ATS Research Desk

ATS Research Desk Sobha Limited FUNDAMENTAL REPORT

ATS Wealth Managers Pvt Ltd.

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Sobha Sobha Group is a multinational, multiproduct group with real estate developments and investments mainly in India along with U.A.E., Sultanate of Oman, Qatar, Bahrain, Brunei and India. Established in year 1976 by a first generation Indian entrepreneur, PNC Menon as an interior decoration firm under the name of Services and Trade Company in Muscat, Oman. Sobha is one of the well-respected brands in the real estate sector. As of December 31, 2016, Sobha has completed 116 real estate projects and 280 contractual projects covering about 84.96 million square feet of area. It currently has ongoing real estate projects aggregating to 42.94 million square feet of developable area and 30.81 million square feet of saleable area. The ongoing contractual projects aggregate to 8.96 million square feet under various stages of construction. These on-going projects are excluded from the purview of overall execution since, on average, a real estate project take around 3 to 4 years to complete. Sobha also has its own in house designers, architects, structural, mechanical, electrical, plumbing and environmental professionals helping the outside dependence and reduction in subcontracts. This combined with transparency in its functioning followed by backward integrated processes ensures that the company has full control over the materials used.

CMP (as on 22/02/2017) 52 Week H/L Market Cap (Cr) Equity Capital (Rs cr) Face Value (Rs) Promoters Holding Non promoters Grand Total Particulars Revenue EBITDA Net Profit EPS (Rs) PE (X)

290.00 369/224 2718.13 98.06 10 60.19 39.81 100 FY12 1413.41 473.03 210.05 21.42 13.63

Investment Rationales:     

Expected pick up in real estate demand Wide product offering Growth potential of Bangalore and Gurgaon market Affordable segment positioned for exponential growth Contract vertical to see traction

 FY13 1871.97 553.77 217.06 22.14 13.19

FY14 2184.71 612.91 233.69 23.83 12.25

FY15 2452.31 632.22 243.94 24.88 11.74

FY16 1878.41 516.75 154.14 15.72 18.58

Outlook Sobha is a dominant player in real estate and developing office space. The expected pick up in the demand for the real state, reduction in interest cost and increase in per capita income can act as a supplement for the growth of the company. With wide product portfolio, substantial market reach, strong recall and strong on time delivery history along with the available market opportunity, we expect Sobha to outperform the industry in medium and long period of time.


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Company profile In the real estate vertical, Sobha has a presence in 9 cities spanning 5 States, namely Bangalore, Gurgaon (NCR), Chennai, Pune, Thrissur, Cochin, Calicut, Coimbatore and Mysore. It has commenced operations of its first commercial mall in Sobha City project, Thrissur. It has a total developable area of 0.44 million square feet with a total leasable area of 0.32 million square feet; Sobha had also initially sold 0.61 million square feet. So far, it has leased about 80% of area to various reputed brands. In the contractual vertical, Sobha has a presence in 25 cities spanning 13 States. The Company has a diverse client base for contractual operations catering to premium clients. While the Company values this long-standing relationship, it also recognises the need to spread its client base and reduce its risk portfolio. The share of contractual orders from non-Infosys clients stands at 64% as at the end of March 2016. Its corporate clients includes Biocon, LuLu group, Dell, Bosch, Syngene, Taj Hotels, HCL, ITC Hotels, GMR, Huawei Technologies, Manipal group etc.

Project execution track record (mn sq ft)

Real Estate Contracts

FY16 5.6 5.5

FY15 4.36 3.25

FY14 2.34 4.34

FY13 1.48 2.98

FY12 3.15 2.07

Revenue breakup 1%

32%

Real Estate Contracts Others 67%

Key Ratios

Debt-Equity Ratio Current Ratio Fixed Assets Inventory Debtors Total Asset Turnover Ratio Interest Cover Ratio EBIDTM (%) ATS Wealth Managers Pvt Ltd.

