Real Estate - Bangalore visit: No inkling of let-down - ICICI Securities

Reason for report: Company visit and upgrades

We met senior management of Sobha Developers (Sobha), Prestige Estate Projects (Prestige) and property consultants in Bangalore and came back positive from the meets. The South India market continues to remain buoyant with sustained transactions in both residential and commercial segments. The sales run-rate for both Sobha and Prestige continued to remain strong in Q2FY13 as well. For Prestige, sales booking for the first two months of Q2FY13 stood at ~Rs5bn with new launches in Bangalore eliciting favourable response. Further, leasing activity has remained buoyant with clear visibility of the company increasing its lease portfolio to ~4mn sqft (rentals of Rs2.25bn) by FY13-end. We upgrade our target price for Prestige to Rs156/share to account for the increase in visibility of comfortably surpassing its residential sales target and achieving commercial lease. Sobha continues to maintain its sales momentum with 0.6-0.7mn sqft sales achieved in the first two months of Q2FY13 on the back of 0.9mn sqft of launches. Though Sobha's debt is likely to increase in Q2FY13 due to dividend payout, tax and new land purchases, we believe strong pre-sales will continue to provide growth capital for the company and would also enable deleveraging. We remain positive on Sobha and, on the back of the recent correction, upgrade the stock to BUY with a target price of Rs384/share.

Prestige Estate Projects. Sales momentum for Prestige in Q2FY13 remained strong with the company booking sales worth ~Rs5bn in the first two months of the current quarter (YTDFY13 at Rs15bn against Rs25bn guidance for the full year). With new launch visibility of ~4mn sqft in H2FY13, we believe Prestige is all set to surpass its sales guidance (of ~5mn sqft volume and Rs25bn value) by decent margins. With assured leasing of 0.5mn sqft in Cessana-C7 to Cisco in December and Exora's B2 getting ready (50% leased out), visibility on the lease portfolio has risen to ~4mn sqft by FY13-end. We remain positive on Prestige and increase our target price to Rs156/share incorporating the improved sales visibility. We believe the company is well placed wherein both fundamentals and valuations warrant an upside from current levels.

Sobha Developers. Sobha clocked sales of 0.6-0.7mn sqft in the first two months of Q2FY13 and is targeting to surpass the previous quarter's sales in both volume and value terms (realisations for the current quarter are likely to remain flat sequentially). The company launched two projects (Sobha Mozaria Grandeur in Banergatta, and Sobha Jade in Thrissur) of ~0.9mn sqft during this period along with new phases in Sobha City and Forest View. Sobha is confident of achieving its sales target of 3.75mn sqft and Rs20bn sales in FY13. Further, the company expects NCR revenue recognition to start from H2FY13 onwards with ~Rs2bn sales likely to be booked from that project during FY13. Though Q2FY13 cashflows may remain strained due to: i) ~Rs900mn of outflow in dividend and tax, and ii) land acquisitions, we expect sustained positive newsflow on new property development initiatives and sales volume. Upgrade Sobha from Add to BUY with target price of Rs384/share.

Property consultants' views. Bangalore has surpassed major property markets in terms of absorption, with commercial absorption YTD at 5mn sqft (absorption is the space already occupied; transactions would have been far higher). Vacancy rates continue to decline on a steady rate. There is hardly any ready-to-move-in supply in the market with new under-construction supply already pre-committed. IT/Non-IT space demand in the city stands at 50:50 and no impact of the change in SEZ regulations has been observed (except for marginal delays of 1-2 months on commitments). Large four to five IT and financial MNCs have already committed for incremental space of >4mn sqft. Demand for commercial space continues to remain strong in Chennai and surprisingly in Hyderabad too, with the Tidal Park project, Madhepur, doing extremely well.

Source : Equity Bulls

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