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Sunday, June 21, 2009

Omaxe Ltd and Sobha Developers Ltd:-Future growth prospects and outlook

1)Scripscan:Omaxe Ltd
Traded in:Nse-bse

Story:Omaxe"ss debt to equity ratio remains high at 1.13x with gross debt amounting to Rs 1,700 crore, of which Rs 99 crore is payable to Indiabulls Financial. The company is working on restructuring substantial portion of its debt. Average interest cost is down to 14%; however, I see high debt levels adversely impacting earnings, with overall profitability under pressure.Omaxe"ss over-dependence on North India raises risks of a pre-sales slowdown with sluggish demand environment and tight liquidity conditions resulting in significant execution delays. With a move in the right direction, response to these projects will be crucial. Factoring in easing liquidity, lower cost of capital of 14% and roll-forward to March-10E, The scrip looks only good at sub 60 levels.I believe the company"ss fundamentals are still weak, with the stock up 150% over the last three-four months.

2)Scripscan:Sobha Developers Ltd
Traded in:Nse-bse

Story:As of 31 March 09, Sobha?s net debt is Rs 1900 crore and current market cap is Rs 1300 crore.Hence, significant equity dilution is necessary to improve its balance sheet.Unlike peers, its a laggard in raising equity and probably does not have assets that are monetisable in these liquid markets. Its major markets are yet to show demand buoyancy. While Sobha has been able to reschedule its debt and sell stake of project; its ability to raise equity at parent level has yet to bear fruit.It has proposed to raise a Rs 1,500-crore funding compared to its net debt of Rs 1900 crore as on 31 March 09 and current market cap of Rs 1300 crore.With improving liquidity, I reduce weighted average cost of capital by 100 bps to 17.5 and reduces the discount to gross asset value from 55% to 50%. I then exclude liabilities to arrive at the revised target price of Rs 90 for its real estate business. By adding Rs 59 for its other businesses, the target price results in Rs. 149.

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