FY12

FY13

FY14

FY15

FY16

0.63 1.59 3.47 1.03 12.94 0.44 3.73 33.47

0.63 1.55 3.57 1.05 13.52 0.55 2.9 29.58

0.63 1.52 3.85 1.01 10.65 0.6 3.14 28.05

0.73 1.52 3.99 0.95 11.69 0.59 2.97 25.78

0.86 1.55 2.38 0.68 8.88 0.4 2.63 27.51 Page 3

CPM (%) ROCE (%) RONW (%) Payout (%) EBIT / Sales (X) Price Earning (P/E) Price to Book Value ( P/BV) Price/Cash EPS (P/CEPS) EV/EBIDTA Market Cap/Sales

17.6 13.48 10.72 24.26 0.31 16.37 1.62 13.69 9.35 2.29

14.77 14.45 10.38 33.42 0.27 16.66 1.6 12.93 8.55 1.83

13.85 14.98 10.53 30.92 0.25 16.42 1.6 12.55 8.1 1.68

12.89 13.61 10.33 29.86 0.23 17.52 1.61 13.25 9.2 1.6

11.58 9.71 6.17 13.06 0.24 17.95 1.05 12.59 9.25 1.43

Revenue of the company has been steadily growing at a CAGR of ~6% in the distressed times in real estate industry from FY12 to FY16 ie from Rs.1413 crore to Rs.1878 crore. While the net profit part has de grown at -5.7%, mainly because of the higher interest and other kind of expenses. The slide on the top line revenue part from Rs.2452 crore to Rs.1878 crore is attributed to the slow demand pick up in the major revenue driving Bangalore market.

Q3 FY17 concall highlights  Collections were steady at Rs.5.9 bn (vs. Rs 5.6 bn in Q3FY16) indicating steady pace of execution. Consequently, Sobha generated net operating cash flow of Rs 134 mn (6th consecutive quarter of surplus post interest and taxes).  Sobha reported strong revenue and PAT of Rs.5.4 bn (up 23% YoY) and Rs.0.39 bn (up 8% YoY) in Q3 despite lower pre-sales, aided by3 towers from “Dream Acres” crossing revenue recognition threshold in Q3.  Contractual business: Revenue increased 36% YoY to Rs 2.1 bn. It has unbilled revenue of Rs 6.5 bn in this segment.  Net debt remained steady at Rs.20.8 bn (net D/E of 0.8x). Management expects net debt to remain steady going ahead. Cost of debt declined to ~11%(from 11.26% in Q2).  From its ongoing project of 37.8 msf, Sobha is yet to receive ~Rs.35 bn of cash. With 18.6 msf of unsold inventory worth ~Rs.120 bn and ~Rs.87 bn of pending costs, net cash of ~Rs.68 bn is expected over 5-6 years.

Management profile Mr. P.N.C. Menon is the founder of the Sobha Group of companies with 24.30% stake. He was a first generation entrepreneur; Mr. Menon began his professional career by setting up an interior decoration firm in the Sultanate of Oman in 1976. Since then he has incorporated several companies in the Sultanate of Oman, United Arab Emirates and Qatar and also expanded into construction and real estate development. Mr. Ravi P.N.C. Menon has been the Chairman of Sobha Limited since June 2012. Basically graduate in Civil Engineering from Purdue University, USA, he joined Sobha in 2004. Over the past decade, he has handled and mastered the numerous areas of Project Execution, Quality, Technology, Process & IT, Customer Relationship Management, Design & Engineering and many other facets of the business. He has contributed significantly towards product delivery, increasing it from mere 6 million square feet in the financial year 2004-05 to over ~85 million square feet in cumulative up to the fiscal 2014-15.


