ICICIDirect - Sobha Developers IPO

Capital Structure

Authorised Capital: 800,000,000 equity shares of Rs 10 each
Equity shares outstanding prior to issue: 64,004,908 equity shares of Rs 10 each fully paid-up
Equity shares outstanding after the issue: 72,898,240 equity shares of Rs 10 each fully paid-up

Background

Shobha Developers Ltd (SDL) is a leading Bangalore-based real estate development and construction company that focuses on residential and contractual projects. SDL is involved in the development of convention centres, software development blocks, multiplex theatres, hostels, guest houses, food courts, restaurants, educational and research centres and club houses in various states of India. As on June 30, 2006, its land reserves comprise of 2,592.83 acres and land arrangements amounted to 3,456.19 acres. As on September 30, 2006, its land reserves amounted to 2,747.06 acres and land arrangements to 3,373.28 acres.

The company has a unique backward integrated model with facilities and resources that include an architectural and design studio, concrete block making plant, metal and glazing factory, interiors and wood working factory, mechanical, electrical and plumbing division and project management team. The company has obtained an ISO 9001 (1994 series) and an ISO 9001 (2000 series) certification for its activities in the real estate and construction industry from Bureau Veritas Quality International.

The issue

Issue Size: 8,893,332 shares of Rs 10 each
Employee Reservation Portion:889,300 shares of Rs 10 each

Net Issue to the Public

QIBs: 4,802,450 shares
Non-Institutional Investors: 800,300 shares
Retail Investors: 2,401,282 shares

Objectives of the issue

The objectives of the issue are to fund land acquisition, finance the construction and development costs for existing and proposed residential projects, repay certain loans and fund expenditures for general corporate purposes.

Key Investment Rationale

Integrated player
In an industry where outsourcing is the norm, SDL has in-house resources to deliver projects from conceptualisation to completion. The company constructs its own projects and undertakes interior and finishing works as well as manufacture of raw materials. Thus, the company can control cost overruns and enjoy good margins with no dependence on suppliers. Buoyed by the success of its backward integration strategy, SDL now wants to diversify its portfolio by entering into specialised service segments. The company wants to build hotels, malls, integrated townships, shopping complexes, multiplexes, and undertake plot developments. Forward integration would enable the company provide products across the real estate value chain.

Extensive land reserves
The company's land reserves form an important asset for its business. Its land reserves aggregated to 2,593 acres of land, representing an aggregate of approximately 118 million sq. ft of developed or potential developed area, over 78 locations in 7 cities across India. Its land arrangements aggregating approximately 3,456 acres of land, representing an aggregate of approximately 117 million sq. ft of developed or potential developed area, over 13 locations in 3 cities across India.

Opportunities in contractual projects
The company has successfully executed contractual projects for major clients that include Infosys Technologies, MICO, Taj Group of Hotels and other companies. The execution of contractual projects is a key growth area for the company's business and it intends to pursue contractual assignments from existing clients and build its corporate client base by actively engaging in competitive bidding for the execution of projects.

Key Concerns

• A significant portion of company's revenues from contractual projects is attributed to one client.

• The increasing competition and applicable regulations are likely to result in land price escalation and a further shortage of developable land.

• The company is currently availing of certain tax benefits under the provisions of the Income Tax Act, which if withdrawn, may adversely affect its financial performance and results of operations.

• The real estate industry is competitive, highly fragmented, with low-entry barriers. This could adversely affect results.

Financials

SDL's revenues have grown at a CAGR of 75% between FY04-06 to Rs 597 crore in FY06. During the same period, operating profit and net profit have grown at a CAGR of 175% and 57%. RoNW stood at 65.21% in FY06.

Valuations

At the issue price band of Rs 550-640, the stock discounts its FY06 EPS of Rs 13.96 by 45.86x (upper end) and by 39.39x (lower end). SDL is currently executing major projects across southern and western India and has huge quantities of land.