Subscribe to Sobha Developers IPO: Edelweiss Capital

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The Bangalore-based Sobha Developers, SDL is open for subscription with a public issue of 88,93,332 equity shares of Rs 10 each through book building process in the price band of Rs 550 - 640 per share. 

The issue comprises a reservation of upto 8,89,300 equity shares for SDL's permanent employees and a net issue to the public of 80,04,032 equity shares. It constitutes 12.20% of the post-issue paid-up capital of the company. The issue closes on November 29.

The Edelweiss Capital report on Sobha Developers IPO:

Best in the league

We recommend investors to subscribe to the Sobha IPO, for the following reasons:

Discounted valuations

Sobha's post issue EV trades at a discount of 48% to its cumulative NAV. The 48% discount to NAV is significant given that most of the other comparable real estate companies are trading at a discount of less than 25% at current market prices. NAV is based on discounted project values and not on the market value of land.

Qualitative factors

Sobha is well known for its quality of construction and superior execution capabilities. The company follows a unique backward integration model, which helps it retain core competencies internally and keep a check on quality standards and execution timelines.

Backward integration

Sobha follows a unique backward integrated business model. Sobha has an in-house design studio, a concrete blocks manufacturing unit, a metal and glazing unit, an interior and woodwork unit; and a mechanical, electrical and plumbing unit. This is a key competitive advantage differentiating it from other developers who outsource these activities to third party vendors.

Strong execution capabilities

Given its superior project management team, the company has built a reputation of delivering construction in time.

Capability to create innovative and modern facilities

Given the excellent architecture and project management teams, Sobha has developed structures and designs that have been unique and involving a high level of skill set.

Background

Incorporated in 1965, Sobha Developers is one of the leading premium real estate developers in India. The Bangalore-based company has completed over 21 residential projects with built up area of 2.98 mn sq ft and 75 contractual projects having a built up area of 8.42 mn sq ft. It has a land bank of 2,747 acres and land agreements for another 3,373 acres.

Most of the company's projects have been either residential or contractual and spread across Bangalore, Mysore and Hyderabad. The company is now looking to diversify into other geographies and across other segments. Contractual construction represented 32% and 62% of its revenues in FY06 and FY05 respectively.

Growth

Sobha is looking to enter into other segments like malls, hotels, multiplexes and townships. Going forward, 50% of the revenues will come from residential properties and 30% from contractual constructions. Sobha is also diversifying geographically in other cities like Kochi, Chennai, Mumbai, Jaipur, Goa and the NCR.

The company has a total land bank of 6,120 acres, which will be used for these projects over the next six to nine years. Sobha currently has residential projects of 4.97 mn sq ft under development and another 5.17 mn sq ft is planned in the coming months. We expect Sobha to deliver more than 10 mn sq ft of contractual construction annually; currently order book stands at ~ INR 8 billion or 6.25 mn sq ft.

Valuation

Total NAV for Sobha, including its land bank and contractual business stands at ~ INR 90 billion or INR 1,231 per share. We have valued the land reserves at INR 44.6 billion, land arrangements at INR 30.5 billion and its contractual business at INR 14.96 billion. At the higher end of the issue price Sobha will have a market cap of INR 46.7 billion and EV of INR 46.96 billion (taking into account the capital raised from the issue). EV is at a healthy discount to NAV of 48%, offering significant upside potential.

Contractual construction

Sobha has delivered 75 contractual projects with a built up area of 8.42 mn sq ft. The company currently has an outstanding order book of ~ INR 8 billion to construct 6.25 mn sq ft. Historically, 90-95% of the contractual business has been derived from Infosys, however, Sobha is looking to expand its customer base to other IT/ITES companies as well.

We believe ample opportunity exists for further expansion of contractual business given the IT parks and IT SEZs being developed by larger IT/ITES companies. On an ongoing basis we expect Sobha to develop 10 mn sq ft annually, revenues from construction are expected to range from INR 1,000-1,200 per sq ft. At 17% margin for the contractual business, we value the business at INR 14.96 billion.

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