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Industry Overview The real estate sector is considered as one of the most globally recognised sectors. In India, real estate industry is the second largest employer after agriculture and it is slated to grow at 30 per cent over the next decade. The real estate sector mainly comprises four sub sectors namely - housing, retail, hospitality, and commercial. The growth of this sector is positively correlated with the growth of the corporate environment and the demand for office space as well as urban and semi-urban accommodations. The construction industry is ranked third among the 14 major sectors in terms of direct, indirect and induced effects in all sectors of the economy. It is also expected that this sector will attract more nonresident Indian (NRI) investments in both the short term and the long term as it is historically considered as a safe mode for investment. Bengaluru by far is expected to be the most favoured property investment destination for NRIs, followed by Ahmedabad, Pune, Chennai, Goa, Delhi and Dehradun. The Indian real estate market is expected to touch US$ 180 billion by 2020, while the housing and reality sector alone is expected to contribute 5-6 per cent to the country's Gross Domestic Product (GDP). In the period FY2008-2020, the market size of this sector is expected to increase at a Compound Annual Growth Rate (CAGR) of 11.2 per cent with major organized players growing at a much faster rate. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India's growing needs.

Making response to an increasingly well-informed consumer base and bearing in mind the aspect of globalisation, Indian real estate developers have shifted gears and accepted fresh challenges. The most prudent change has been the shift from family owned businesses to that of professionally managed ones. Real estate developers, in order to meet the growing need for managing multiple projects across cities, are also investing in centralised processes to source material, organise manpower and hiring qualified professionals in areas like project management, architecture and engineering. The real estate sector has been witnessing a paradigm shift during past few years through steady transformation to become a structured sector from an unorganized sector. The shift is mainly attributable to transparent and effective legislations and ever increasing participation from domestic and international private equity players. The increased confidence in real estate as an industry is a perfect parameter to anticipate revival of the sector and the growth prospects of the sector in the coming future. The current ATS Wealth Managers Pvt Ltd.

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regime has also introduced, formalized and fast tracked various initiatives like the REITs Regulations, Smart Cities, the Real Estate (Regulation and Development) Act, 2016. Such initiatives can prove to be a solid foundation for fostering growth in the long-term. As infrastructure projects get more financial backing from the government, stalled projects across the country are expected to get a kick start in the coming future. Better infrastructure results in better connectivity across locations which can act as catalyst commercial and residential real estate. Different Government initiatives like Make in India, StartUp India and Skill India are expected to bring in changes in how India does business. It combined with an expected increase in foreign direct investment; India’s growth is expected to touch ~7.8%. Foreign investment in India’s real estate sector is also expected to revitalize a lagging industry that has been plagued with liquidity crunch in the past few years. The “Housing for All by 2022” scheme by government is an ambitious plan to provide affordable housing for people of the economically lower segment, slum rehabilitation and subsidy for house construction. The Central been pushing the banks to pass on the benefit of lower interest rates to the customers. Once these benefits are passed to the customers, the sector is expected to witness enhanced demand flowing in. According to industry research estimates, the FDI in flows in this sector are estimated to be ~9% of the total inflows in the country. The residential segment continues to strive for momentum amidst lukewarm response from the market and the ever changing landscape of the sector. The residential real estate segment has been moving in the lower band of corrective phase which now seems to be moving towards a more stable value and growth proposition. Growing economy, increase in per capita income, rapid urbanization, favorable demographics and enhanced policy support and reduced interest rates are suggesting signs of recovery and uptrend in this segment. Initiatives taken up by the current regime which includes Smart Cities, Housing for All, HRIDAY and PRASAD schemes are expected to provide much needed stimulus to the residential market. The pressure on unsold inventory has been reducing since the last few quarters because to limited number of new launches by the major players. Developers have been mainly focusing on project completions, instilling consumer confidence among potential suiters. The benefits provided to buyers in the Union Budget, 2017 are also expected to push demand further in the segment The commercial segment has consolidating on the growth trajectory owing to improved business sentiments and rising growth prospects in the IT/ITES and related sector attributed to improving macroeconomic dynamics along with corporate expansion plans. The market sentiments were further boosted by key announcements such as the removal of Dividend Distribution Tax for REITs, paving way for much needed appetite and willingness both from a developer and an investor perspective in the industry. Bengaluru remained the top performing city in this segment followed by Mumbai and Delhi-NCR. As per market estimates approximately 59% of the total absorption in the segment was contributed by IT/ITES sector followed by Banking and Financial Services Industry accounting for ~19% in major cities like Bangaluru and NCR. JLL(Jones Lang LaSalle Incorporated) estimates that new completions of office spaces is expected to remain stable rate but inadequate supply of relevant office space in markets with higher may prove to be a key limiting factor for lower than steady absorption in the near future. Vacancy levels have been estimated to be in the range of ~15%.


