Sobha Developers’ Q1FY08 results were impressive, though marginally below our expectations. The company’s revenues and PAT stood at Rs 2.7 billion and Rs 408 million, up 31% YoY and 141% YoY respectively. Fully-diluted EPS stood at Rs 5.6 in Q1FY08 against Rs 2.3 in Q1FY07 and Rs 8.35 in Q4FY07. Revenues and PAT were 18.7% and 8.4% below our expectations respectively as Sobha realised sales on only 4.5 mn sqft from its ongoing projects of 11.5 mn sqft, with the remaining projects not reaching 25% construction completion benchmark. EBITDA margin was strong at 25%, implying higher realisation per sqft. We remain positive on the strong earnings growth potential (46% CAGR over FY08E- 10E) and robustness of Sobha’s business model; reiterate BUY.

Revenue break-up

In Q1FY08, Sobha’s revenue contribution from real estate and contractual segments stood at Rs1.5bn and Rs 1.1 billion, up 48% YoY and 9% YoY respectively.

Improved margins

Sobha has shown significant improvement in its EBITDA margin at 25% against 20% in FY07. EBITDA margin for real estate and contractual business stood at 46% and 18% respectively. Sobha has been able to hike prices of its projects, with 70% of its ongoing projects in Bangalore already sold-out.

Real estate project pipeline

Till date, Sobha has completed 7mn sqft of real estate development. It has 30 ongoing projects (11.5 mn sqft) with sales value of Rs 30.1 billion (realisation of Rs 2,611/sqft) – of which Rs 24.6 billion will be booked FY08 onwards. Sobha will likely add another 9.3mn sqft of property development to its pipeline. The company is also mulling developing a high-end mall and hotel in central Bangalore.

Trissur project

Sobha has launched the phase-I of integrated township project in Trissur, spread over 57 acres with an estimated investment of Rs 8.5 billion over five years. The company is initially developing villas and apartments – it booked Rs 570 million from Trissur in Q1FY08.

Contractual business

Till date, Sobha has completed 10.1mn sqft of contractual development. The company is currently developing 34 projects aggregating 8.7mn sqft with contract value of Rs 8.2 billion, of which Rs 5.6 billion will be billed in the coming quarters based on percentage completion. Apart from this, Sobha has 16 projects in its pipeline, which aggregates to 3.2mn sqft, valued at Rs 2.2 billion. 85% of the contractual income for the quarter was contributed by Infosys against 90% in FY07.

Land bank status

Sobha’s total land bank is at 3,573.5 acres, excluding 162 acres allocated to ongoing projects. The overall cost of land bank is Rs 22.1 billion with Rs 11.8 billion already paid. The company’s land acquisition cost is attractively priced at Rs142/sqft.

Further developments

Sobha is launching a product line consisting of office furniture and household furniture in the retail market and is also exploring expansion into high-end value-added building material products. Sobha has obtained an in-principle approval from the state government of Kerala for development of the high tech city at Kochi. The company is expanding to new locations such as Coimbatore, Pune, Chennai and Mysore to increase volumes.

Outlook

In FY08E, we expect Sobha’s revenues and PAT at Rs 19.5 billion and Rs 2.6 billion respectively. The stock currently trades at FY08E and FY09E P/E of 22.1x and 16.6x with EPS estimates of Rs 36 and Rs 47.8 respectively. Our fair value estimate of Sobha’s NPV stands at Rs 96.5 billion or Rs 1,324/share. We expect the company’s PAT to grow at 46% CAGR through the next three years. Given the strong earnings momentum and discount to NAV, we reiterate BUY.