Demand in Kochi a worry for Sobha Developers

Company will get a 10% mark-up on construction costs, as well as 5% of the project profits, as management fee

This week, the Sobha Developers stock lost three per cent, owing to the near-term sluggishness in the Kochi market, where the company invested Rs 330 crore recently. Through the deal, it acquired 50 per cent stake in a 17-acre project at Marine Drive, Kochi, from Puravankara Projects.

While the deal gives the company access to the Kochi market’s Marine Drive area and the land parcel holds development potential of three million sq ft, analysts aren’t bullish about the prospects for the area. J M Financial’s Abhishek Anand says there is concern about the dynamics of the Marine Drive micro market, as it is facing a demand slowdown, especially in the premium segment. Also, the inventory pipeline in the region is likely to result in limited price appreciation, he adds.

Given the slowdown and the slow offtake of current projects in this market, analysts believe the project is expected to be launched only in FY16.

Considering the premium pricing and the fact that the company has 1.5 million sq ft share, one can expect the deal to add Rs 9-10 to Sobha’s net asset value per share. Analysts have increased their target price accordingly, with a consensus Bloomberg target price of Rs 431. The company will get a 10 per cent mark-up on construction costs, as well as five per cent of the project profits, as management fee.

While the Street will keep an eye on execution of existing projects, how the company monetises the remaining land bank of 2,600 acres will act as a trigger for the stock in the medium term. Most analysts continue to have a ‘buy’ rating on the stock, given the stability in Bangalore, the company’s biggest market (it accounts for about 60 per cent of the company’s volumes). Of the 38 analysts tracking the stock, 87 per cent have a ‘buy’ rating; the rest have a ‘hold’ rating.

The deal will raise Sobha Developers’ net debt to an estimated Rs 1,550 crore, with a net debt-to-equity ratio of 0.6, says to HDFC Securities’ Adhidev Chattopadhyay. And, a 50 per cent partner in its project will help Puravankara Projects reduce its leverage. At the end of December 2013, the company had debt of Rs 1,486 crore and a net debt-to-equity ratio of 0.67. Now, this will decline due to the infusion of Rs 330 crore.