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Investment Rationale Backward integration to aid margins and improve efficiency The backward integration model followed by Sobha is one of the key components of its competitive strengths. This ensures Sobha has control not only on the supply but more importantly on the quality of the materials it uses in construction activities as well as help in improving margins. It includes the lights of interiors division, a metal works and glazing factory and a concrete products factory. Sobha has also diversified into retail business with a range of spring mattresses under the brand name 'Sobha Restoplus', with more than 27 variants of mattresses are produced by the mattress division using cutting-edge machinery of international quality. This backward integration model was further strengthened with the lights of setting-up of manufacturing facilities, viz. Concrete Products Division, Glazing & Metal Works Division and Interiors Division. The Concrete Products Division manufactures concrete blocks, pavers, kerbs, water drainage channels, paving slabs and related landscape products of international quality in large scale volumes which are mainly used for internal consumption. The key features of this division include hi-tech full-fledged manufacturing facility spread over an area of 8 acres. Sobha has all the competencies and in-house resources to deliver a project from conceptualization to completion resulting in reduction in working capital cycle and higher margins without compromising on quality.

Expected pick up in real estate demand Its residential projects portfolio includes the lights of luxury and super luxury apartments, villas, row houses, plotted development and aspirational homes. Liberalization of FDI norms, rationalization of taxation regime for REITs and recent budgetary proposals for developers and home buyers are all welcome measures and will offer the necessary growth impetus to the real estate sector. It currently has 39 projects measuring Total Developable area of about 42.94 mn. sq ft and Super Built-up area of 30.81 mn. sq ft, located at 9 cities across India. Demand for housing across major eight Indian cities in the lst quarter of CY2016 declined 31% owing to the uncertainty post demonetization. Both primary and secondary market witnessed very few transactions reaching conclusion during the quarter, we expect market to stabilize in the coming quarters providing some relief especially in the low cost or middle ticket size housing segment.


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Wide product offering


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Sobhas portfolio includes projects from ticket size of less than 50 lakh rupees to more than 3 crore. While the projects on the price bracket from Rs.50 lakh to Rs.1.5 crore accounts for ~70% of the overall revenue. With the wide range of projects with Sobha will be in a position to capitalize on the unsold inventory in completed projects is at 0.25 Mn.sqft (which includes 0.09 Mn.sqft of plotted developments). Total area released for sale in ongoing projects is 16.23 Mn.sqft. Out of which, 9.66 Mn.sqft (60%) sold till 31st Dec-16. In addition to this, Projects approved and area not released for sale is 11.75 Mn.sqft. 81% of the total projects is procured by salaried class people under the age of 50. The increase in per capita income, favorable demographics, increase in nuclear household and increment of 7th pay commission may further add to the growth prospects of the company as well reduce the risk associated with over dependence on Bangalore market.

Growth potential of Bangalore and Gurgaon market Bengaluru real estate is a stable realty market and has steady prices as it has neither seen violent fluctuations nor a crash which could have engineered a negative sentiment. The capital of Karnataka has witnessed phenomenal migration in the last several decades to become the hub of Indian IT industry with a 40 per cent share. The main market drivers namely IT/ITes sector- which ensure strong macroeconomic dynamics, most home buyers find Bengaluru a perfect place to settle and retire. It is not a surprise then that the real estate demand in the city arises mainly due from the migrant population looking for housing units priced anywhere below Rs 60 lakhs. As the capital city of Delhi has expanded and taken the form of the National Capital Region (NCR) of India, covering various other districts of the outskirts, Gurgaon was included under this NCR. Gradually, Gurgaon’s different districts developed, including Sector 39 which is one of the most developing areas. With various companies opening up and rapid development of infrastructure, many inhabitants are migrating to this area for a better future. This has automatically created the need for constructing residential spaces and therefore, Gurgaon Sector 39 real estate property market is all set to rise in the near future.

