Research Notes – November 4, 2010

Initiate ‘buy’ on Sobha Developers – TP Rs.409

 Initiate buy coverage on Sobha Developers with one year target price of Rs.409. The stock is currently quoted in the range of Rs.360.

 The company derives majority of its cash flow from residential property development in South India, Bangalore, Chennai etc. In these markets, demand is driven by end users like IT and ITES clients. It has reduced the volatility in cash flow of the company and is less dependent on strong broker networks, which is the rule in the National Capital Region (NCR) and Mumbai markets.

 It seems that residential volume in South India would continue to grow due to improving affordability of Sobha’s properties.

 Sobha would be a leading beneficiary out of its strong execution track record and improving affordability of offerings.

 Company has built strong brand equity due to its association with Infosys as a construction contractor and potential value is likely to unlock from Infosys driven contractual business.

 Sobha has in-house construction expertise and this will give it a competitive edge in key markets.

 Company has delivered around 6 million sq ft annually over the last three years and this execution track record is matching to the industry peers. Continued improvement in execution is expected to help Sobha to turn the cash flow positive by FY11.

 Company has gradually increased its contractual business revenue to around 27% of total revenue in the current year so far. This business is primarily dependent on contracts from Infosys, account for 90% of total contractual revenue. Efforts are underway to diversify contractual business. Substantial value unlocking is expected when these efforts are fully materialized.

 Considering good execution records and improving cash flow, buy is initiated in this stock with a target price of Rs.409 over one year.

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