Sobha's sales momentum to continue in FY19, stock rises nearly 8%

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Shares of Sobha on Friday settled with gains of nearly 8 per cent after the company reported strong sales for the second consecutive quarter and 2017-18.

In the March quarter, the company sold over a million square feet which fetched Rs 8.1 billion. Of this total amount, Sobha’s share was Rs 6.5 billion.

Realisations were also strong at Rs 7,993 per square feet, up 3.75 per cent year-on-year (y-o-y), reflecting higher share of premium projects. While projects in Kochi and Gurugram received good response, about three quarters of the company’s sales come from Bengaluru.

Sales on an annual basis, too, were better-than-expected as the company sold 3.6 million square feet for Rs 24.2 billion, its highest annual sales to date.

While volumes were up 21 per cent, sales (value) were up 30 per cent, indicating a higher proportion of luxury units sold. 

Analysts estimate that its mid-income project ‘Dream Acres’ in Bengaluru accounted for about 0.8 million square feet of the total annual sales. Sobha launched two projects in the March quarter — one in Bengaluru (Sobha Forest Edge) and the other in Chennai (Sobha Gardenia).

Though the company has not guided for sales in FY19, analysts at Axis Capital expect the momentum to continue on the back of new projects. 

The brokerage expects top developers in Bengaluru to gain market share due to consolidation on account of the Real Estate Regulation Act. Further, given its strong execution capability and land bank, it is well poised to capitalise on affordable housing opportunity.

Though sales have improved, Sobha’s debt has increased to Rs 24.6 billion from Rs 12.4 billion in FY12. 

Analysts at Kotak Institutional Equities said while operating cash flow had been positive, Sobha needs to expand through an asset light model. In the near term, given the pick-up in sales and collections, there should be a reduction in debt. 

The company is also expected to benefit from the implementation of the goods and services tax with input credit for vertically-integrated business units, according to analysts at JM Financial. The Street will look out for the pace of debt reduction and visibility or execution on its land bank, especially at Kochi. 

While analysts are positive on Sobha’s operation and prospects in the residential market, the stock after Friday’s sharp rise is fairly valued at the current price. Kotak has a price target of Rs 510 (1.7 times book value).


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