Sobha Developers (SDL) is a Bangalore-based real estate development and construction company that focuses on residential, commercial and contractual projects. The company, is amongst the top real estate developers in South India with a total land bank of approximately 3,327 acres (~220 million square feet saleable area (spread across 10 cities and currently, 12 million square feet under construction ). Currently, it has around 23 projects at different stages of development in Bangalore, Pune, Coimbatore and Trichur, which is expected to be completed by 2010-2011 and has already invested Rs. 10,000 million in these projects. The company is also looking at a couple of new launches in the Bangalore residential space as it is reducing its focus from commercial projects until demand in the realty market revives.
As per the media reports, of about 2,000 flats/villas that are under various stages of construction, SDL has been able to sell close to 50 per cent. The company also plans to enter the affordable housing segment in Coimbatore, Tamil Nadu.
Issue Details & Updates
Price Band : Rs. 550 - 640
Issue Price : Rs. 640
Issue Size : Rs. 5692 million
Issue Open / Close Date : 23-11-2006 to 29-11-2006
Issue Listing Date : 20-12-2006
Lead Manager : Kotak Mahindra Capital Company
Enam Financial Consultants
IL &FS Investsmart
Listing Price : Rs. 1111
Current Market Price : Rs. 222.25
52 Week H/L : Rs. 415 / 67.45
Latest Market Cap : Rs. 16,224 million
The issue was subscribed over 108 times. The company proposed to utilize the net proceeds of the issue to finance acquisition of lands, fund the construction and development costs of some of its projects under development, repay certain loans of the company and fund expenditures for general corporate purposes.
Promise vs Performance table : Amount in Rs Mn
| Particulars | Proposed Exps | Actual Allocation (Post IPO issue) | Proposed Utilisation Status (Yearly) | | | | FY 2007 | FY 2008 | FY 2009 | FY 2010 | Land Acquisition | 2342.6 | 2342.6 | 2343 | | | | Development and construction costs for projects | 1424.9 | 1425.0 | 433 | 534 | 446 | 11.2 | Loan Repayment | 1321.76 | 1321.8 | 1322 | | | | General Corporate Purposes | NA | 254 | NA | | | | Less - Issue expenses | NA | 350.0 | | | | | TOTAL Fund Raised / Proposed to be Utilised (net of issue exps) | 5694.0 | 5344 | 4098 | 534 | 446 | 11.2 | Aggregate Utilisation (incl. General Corp Exps) | | | 4413 | 5344 | | | Per cent Allocation | | | 83% | 100% | | | Balance - MF Investments / Investment in Scheduled Banks | | | 931 | - | | |
Post IPO Progress Card
The company spent its entire proceeds by the end of FY 2008, much before the proposed allocation period of FY 2010.
SDL utilized Rs. 2569 million towards land acquisition and Rs. 1587 towards repayment of loans which was higher than the allocation stated in the RHP. The higher amount spent for the above was adjusted by lower expenditure towards development and construction cost.
The Company has sold its Investment in the equity shares of its subsidiary, M/s. S.B.G. Housing Pvt Ltd, after approval by the Board of Directors in the Board Meeting held on October 29, 2007. The equity shares, carrying value of Rs. 0.10 million was sold for a consideration of Rs 0.1 million.
The company also reduced its land obligations by strategically exiting some of its land deals due to a liquidity crunch. Nevertheless, it still has to pay Rs 900 million for the unpaid land.
Latest Financials – Rs Million
| Particulars | FY 2009 | FY 2008 | | Net Sales | 9,747 | 14,226 | | Other Income (Operating and Non Operating) | 157 | 119 | | Total Income | 9,904 | 14,345 | | Total Expenditure | 7,050 | 10,689 | | PBIDT | 2,854 | 3,656 | | Interest | 1,039 | 597 | | PBDT | 1,815 | 3,059 | | Depreciation | 360 | 350 | | Tax | 358 | 426 | | Profit After Tax | 1,097 | 2,283 | | | | | | PBDTM(%) | 29% | 26% | | PATM(%) | 11% | 16% |
Notes on Financials
With effect from April 01, 2008 the Company changed its accounting policy for revenue recognition from percentage of project completion method to collection/dues against sales.
For FY 2009, the company’s net sales and net profits declined by 32 per cent and 52 per cent at Rs 9,679 million and 1,097 million respectively. For Q4 FY09, the company’s performance remained dismal as revenues as well as profit after tax declined by 69 per cent and 96 per cent respectively to Rs 1500 million and Rs 27 million respectively.
Reported its lowest EBITDA margin of 12.5 per cent as revenue base declined without any significant drop in expenses. The company has entered the ‘Affordable Housing Segment’ which may in turn, reduce margins.
During the last quarter, realty sales contributed close to 60 per cent of total revenues and the remaining came from contractual segment.
Debt continues to remain high at Rs. 19,332 million, with debt-to-equity at 1.8x ( highest among property companies). The company has to repay outstanding debt of around Rs. 8500 million (almost 50 per cent of the outstanding debt) by CY2009. The company plans to re-finance these loans and had also received commitments for Rs. 5000 million cost of borrowing of 13% pa which again remains on the higher side. With the current market cap at Rs 17,000 million, there is scope for significant equity dilution to improve its balance sheet. However, unlike its peers, the company has been a laggard in raising equity with lesser assets that can be monetised.
During the quarter preceding the last quarter, the Company also received from the promoters towards the proposed rights issue an amount of Rs. 475 million as advance against share subscription.
As per the latest developments, Sobha Developers is looking to raise up to Rs 7,500 million to retire part of its Rs 19,332 million debt and proposed to increase its FII investment limit up to 100% of equity. Among the options being considered by the real estate developer are raising money from the markets, selling around 200 acres of its 3,000 acre land bank, and roping in investors for various projects. The company’s board has also called an extra ordinary general meeting on June 17 to consider increasing the share capital of the company to up to Rs 15,000 million.
SWOT
Key Positives
Unique business model with strong execution capabilities and backward integration. Also reflected in the track record of timely execution and high quality construction work that had in the past, helped the company to command a premium for its projects. Moreover, stability in contractual business to provide steady cash-flows.
In the process of de-risking its business model by diversifying into geographies at prime locations and offering new products like villas, row houses, developed plots, etc., against traditional residential apartments.
Preferred contractor for Infosys and other major players. However, the recent slowdown in the IT sector has either resulted in to cancellation or postponement of projects. This may continue to have an overhang on the counter.
Key Concerns
Debt to equity ratio at 1.8:1 for the latest quarter remains a big concern area. By and large, the overall liquidity crunch and a weakening demand in the sector remain other concerns.
The company is geographically concentrated in Bangalore (South India). With the IT sector bearing the major brunt of the global economic slowdown, this real estate developer has felt the impact. The high leverage position might delay its projects and also affect the profitability of the company. Also, the majority of its land bank is concentrated in Bangalore where realty prices have been trending downwards.
SDL’s lower cash and the liquidity crunch has dented its ability to fund ongoing projects and expansion plans. Anticipation of price correction in the propertymarket has kept housing demand sluggish despite fall in the interest rates.
theIPOguru.com Recommendation : AVOID
Sobha’s strategy of exiting land deals due to the current slowdown & cash crunch augurs well. However, concerns about oversupply in Bangalore and an imminent correction in the property prices remain key concerns. Low affordability levels, and low demand for its offerings especially in the Premium segment also remains a key deterrent. Those wishing to ride the momentum in the realty segment are likelier to focus on the larger pan-Indian players like DLF and Unitech. |