Affordable segment positioned for exponential growth Sobha has created a new segment – Sobha Dream Series – to mark its foray into affordable housing segment. The company has launched Sobha Dream Acres, the first project under the new segment. ATS Wealth Managers Pvt Ltd.

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Sobha will be selling apartment units ranging from 650 square feet to 1,200 square feet at a price of Rs 5,000 per square feet. The reduction of tax for the salaried class, especially in the Rs 3-5 lakh per annum segment, will boost spending power and drive investment in real estate. The announcement of National Housing Bank refinancing of individual loans of about Rs 20,000 crore in 2017-18 is likely to give a much needed push to affordable housing. The paradigm shift in eligibility criteria for affordable housing from built up area to carpet area will increase the unit size by 20-30 % and benefitting home buyers the benefit of owning larger unit. The government has also extended the time of completion of such projects from previous time limit of 3 years to 5 years. The new buyers of affordable housing got a boost with the announcement of reduction in interest of 4% and 3% on loans up to Rs.0.9 million (USD13,318) and Rs.1.2 million (USD17,758), respectively. The proposed lowering of the income tax rate to 5% for taxpaying population having income less than INR0.5 million per annum (USD7,400 million) will increase the disposable income of the common man which will, in turn, increase the spending power and increase investment in the affordable segment.

Contract vertical to see traction The contractual vertical, Sobha has its presence spread over 25 cities spanning 13 States. It has 8.07 million square feet of area under execution. It also recognizes the need to spread its client base and reduce its risk portfolio, in order to de risk its portfolio it has reduced the dependence on single player (INFOSYS) from 80% of completed projects to 20% of the upcoming projects Its corporate clients includes Biocon, LuLu group, Dell, Bosch, Syngene, Taj Hotels, HCL, ITC Hotels, GMR, Huawei Technologies, Manipal group etc. As Sobha predominantly operates on a cost + margin basis, it seeks to expand its contractual operations while preserving its margins by leveraging the growth prospects of major corporate clients.

Leveraging opportunity on land bank Sobha has been gradually and strategically built-up its land bank. The Company has a land portfolio comprising of 2,476 acres. The land parcels are spread across the country – Bangalore, Cochin, Chennai, Hosur, Coimbatore, Pune, Thrissur, Mysore and Gurgaon. As and when the sentiments in the real estate


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sector improve, supported by a growing economy, the Company may unlock the value of these lands, resulting in higher efficiency when comparing with its peers with low or less land bank.

Conclusion and Recommendation Sobhais favorably placed to tap in the large opportunity in both real state and office space segment with sound financials. With the governmental initiatives for housing along with the efforts of Shoba to reduce the dependence on bangaluru market it is expected to tap in the markets opportunities an expected to outperform the industry and market in medium and long period of time.


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Financials Profit and loss account (Consolidated)

INCOME : Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income EXPENDITURE : Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Administration Expenses Miscellaneous Expenses Less: Pre-operative Expenses Capitalised Total Expenditure Operating Profit Interest Gross Profit Depreciation Minority Interest (before tax) Profit Before Tax Tax Fringe Benefit Tax Deferred Tax Net Profit Minority Interest (after tax) Profit/Loss of Associate Company NP after Minority Interest & P/L Asso.Co. Extraordinary Items Adjusted Net Profit Dividend Dividend Per Share(Rs) Book Value (Unit Curr.)


