Sobha Developers 2Q FY16 results disappointed again as net profit was down 32% y-o-y at INR 401 mn, lowest in last 4 years. Revenues were also down 33% y-o-y largely as sales from existing projects remained weak. The EBITDA margins declined to 26.5% down 1.7 pts on q-o-q basis due to higher mix of contractual revenue.
We calculate a 12m fwd fair value by applying a 38% discount at 0.5SD below mean to our NAV estimate of Rs 566.
The 12m fair value is then discounted back by one year to reflect the current fair value TP of Rs 310. Key downside risks: slower sales, lower-than-expected ASPs achieved. Key upside risks: better-than-expected demand and lower interest rates
Based on its ongoing projects, we expect Sobha to generate Rs 6,000 crore of free cash flows over the next five years, amounting to about 114% of its current enterprise value. We are now cautious on Sobha achieving its full year guidance and it will highly depend upon new launches. The company has already missed its sales targets 2 years in a row. However, Sobha is known for its unmatched construction quality and timely completions, which should continue to attract homebuyers. In addition, its transparency gives us confidence in the company’s prospects. A large, diversified land bank supports long-term margin sustainability. However, company is experiencing slowdown in key markets resulting in weak cash flows leading to increased debt.
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