We downgrade Sobha Developers to add from buy and revise our target price of R520 to March 2016e (earlier March 2015e R485 per share). FY14 again saw Sobha displaying strong operational performance with growth in sales, collections and positive cash flow from operations, outperforming peers in Bangalore. We continue to believe in the consolidated volume growth story of Sobha as it expands into new markets, in Bangalore and otherwise. A strong balance sheet and asset-heavy model (land bank in growth locations at low-book value) will help maintain margins ahead.
Sobha has rallied over 30% in the three months. We believe the market is now assigning a higher value to the residual land bank than three months ago. We value the residual land bank at the multiple to the book value (provided book value is lower than the market value of land) and not at market value as residual land is not realisable in the next year. Our multiple is based on the current pace of sales and that over the next few years.
In Bangalore, although Sobha has increased the value of area sold in the past two years (on higher realisation), volumes have remained flat. Sobha has launched more luxury and superluxury projects in FY14. We maintain our sales estimates of 3.9 million and 5 million sq feet for FY15e and FY16e on the back of launches in new markets, but maintain steady run-rate of sales in existing markets. We await management plans to further increase volumes in existing markets, especially Bangalore.
Kotak Institutional Equities