Mixed reaction to Sobha Developers

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Real estate boom, economic growth, markets' bullishness and more importantly their own foothold and reputation in the realty market helped the construction companies to raise money from capital markets.

Gayatri Projects , Tantia Constructions , Parsvnath Developers etc received good response from investors at the time of subscription. There are other companies in the IPO pipeline like DLF, Orbit etc. Interestingly, Sobha Developers was fully subscribed on the first day of subscription period.

Bangalore-based Sobha Developers, SDL, one of the leading real estate developers and construction companies in India, is open for subscription with an initial public offer of 88,93,332 equity shares of Rs 10 each through book building process in the price band of Rs 550 - 640 per share.

After looking at the company's past performance and future plans, analyst and broking firms are very much bullish on Sobha Developers for the long term.

Investment Advisor, SP Tulsian says that Sobha Developers is a good issue and also a reflection of real estate boom and good market condition. The company has a good presence in Bangalore, which is Tier-I city. It has a good land bank in this city. It is a property developer and it develops commercial as well as residential properties. It is going to develop the land for next three-four years.

He also says that as compared to Parsvnath Developers, which has a pan-India presence, it looks a bit expensive; but still it is a good issue. Now a days Tier-I cities are growing very fast. It looks good for short term as well as long term. One can also use listing gains.

Broking firms have also come out with their reports on this issue. They firmly believe that the company looks good with the long term perspective. They feel that the company's land bank is robust, backward integration model is also good, which helped them reduce the cost of the company and it is diversifying its portfolio in this business.

Cushman & Wakefield, international property consultants have valued the 118-million sq ft of saleable land of the company at Rs 70-77 billion. After reducing the developer's margins, the market value of the pure land is around Rs 39.7-43.8 billion.

RS Iyer of KR Choksey says that Sobha Developers is an average issue that is a craze now and can be called a fancy issue. Investors can apply for this issue with a short term view. There is no assurance for long term. Investors can apply on their own risk.

He also added that it means that investors can take the advantage of listing gains. The company is taking the advantage of bullish market. Markets are at new high. They can become volatile at any time in near future. The company will definitely list below issue price if markets crash on its listing day. Because markets will become volatile as it goes towards new high day by day.

SDL's business plan over the next seven years

Residential projects

Currently, SDL is in the process of developing 15 projects spread over an area 4.97 million sq ft in Bangalore. In addition they are also proposing to develop 13 residential projects in Bangalore aggregating to 5.17 million sq ft.

Contractual projects

The scope of work on contractual projects include designing, electrical works, plumbing works, metal and glazing work, interiors and construction. These would include building of convention centers, software development blocks, multiplex theatres, hostel facilities, guest houses, food courts, restaurants and corporate offices. The contractual projects segment accounted for about 34% of FY06 revenues.

Manish Bhatt of Prabhudas Lilladher is of the view that Sohha Developers is an excellent issue. It is good with short term as well as long term perspective. Investors should apply for this issue with full confidence.

Positives

• The tenth five-year plan estimates a shortage of 22.4 million dwelling units. Thus, in the coming 15-20 years, 80-90 million housing units will have to be constructed with a majority catering to the low-income group.
• Another major booster for the growth of real estate is growing demand for office premises by booming IT industry especially the BPO sector.
• The increase in disposable income coupled with more brand consciousness results in higher sale of branded goods. With organised retailing poised for sharp growth in the near future, requirement of real estate will be essential.
• SDL is presently developing 15 residential projects having an aggregate super built up area of 5 million sq ft, comprising 2,682 apartments. It also plans to develop 13 residential projects covering 3,077 apartments and 5 million sq ft. The company is also in the midst of executing 23 contractual projects for various corporate and other entities having a total contract value of Rs 5.3 billion.
• The company has a unique backward integration model whereby it is able to deliver a project right from conceptualization to completion. The model includes an architectural and design studio, concrete block making plant, metal and glazing factory, and other divisions.
• SDL intends to diversify its project portfolio by undertaking the development of hotels, integrated townships, malls, multiplexes and shopping complexes. The company is also diversifying geographically by entering into other cities like Mysore, Pune, Kochi, Chennai, Mumbai, Mangalore, Coimbatore, Jaipur, Goa, Hyderabad and the NCR.
• SDL's total land bank has been valued at between Rs 70.3 billion and Rs 77.8 billion by Cushman & Wakefield.
• SDL's extensive land bank is expected to be developed over the next 7-10 years. The company has a proven track record, having delivered 1,552 apartments with a super built up area of 3 mn sq ft and 75 contractual projects covering 8.4 mn sq ft, besides having constructed properties for leading software company Infosys.
• The company has patented Construction Manual - first of its kind in India. They have been given awarded the DA 1 rating from CRISIL indicating excellent track record in executing the projects.

Risks

• About 2.1% of the company's total land reserves fall in the restricted 'green belt' area, as declared by the respective state governments, wherein no commercial or residential development can be undertaken.
• The company may face pressure on margins due to increasing raw material prices of iron & steel, cement or decreasing sales volumes due to slump in property prices.
• Any reversal of trend in the real estate sector or downturn in the economy is likely to adversely affect the company. Also, limited land supply, increasing competition and the existing regulations may result in price escalation and a shortage in land supply.

Sources: Ask Raymond James, BRICS PCG

By Sunil S Matkar