The macroeconomic situation continues to be tough for most realty players, but Sobha Developers managed to post strong sales volumes and improve its cash flow in 2011-12. A strong Bangalore market and new launches helped the company achieve volumes of 3.28 million square feet (mnsqft), in line with its 2011-12 guidance of 3-3.5 mnsqft. Higher volumes and improved realisations enabled it to book sales (pre sales) of Rs 1,701 crore for the financial year. Param Desai of Nirmal Bang expects the company to launch 5.5 mnsqft in 2012-13, which will drive growth and help lower its debt-to-equity ratio. Sobha Developers’ managing director, J C Sharma, says the company continues to generate free cash flow every quarter and would look to reduce its debt-to-equity ratio from 0.6 to 0.5 in 2012-13.
The strong improvement in operational performance over the last few quarters has helped the stock generate over 62 per cent returns since October 2011. Given the relatively strong Bangalore realty market, the Street seems to have taken a liking for developers such as Sobha and Prestige Estates, which have given stellar returns. For Sobha, the sharp price appreciation in recent months means the stock is now trading at reasonable PE valuations of 13.4 times 2012-13 estimates, compared to 10-14 times for its comparable peers. Against this backdrop, analysts believe the upside for the stock is 10-12 per cent, while further triggers would be additional repo rate cuts by the Reserve Bank of India. Investors, thus, can look at accumulating it on dips.
Strong quarter, steady year
Buoyed by new launches in Bangalore, Chennai and Coimbatore, the company last week reported (in an operational update) volume growth of 31 per cent year-on-year at 0.86 mnsqft for the March quarter. Pre sales or bookings of Rs 1,700 crore in 2011-12 were 50 per cent higher compared to 2010-11 and 20 per cent higher than its own guidance of Rs 1,500 crore. Average realisations were also up 27 per cent at Rs 5,181 per square feet on account of higher value National Capital Region (NCR) launch. If the company can sustain this annual run rate over the next two-three years, it can generate sustainable operating cash flow to the tune of Rs 580 crore, feel J P Morgan India analysts Gunjan Prithyani and Saurabh Kumar.
| IMPROVING MARGINS | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Net sales | 1,473 | 1,493 | 1,799 |
| % chg y-o-y | 30.5 | 1.4 | 20.5 |
| Ebit | 288 | 302 | 406 |
| % chg y-o-y | 34.7 | 4.8 | 34.6 |
| Ebit (%) | 19.6 | 20.2 | 22.6 |
| Net profit | 181 | 173 | 244 |
| % chg y-o-y | 35.2 | -4.3 | 40.9 |
| Net debt-equity (x) | 0.6 | 0.6 | 0.5 |
| E: Estimates; EBIT is earnings before interest and tax Source: J P Morgan, Company | |||
While 2011-12 estimates looked muted, it was largely due to a high 2010-11 base (which included income from sale of land). However, the same is expected to be robust in 2012-13, led by new launches. The company is also expected to generate free cash flow (post capex) of Rs 100-130 crore in 2012-13. The high operating cash flows make it standout in the realty market. Ambit Capital analysts say the run rate of operating cash flows in 2011-12 was twice the interest cost outflow, making Sobha one of the two listed developers generating net cash surplus from ongoing operations, without relying on alternative strategies like land sales or low-margin products like affordable housing.
Bangalore-centric, but diversifying
While the company has been able to overcome macro headwinds such as higher interest rates and falling demand, any sharp slowdown of the Bangalore market could dampen its pace of growth. That’s because, India’s information technology capital accounted for 69 per cent of the company’s sales volumes in 2011-12. Moreover, a third of its land bank of 2,500 acres is in the Bangalore area. While the company has reduced its sales volume dependence on the Bangalore market (from 72 per cent in 2010-11), it still accounts for a significant portion. Sobha is present in Chennai, Thrissur, NCR, Pune and Kochi, among others.
Credit Suisse analyst Sandeep Mathew says Sobha’s volume growth in its core residential market has begun to show signs of moderation (+1 per cent quarter-on-quarter, +5 per cent year-on-year), which poses a risk to sustained volume gains in 2012-13. This means the company will have to accelerate diversification into other areas, if it is to sustain growth. Mathew says, “Higher penetration of new markets (NCR, Chennai) will be a key growth driver to bookings in 2012-13.” Sharma of Sobha Developers isn’t perturbed. While admitting that there is scope for more growth in other cities, he says Bangalore’s residential and commercial markets are quite robust and will continue to be a major contributor.
While the company is planning to reduce its total debt of nearly Rs 1,300 crore (net debt is at Rs 860 crore), J P Morgan analysts feel at 3.6 times, Sobha’s net debt/earnings before interest, taxes, depreciation, and amortization is 20 per cent higher than their comfort range. This is a cause for concern, but they say positive operating cash flows and land monetisation efforts give comfort on the overall funding profile.
