We reiterate our 'buy' rating on Sobha Developers and assign a DCF-based target price of Rs 504. We value Sobha current/forthcoming projects at Rs 2,000 crore, contractual projects at Rs 270 crore, rental assets at Rs 270 crore and residual land bank at Rs 3,660 crore. We continue to like the company for its strong execution, consistent sales and strong corporate governance.
Sobha reported an in-line quarter with revenues of Rs 590 crore and Ebitda of Rs 160 crore, in line with estimates, while PAT at Rs 70 crore was below estimates by 15% due to presence of one-off items, change in revenue recognition and adverse revenue mix. Volumes for the quarter stood at 1.1 million square feet (msf) for Rs 670 crore, while debt declined to Rs 1,280 crore vs Rs 1,340 crore at Q3FY13 end.
Sobha is targeting 4.2 msf of new sales for FY14, where we believe new cities will play a key role. We expect Sobha to generate net operating cash flows of Rs 1,020 crore over FY14-15e from ongoing projects of 18 msf and new launches of ~12 msf.
The company targets to reduce exposure to Bangalore to less than 60% (63% in FY13). Our analysis of sales mix suggests that to achieve both objectives, non-Bangalore sales will have to increase 40%, implying dependence on new cities. Management expects new project acquisitions to be announced in Q1FY14 itself, and further expects its launch within FY14.