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Sobha
BUY
INDUSTRY REAL ESTATE In-line performance
CMP (as on 13 Nov 2017) Rs 500 Sobha Developers (SDL) 2QFY18 net profit came in Key highlights
at Rs 503mn. Adjusted for MAT credit of Rs 103mn, In-line performance: SDLs revenue grew 19.5% YoY,
Target Price Rs 572 PAT is Rs 400mn, in-line with our estimate of Rs owing to strong growth in the Real Estate development
Nifty 10,225 432mn. SDL recorded 0.86mn sq ft of pre-sales for business (+36.3% YoY), but was partly negated by a
decline in the Contracting segment (-13.6% YoY).
Sensex 33,034 2QFY18, with pre-sales value at Rs 7.8bn (SDL share
EBIDTA margin expanded 19bps YoY to 19.3%. Despite
KEY STOCK DATA Rs 5.9bn). Cost of funds reduced to 9.88% QoQ. better contribution from the high-margin realty
Bloomberg SOBHA IN segment (76.3% vs 67.1% YoY), EBIDTA margins
Net D/E increased from 0.75x to 0.84x QoQ. Net debt
No. of Shares (mn) 96 remained muted.
stood at Rs 22.8bn (+Rs 2,584mn QoQ). This was on
MCap (Rs bn) / ($ mn) 48/736
account of lands payment of Rs 2.8bn. Customer Net D/E at 0.84x, capex pick-up key headwind: SDL
6m avg traded value (Rs mn) 153 incurred Rs 131mn capex on commercial assets during
collection stood at Rs 6.9bn for 2QFY18 in line with 1HFY18 vs Rs 83mn during 1HFY17. Going forward, SDL
STOCK PERFORMANCE (%)
1QFY18, at Rs 7.3bn. may step up APMC capex (from FY19E). During
52 Week high / low Rs 555/223
2QFY18, land payments witnessed a steep jump to Rs
3M 6M 12M Despite higher contribution from the Real Estate
2.8bn (2QFY17- Rs 503mn) for lands in Kochi.
Absolute (%) 34.9 22.7 101.9 business (76.3% vs 67.1% YoY), EBIDTA margins
Near-term outlook: Though the underlying real estate
Relative (%) 29.1 13.3 78.7 remained muted. SDL is sitting on 15mn sq ft of market still remains dull, organised players like SDL
SHAREHOLDING PATTERN (%) unsold inventory and pre-sales acceleration is key for may benefit from the shift in market share from the
Promoters 56.08 further re-rating. Maintain BUY with an increased unorganised to organised sector. We remain
FIs & Local MFs 10.70 NAV of Rs 572/share. constructive.
FPIs 28.72
Public & Others 4.50 Financial Summary*
Source : BSE (Rs mn) 2QFY18 2QFY17 YoY (%) 1QFY18 QoQ (%) FY17 FY18E FY19E FY20E
Net Sales 6,466 5,411 19.5 6,789 (4.8) 22,462 25,713 27,407 31,624
Parikshit Kandpal EBITDA 1,248 1,034 20.7 1,215 2.7 4,199 4,928 5,331 6,009
parikshitd.kandpal@hdfcsec.com APAT 503 384 31.0 477 5.5 1,667 1,886 2,136 2,569
+91-22-6171-7317 Diluted EPS (Rs) 5.2 4.0 31.0 5.0 5.5 17.3 19.6 22.2 26.7
P/E (x) 28.9 25.5 22.5 18.7
Kunal Bhandari EV / EBITDA (x) 16.4 14.4 13.2 11.8
kunal.bhandari@hdfcsec.com RoE (%) 5.2 6.4 6.9 7.9
+91-22-6171-7319 Source: Company, HDFC sec Inst Research, * Consolidated
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
SOBHA: RESULTS REVIEW 2QFY18
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SOBHA: RESULTS REVIEW 2QFY18
Net D/E increased from Worst-case scenario: Consolidated net D/E peaks at 0.84x
0.75x to 0.84x QoQ. Net Net D/E increased from 0.75x to 0.84x QoQ. Net debt during FY19E, as the construction of APMC projects
debt stood at Rs 22.83bn stood at Rs 22.83bn (+Rs 2,584mn QoQ). This was on pick up.
(+Rs 2,584mn QoQ). This account of land payment of Rs 2,794mn. Customer
collection stood at Rs 6.9bn for 2QFY18, in-line with While we remain cautious on rising debt levels, we
was on account of land expect SDL to monetize the non-core land bank to fund
payment of Rs 2,794mn. 1QFY18 at Rs 7.3bn.
the Capex of the APMC project. SDL may not have
Customer collection stood With an outlay of Rs 10bn expected for the APMC near-term liquidity concerns, as cash flows from real
at Rs 6.9bn for 2QFY18 in commercial project, net debt may increase further. Net estate/contractual business continue to be robust.
line with 1QFY18 at Rs D/E may remain stable in the 0.7-0.8x range. In-line
7.3bn with SDLs lean Capex guidance, the company incurred We expect consolidated gross debt to stabilize at the
Capex of Rs 180mn on commercial assets during FY17 current level of Rs 24.3bn by FY20E. Net D/E will peak
and Rs 131mn in 1HFY18. The Capex may step up at 0.9 xs in a worst-case scenario.
