Our channel checks suggest that Sobha Developers (Sobha) is set to launch its first project in Gurgaon by April-end. Phase I is expected to include 200 villas ranging from 250–700 sq yds at an ASP of >Rs 4500/sft, followed by a Group Housing project in H2FY12. The project, in our view, is strategically located and holds significant potential. However, much will depend on the construction of a new 18km Northern Periphery Road (NPR), the contract for which has been awarded recently after delays due to the ensuing legal issues.
Nevertheless, volumes (and cash flows) from this launch may remain low as we expect limited offtake of units on account of the high ticket size (above Rs 20mn) and limited physical infrastructure in surrounding areas. Further, margins may take a hit in the near term due to higher spending on construction costs. Our estimates already factor in low volumes from this project in FY12 (0.3msf for Sobha’s 64% share). Maintain BUY.
Project is on upcoming NPR, near Delhi:
The key features of the project include (a) Strategic location: proximity to Delhi (Dwarka), Delhi airport and the upcoming diplomatic area once the NPR is laid, (b) good construction quality, and (c) High-end township of Villas. A news article (dated 16 March) suggests that the Haryana Urban Development Authority (HUDA) has awarded the laying of NPR to Indiabulls Real Estate (IBREL). It may be noted that the NPR’s timely completion hinges on the resolution of land-related cases, which delayed the construction of NPR for the past few years.
Channel checks suggest slow initial offtake
: Our channel checks suggest that initial offtake may remain low if the ticket size exceeds Rs 15mn. The higher the ticket size, the tougher it will be to sell the project considering (a) Sobha is not an established name in the region, (b) competition remains high in mid as well as high-end residential projects and (c) the risk of further delays in NPR construction on account of the ongoing legal issues.
Contribution to margins, cash flow may be low in near term:
Considering the expected launch price, we expect slow offtake of the project, resulting in low cash flow generation in the near term. Further, margins may remain low because of (a) high land cost (Sobha gets 64% of revenues), and (b) high construction costs (Rs 3000psf). The key for Sobha will be to showcase its build quality, which, if established, may help fetch higher realizations later. Our estimates already factor in low volumes in FY12. Maintain BUY.
The Project:
Sobha holds rights for ~4msf of integrated development under a 64% revenue sharing agreement with the land owner and has ~1.5msf of group housing project in sector 106 and 109 of Gurgaon. The project lies on the upcoming 150mts wide road (NPR) which will connect Dwarka to Gurgaon. Once this road is functional, Sobha’s project will be within 5kms to the Airport, Dwarka and the upcoming hospitality district in Delhi.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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