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Published on 6/04/2020 11:49:35 AM | Source: ICICI Securities Ltd

Buy Sobha Ltd Ltd For Target Rs. 261- ICICI Securities

Posted in Broking Firm Views - Long Term Report| #Real Estate Sector #Broking Firm Views Report #ICICI Securities #Sobha Ltd.

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Sailing in choppy waters

Sobha’s share price has corrected by 60% over the last 3 months. This is owing to the company’s net debt levels having risen by Rs6.6bn in 9MFY20 to Rs30.9bn (net D/E of 1.3x) and COVID-19 induced concerns over residential sales grinding to a halt. Although the company has clocked steady Q4FY20 gross sales volume of 0.9msf worth Rs6.9bn and FY20 sales volumes of 4.1msf worth Rs28.8bn (down 8% YoY in value terms), the company is headed into choppy waters going ahead. The likely economic fallout of COVID-19 is home buyers deferring their home buying decisions for 6-9 months which spells trouble for Sobha as it has a residential heavy business model coupled with high debt. We have cut our FY21/22E volume estimates by 40% and 20% respectively and now value the company’s legacy land bank at 50% discount to market value. Accordingly, we have cut our FY20 SOTP based target price to Rs261 (earlier Rs522) and retain our BUY rating.

* Q4FY20 Bengaluru sales strong, other markets steady: Sobha’s Q4FY20 gross sales bookings of 0.91msf worth Rs6.9bn were driven by sales in Bengaluru, which accounted for 0.66msf or 73% of the sales volumes. Other markets clocked a relatively stable performance on QoQ basis. For FY20, Sobha’s share of sales bookings worth Rs23.8bn was down 8% on YoY basis.

* Net debt has increased sharply in FY20: In 9MFY20, Sobha’s consolidated net debt has increased sharply by Rs6.6bn which has not been accompanied by a ramp up in sales volume across geographies. Although the company has mentioned that net debt has reduced marginally in Q4FY20 (absolute figures not available), the likely COVID19 induced slowdown on residential sales in FY21, is a cause of concern.

* COVID to impact sales volumes: While a halt in construction activity in Q1FY21 may help to balance the anticipated fall in collections in the short-term, we expect residential volumes to remain weak in Q2FY21 and only see some pick up during the festive season in Q3FY21. We have cut our FY21/22E volume estimates by 40% and 20% respectively to 2.7msf and 3.6msf to reflect the slowdown. While the company has a large land bank of over 2,000acres, significant chunks are legacy ones in Hosur, Kerala and Chennai which are not monetisable in the current scenario and hence we have assigned a 50% discount to market value for the company’s land bank.

* What can save the day? Sobha continues to have a strong brand in South India with a timely execution record. In a scenario where residential demand recovers to preCOVID levels in H2FY21, the company may be able to rein in debt levels with its 14msf of planned launches and monetising its existing inventory across projects.

 

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