Invest shares in Sobha Developers (SDL)

 Sobha Developers (SDL) is among the leading real estate developers in Bangalore and it is expanding into other markets like Kochi, Chennai and Pune. The company is tapping the market with an issue of 8.89 million shares in a price band of Rs 550-640. At the higher end of the price band, the issue will add up to Rs 570 crore.

The company will utilise the proceeds of the issue to acquire land and complete some of its projects currently under execution. The company hopes to scale up its operations manifold over the next few years. Given the company’s prospects and high interest in the real estate sector, investors can consider subscribing to the issue.

Profile: SDL has two major lines of business — real estate development and contractual business. As a real estate developer, the company acquires land, builds commercial and residential projects and sells them.

As a contractor, the company’s primary role is to construct buildings for others. So far, the bulk of SDL’s contractual business has come from Infosys. SDL developed 4 million sq ft of space last year; of this 1.6 million sq ft was as a real estate developer, while the remainder was on contract.

Since its inception in 1995, SDL has developed and built close to 2.98 million sq ft of space as a developer and built another 8.42 million sq ft on contract. Of the contract business, almost 90% has been for Infosys.

The company also has a manufacturing business that includes furniture and interiors. This accounted for sales of Rs 88 crore in HY07. The company recorded a net profit of Rs 89 crore in FY06 and Rs 54 crore for the six months ended September ’06.

SDL recorded a total income of Rs 628 crore in FY06, up from Rs 205 crore in FY04. For the first half of FY07, it posted an income of Rs 533 crore. The real estate and contractual businesses accounted for 80% of its turnover — this was split in the ratio of 2: 1 between own projects and contractual projects.

Prospects: SDL holds land reserves of 2,593 acres and has entered into agreements to purchase reserves of 3,456 acres. The owned reserves translate into development rights of over 118 million sq ft — the company hopes to complete these over the next 7-10 years. But execution could be a cause for concern, especially since the company plans to expand to other cities.

Valuation & Recommendation: A real estate consultancy has valued SDL’s land bank and land arrangements at Rs 6,200-Rs 7,300 crore. Based on the issue price, SDL is valued at Rs 4,660 crore at the higher end of the price band.

For the first six months of FY07, the property development business accounted for just over 50% of the company’s turnover. This will increase significantly, given its expansion plans. The realty business enjoys higher EBITDA margins of 30%, against 18% for contractual business. This could result in improvements in profitability.

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