Improved cash flows help Sobha Developers

Realty firms have taken a beating over the last few years, with sluggish sales and strained balance sheets. But Sobha Developers Ltd fared well on both these counts during fiscal 2012 (FY12) to turn out an improved performance.

In the March quarter, the firm sold 860,000 sq. ft of residential space, about 30% higher than a year ago. Though the year began on a relatively subdued note with flat year-on-year (y-o-y) sales in the June quarter, it picked up over the next three quarters. Average price realization improved as the firm clocked 41% y-o-y and 52% quarter-on-quarter revenue growth to Rs476 crore for the March quarter. More importantly, sales rose 18% in a challenging FY12 when rising interest rates cooled the residential realty market.

Robust sales and advances received improved cash flows for Sobha Developers. This, along with the sale of Rs136 crore worth of land assets, cut debt outstanding by 10% to Rs1,144 crore. Analysts are hopeful of a further reduction during the current fiscal which, along with lower interest rates, should improve earnings growth. In the last three quarters, interest costs ate into operating profit as debt rose steadily from the June quarter. Operating profit during the March quarter rose by a robust 2.5 times from a year ago.

Operating margin shot up above expectations to 37% against 24% in the December quarter and 20% in the year-ago quarter, partly driven by land sales. Its debt-to-equity ratio is also now at a reasonable 0.6 and could decline further during the current year.

The firm may also benefit from diversification into cities such as Thrissur, Coimbatore, Mysore and Pune—a departure from its concentration on Bangalore so far. Any interest rate reduction will trigger demand for housing. A report by Emkay Global Financial Services Ltd pointed out that the Bangalore market is likely to see oversupply of residential projects because most realty firms have cleared the inventory built between 2008 and 2010 in the last two years.

That said, the firm’s fortunes are linked to the Bangalore realty market, given that about half its sales are in this zone. This makes the management forecast of selling about 3.75 million sq. ft in FY13, which is around 13% higher than FY12, appear doubtful. This is perhaps why after beating benchmark indices steadily, the stock has slipped in the last 45 days. What sets Sobha Developers on firmer ground against its peers is that with a healthier balance sheet, any trigger in the realty residential market should lift growth significantly for the firm from current levels.

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