FY12

FY13

FY14

FY15

FY16

1413.41 5.51 1407.9 6.47 485.24 1899.61

1871.97 7.43 1864.54 5.52 223.16 2093.22

2184.71 11.27 2173.44 10.33 536.56 2720.33

2452.31 11.75 2440.56 14.92 299.97 2755.45

1878.41 13.36 1865.05 13.39 244.19 2122.63

101.1 21.25 126.75 834.3 303.06 40.12 0 1426.58 473.03 116.54 356.49 38.78 0 317.71 67.24 0 40.42 210.05 4.1 0 205.95 0.05 205.9

107.81 25.44 163.55 1039.3 172.23 31.12 0 1539.45 553.77 170.49 383.28 59.37 0 323.91 76.07 0 30.77 217.06 -0.12 0 217.18 -0.23 217.41

172.53 37.69 186.46 1468.9 191.67 50.15 0 2107.4 612.91 173.44 439.47 68.99 0 370.48 99.63 0 37.17 233.69 -1.36 0 235.04 0.16 234.88

188.18 42.39 197.73 1469.17 192.92 32.85 0 2123.23 632.22 188.34 443.88 72.27 0 371.61 65.03 0 62.65 243.94 5.93 0 238.01 0.02 237.99

160.55 39.49 176.47 970.25 205.05 54.08 0 1605.88 516.75 172.49 344.26 63.4 0 280.86 35.96 0 90.76 154.14 0.86 0 153.28 0 153.28

49.03 5 203.93

68.65 7 217.88

68.65 7 233.66

68.65 7 247.98

19.61 2 261.2

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Balance Sheet (Consolidated)

SOURCES OF FUNDS : Share Capital Reserves Total Total Shareholders Funds Minority Interest Secured Loans Unsecured Loans Total Debt Other Liabilities Total Liabilities APPLICATION OF FUNDS : Gross Block Less: Accumulated Depreciation Less: Impairment of Assets Net Block Capital Work in Progress Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Deferred Tax Assets Deferred Tax Liability Net Deferred Tax Other Assets Total Assets

FY12

FY13

FY14

FY15

FY16

98.06 1901.69 1999.75 35.53 1233.77 7 1240.77 19.83 3295.88

98.06 2038.56 2136.62 10.18 1341.04 37.7 1378.74 19.21 3544.75

98.06 2193.29 2291.35 8.83 1364.56 39.85 1404.41 19.77 3724.36

98.06 2333.69 2431.75 14.75 1868.95 189.85 2058.8 22.46 4527.76

98.06 2463.36 2561.42 15.62 2094.45 141.73 2236.18 24.92 4838.14

499.78 215.83 0 283.95 1.28 0.02

547.62 217.56 0 330.06 0 0.21

587.79 253.21 0 334.58 41.22 0.02

641.55 326.48 0 315.07 52.45 0.02

939.9 375.46 0 564.44 45.43 0.02

1674.59 112.86 58.78 1538.92 3385.15

1901.76 164.14 66.98 1947.87 4080.75

2427.31 246.06 105.47 1895.72 4674.55

2728.39 173.36 163.14 2253.75 5318.64

2790.89 249.81 133.34 2334.59 5508.63

771.77 136.55 908.32 2476.83 7.91 40.95 -33.04 566.84

1108.81 142.31 1251.12 2829.63 7.14 70.95 -63.81 448.67

1539.51 144.61 1684.12 2990.43 7.39 108.37 -100.98 459.08

1320.92 145.13 1466.04 3852.6 6.74 169.79 -163.05 470.68

1487.36 49.67 1537.03 3971.6 8.94 262.76 -253.82 510.48

3295.88

3544.75

3724.36

4527.77

4838.15

Research Analyst: Varun Gopal I G Equity Research Analyst ATS Wealth Managers Pvt Ltd. Disclaimer: This report is only for the information of our customers. Recommendations, opinions or suggestions are given with the understanding that readers acting on this information assume all risks involved. The information provided herein is not to be constructed as an offer to buy or sell securities of any kind. ATS and/or its group companies do not as assume any responsibility or liability resulting from the use of such information.


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