Pre-sales momentum strong

Sobha Ltd. (SDL) reported an operationally robust 2QFY21 with pre-sales volume of 0.89msf (-14%/+37% YoY/QoQ), despite the lack of new launches during the quarter. Pre-sales value grew by 1% YoY on 18% increase in realisation. Real estate collections have also improved to Rs 5bn (vs Rs 3.3bn in 1QFY21). Sales activity has further picked up in October and, with new launcheslined up, management expects positive growth in 2HFY21. However, recovery in contracts business lagged, as segment revenue declined by 47% YoY. We maintain BUY on strong momentum in pre-sales, robust launch pipeline, and likely recovery in execution with improved labour availability. We leave the target price unchanged at Rs 348/sh.

* Revenue misses estimates:

Sobha reported revenue at Rs 5.2bn (-33%/+49% YoY/QoQ), 11% below our estimates, on slower-than-expected recovery in contracts segment (-47% YoY). EBITDA margin came in at 19.8% (-143bps YoY, -867bps QoQ). While interest cost remained flattish sequentially, other income rose by 20/157% YoY/QoQ, on the gain in a land sale. Consequently, APAT declined 76% YoY, 46% behind our estimates. With the improvement in labour availability, we expect execution to recover in 2HFY21.

* Non-Bengaluru markets see strong recovery; launch pipeline robust:

SDL registered pre-sales at 0.89msf (down 14% YoY), with average realisation at Rs 7,737/sf. Recovery was led by strong growth in Gurugram, Kochi, and Thrissur. Bengaluru, the key market for Sobha, witnessed muted recovery (- 31% YoY) on lockdown in the first half of July-20 and restrictions on movement during weekends. Growth in other markets augurs well for Sobha as it would help diversify away from Bengaluru. Total unsold inventory from ongoing projects stood at 14msf at the end of the quarter. SDL is looking to launch 14msf of new projects across geographies. We believe new project launches would support recovery in pre-sales.

* Continued focus on preserving balance sheet:

Consolidated net debt increased marginally to Rs 30.5bn (vs Rs 30.2bn on Jun-20). With Rs 1.1bn of cash, net D/E increased to 1.28x (1.24x on Jun-20). With a check on Capex, deferred investment in land and focus on internal accruals for pending construction expense, we expect debt to remain at a similar level. Total collections, including from contracts segment, have improved from Rs 5.5bn in 1QFY21 to Rs 6.9bn during the quarter. SDL generated Rs 3.9bn from operating activities and free cash flow of Rs 3.6bn in 1HFY21.

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