Monday, December 24, 2007

Fitch Ratings affirms the National rating on Sobha Developers Limited's (Sobha) short-term debt programme at 'F1(ind)'

The rating reflects Sobha's strong market position as a premium residential property developer in South India, and its established track record in the contract construction sector.

Sobha has over a decade of experience in the residential property market in Bangalore, and recently expanded to Trissur and Pune, with plans to enter other cities such as Mysore, Chennai and Coimbatore in the next one to two years.

Sobha has land reserves of 4,012 acres as of October 2007, spread across ten cities.

Its contract construction business has been primarily driven by a long-standing association with Infosys, and the company continues to be associated with Infosys' domestic campus expansion plans.

Meanwhile, the rating is supported by relatively stable cash flows from the contractual construction business which also continues to diversify the revenue streams of the company.

Sobha's financial leverage (Debt/EBITDA) improved in FY07 following an Initial Public Offering, part of the proceeds of which have been used to repay debt and project-related expenses.

As of November 2007, Sobha had 36 ongoing real estate projects, consisting of 11.97m sq feet of saleable area. These consist of 30 residential projects (11.5m sq ft) and six commercial projects (0.4m sq ft). On the contractual construction front, Sobha has 31 projects (8.46 m sq. feet) under execution.

Nonetheless, the rating is tempered on account of Sobha's plans of extending its real estate business to new cities, and its proposed entry into the retail and hospitality segment, where it is a new entrant.

Fitch notes, however, that Sobha has contractual construction experience in the new cities where residential properties are proposed to be developed, and has some familiarity with these markets.

Although Sobha has added new clients in its contractual construction business, a large portion of contractual revenues (90% in FY07) continue to come in from Infosys, adding concentration risk to this business segment.

The higher contribution of real estate to total revenues could also make the company more vulnerable to volatility in this sector that has seen a sharp price rise over the last three years.

Moreover, land might have been acquired during the last two to three years at increased prices, which could affect the company's margins in the event of a fall in property prices.

Fitch expects free cash flows over the next few years to remain negative, as Sobha continues to expand its operations and acquire additional land. While the residential real estate projects are funded in part by customer advances, the increasing contribution of commercial projects (hotels, retail and office space) could result in a higher requirement of working capital.

These are likely to increase overall debt levels and financial leverage in the short to medium term.

Successful foray into new geographies and achieving planned growth without adversely affecting debt metrics could act as positive triggers for the rating.

However, the rating could be adversely affected by additional significant debt-led projects and a downturn in the residential real estate segment in Bangalore, from which Sobha derives a majority of its revenue.

Sobha, founded in 1995, is a leading real estate developer operating in South India.

It derives its revenues from: real estate development and sales (64% of FY07 revenues), contract construction (26% of FY07 revenues), and manufacturing activity.

In FY07, Sobha earned revenue of INR11.86bn and Net Income of INR1.62bn. The total Debt / EBIDTA was 2.3x in FY07, with total debt / equity at 0.7x.
Moneycontrol India

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