Cost of debt has been Debt/Equity Ratio Trend (X) (Consolidated)
coming down for SDL, and (Rs mn) 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18
stands at 9.88% as of end- Net debt (Rs mn) 18,130 20,300 20,968 20,666 20,604 20,250 20,602 20,838 20,736 20,247 22,832
2QFY18, a reduction of Net D/E (x) 0.75 0.82 0.83 0.81 0.8 0.78 0.81 0.80 0.78 0.75 0.84
138bps YoY Cost of Debt % 12.6 12.5 12.14 11.98 11.83 11.58 11.26 10.99 10.42 10.06 9.88
Source: Company, HDFC sec Inst Research
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SOBHA: RESULTS REVIEW 2QFY18
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SOBHA: RESULTS REVIEW 2QFY18
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SOBHA: RESULTS REVIEW 2QFY18
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SOBHA: RESULTS REVIEW 2QFY18
We have then deducted income tax, based on the tax In the exhibit below, we highlight our sales price and
applicable for the project. construction cost forecasts. Our pricing assumptions
are at 10-20% discount to the currently prevailing
The resultant cash inflows at the project level have prices.
Our base property price
been discounted, based on WACC of 15% (cost of
assumption is at a 10-20% equity 20.1% based on beta of 1.9, cost of debt 13% Base Price And Construction Cost Assumptions
discount to current prices in and debt/equity ratio of 0.45x). All the project-level Prices Cost
Location
SDLs key macro markets NAVs have been summed up to arrive at the NAV of Rs/sq ft Rs/sq ft
the company. Bangalore 5,500 2,400
Mysore 3,700 1,800
In case of a future land bank, we have valued at 20% Pune 4,800 2,200
discount to current prices, and not taken into account Chennai 4,900 2,200
construction margins. Kochi 6,500 3,000
Hosur 4,500 1,800
For annuity income-generating assets, we have valued Thrissur 4,500 2,200
cash flows at a cap rate of 12%. Coimbatore 4,400 2,200
Gurgaon 7,500 3,425
From the NAV, we have deducted the net debt as of Calicut 4,500 1,800
FY19E, to arrive at the final valuation of the company. Source: Company, HDFC sec Inst Research
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SOBHA: RESULTS REVIEW 2QFY18
1% increase in average
NAV sensitivity analysis
base sales price impacts Sensitivity to our assumption of property prices Sensitivity of NAV to changes in cost inflation
our NAV positively by 2.5% Our model is sensitive to changes in the assumptions In our base case, we have assumed cost inflation to be
regarding property prices. For every 1% change in the 6%. For every 100bps increase in construction cost
base property prices, the NAV will change by inflation, the NAV will change by approximately 12.1%.
Every 100bps increase in approximately 2.5%.
NAV Sensitivity To Change In Cost Inflation
sales price inflation impacts
NAV Sensitivity To Change In Average Sale Price Cost inflation rates (%) 4 5 6 7 8
our NAV positively by % change in sale
(10) (5) 0 5 10 NAV/share (Rs) 691 637 572 503 432
20.4% price Change in NAV (%) 20.8 11.3 - (12.1) (24.4)
NAV/share (Rs) 421 499 572 646 724 Source: Company, HDFC sec Inst Research
Change in NAV (%) (26.4) (12.9) - 12.8 26.5
The combined impact of a 100bps increase in sales price
Source: Company, HDFC sec Inst Research
100bps increase in cost inflation and cost inflation will be an increase in NAV of
Sensitivity of NAV to changes in sales inflation 8.3%.
inputs decreases our NAV
by 12.1% In our base case, we have assumed an annual sales Sensitivity of NAV to changes in discount rate
price inflation of 5%. For every 100bps increase in the
annual sale price inflation, the NAV will increase by In our base case, we have assumed a discount rate of
100bps increase in approximately 20.4%. 15%. For every 100bps increase in the discount rate,
discounting rate impacts NAV will fall by 4.7%.
NAV Sensitivity To Change In Sales Inflation
our NAV negatively by 4.7% Sales inflation NAV Sensitivity To Change In WACC
3 4 5 6 7 WACC rates (%) 13 14 15 16 17
rates (%)
NAV/share (Rs) 361 465 572 689 819 NAV/share (Rs) 629 600 572 546 522
Change in NAV (%) (37.0) (18.8) - 20.4 43.0 Change in NAV (%) 10.0 4.9 - (4.7) (8.8)
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research
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SOBHA: RESULTS REVIEW 2QFY18
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SOBHA: RESULTS REVIEW 2QFY18
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SOBHA: RESULTS REVIEW 2QFY18
RECOMMENDATION HISTORY
Sobha TP Date CMP Reco Target
650 10-Feb-17 281 BUY 381
600 13-Apr-17 378 NEU 381
550 17-May-17 421 BUY 500
500
8-Aug-17 384 BUY 500
450
11-Oct-17 421 BUY 500
400
13-Nov-17 500 BUY 572
350
300
250
Rating Definitions
200
150 BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
Dec-16
Oct-17
Aug-17
Apr-17
Nov-16
Jan-17
Nov-17
Feb-17
Sep-17
May-17
Jun-17
Jul-17
Mar-17
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
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SOBHA: RESULTS REVIEW 2QFY18
Disclosure:
We, Parikshit Kandpal, MBA, and Kunal Bhandari, CA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the
subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly
related to the specific recommendation(s) or view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have
beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities
Ltd. or its associate does not have any material conflict of interest.
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SOBHA: RESULTS REVIEW 2QFY18
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