sq ft during the first half of the current financial year, will be able to reach its FY14 target of 4.2 million sq ft. In FY15, the firm has plans to launch 12.34 million sq ft, which includes its first project in Kochi and over the next three years it is targeting 21 million sq ft from its existing land bank. The management has indicated the run rate of launches, 3.75 million sq ft at the end of FY13, would double to 7.5 million sq ft over the next five years.
While the net debt has gone up by Rs 38.6 crore on a sequential basis to Rs 1,268 crore owing to land acquisition and dividend payout, the company has maintained that net debt-to-equity ratio will remain in the 0.5 to 0.6 times band. Jefferies analysts believe gearing levels are likely to remain under 0.6 times, given operating cash flows, which could improve further on the back of growing pre-sales which were up 20 per cent year-on-year (y-o-y). Another positive is the cost of debt has come down by 20 basis points (bps) to 12.73 per cent over the past six months, partly aided by a rating upgrade by ICRA to A- from BBB+.
Given the large land bank (2,500 acres, 232 million sq ft developable area), strong cash flows and low leverage, most analysts have a ‘buy’ on the stock. Goldman Sachs analysts say Sobha Developers recent launches and its strong pipeline will help it improve its return on equity (RoE) by 630 bps over FY13-16. The analysts also believe valuations at a 47 per cent discount to net asset value (NAV), compared with the five-year average discount of 32 per cent, are also attractive. At current levels, it is trading nine times its FY15 earnings. Most analysts have a target price ranging Rs 420-460, indicating potential upside of 30-45 per cent.
The Bangalore-based developer recorded a revenue growth of 30 per cent at Rs 540 crore, above expectations. The contractual segment (32 per cent of sales) grew 74 per cent y-o-y to Rs 98 crore and boosted the overall revenues. Thanks to this growth, earnings before interest, taxes, depreciation and amortisation (Ebidta), too, improved by 12 per cent y-o-y to Rs 140 crore. Net profit was up 13 per cent to Rs 50 crore.
The Ebidta margins at 27 per cent disappointed. These were down 450 bps, y-o-y, and were below analysts’ estimates of 30 per cent. The management explained that product mix and sale of a villa property (Rs 40 crore) were the primary reasons why margins took a tumble. A higher proportion of contractual projects segment (32 per cent against the normal 23-24 per cent) also contributed to the margin fall. This segment fetches about 20 per cent margins compared with property development business’ 35 per cent.
According to the management, margins are likely to revert to the 30 per cent levels as more property development projects come up for revenue recognition.
Steady volumes
The company registered sales volumes of one million sq ft in the September quarter, up six per cent y-o-y. Sales were up 20 per cent, y-o-y, and five per cent, sequentially, at Rs 632 crore. The firm had two launches in the quarter, one each in Bangalore and Kozhikode, with a total saleable area of 1.13 million sq ft. While realisations were up 13 per cent, y-o-y, at Rs 6,304 a sq ft, they were down sequentially.
The company says the fall is due to higher unit prices and volumes from its Bangalore Indraprastha project in the June quarter. Sales to non-resident Indians (NRIs) were up over the past two quarters due to rupee depreciation. NRIs accounted for 28 per cent of sales in the first half of FY14 against the normal 20 per cent.