IGI Logo

Momentum sustained in residential segment

Sobha reported a strong 3QFY22 with highest ever quarterly sales volume of c.1.32msf (+17% YoY; down 2% QoQ) while Sobha share of sales stood at INR 9.08bn (+34% YoY; +6% QoQ) at an average price realization of INR 7,920psf (+1% YoY; +4% QoQ). Bangalore remained the mainstay for sales and contributed c.72% of sales volumes (0.96msf; +22% YoY; +20% QoQ) in 3QFY22 largely led by sustenance sales. During the quarter, ‘Sobha Avalon’, a residential project in Gift City (0.33msf of super built up area) was launched. Going forward, the sales momentum remained is expected to continue in 4QFY22 backed by new launches (13.73msf of forthcoming launch pipeline; 10.81msf as of 2QFY22). Simultaneously, the management continues to focus on reducing operating overheads as well as lowering debt. As a result, net debt reduced by INR 1.23bn QoQ and is expected to reduce further in 4QFY22 (currently 1.07x net debt to equity; target less than 1x). Sobha will benefit from i) pick-up in residential business across cities, ii) deleveraging of balance sheet and iii) revival in contractual business. In the current residential upcycle, Sobha management is also planning to launch projects on the existing land banks (c.200msf of developmental potential) across cities thereby leading to further deleveraging. We maintain ‘BUY’ rating with a Mar’23 TP of INR 970. Key Risks: slower-than-expected project launches.

* Cash flows remain healthy: In 3QFY22, cash collections in Sobha’s real estate business came in at INR 10.59bn (+22% YoY; +16% QoQ; highest ever) resulting in net operating cash flow of INR 2.09bn (+15% YoY). Consequently, net debt reduced to INR 26.54bn (1.07x net debt to equity; declined INR 1.23bn QoQ) and management targets to bring it below 1x in the near term (likely given the current run rate). The cost of borrowing also seems to be on a downward trajectory and stood at 8.65% (8.85% in 2QFY22).

* Revenue recognition to be back ended: Balance revenue of INR 77.55bn (already sold) is yet to be recognised on books as of Dec’21 thereby providing good visibility of revenue recognition in the coming years. Reported financials remained subdued on account of weak revenue recognition INR 6.68bn (down 2% YoY; down 18% QoQ) and reported PAT coming in at INR 326mn (+51% YoY; down 32% QoQ) led by lowering of finance costs and higher other income.

* Forthcoming project pipeline: Sobha has a strong launch pipeline of projects with 13.73msf in area (13.41msf of residential + 0.32msf commercial) to be launched in multiple phases over the coming quarters. These projects are spread across Sobha’s own land bank and are likely to augur well from a margin perspective when recognised.

* Contractual business order book healthy: The order book expanded to INR 23.5bn (INR 22.8bn as of 2QFY22) as management witnesses recovery in order booking. Improved collections of INR 21.8bn (19.0 in 2QFY22) further helped in reducing debt.

* Maintain ‘BUY’; Mar’23 TP of INR 970: We believe Sobha remains well-placed to do well with the current uptick in the residential segment We maintain ‘BUY’ rating with a Mar’23 TP of INR 970. Key Risks: slower-than-expected project launches

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

CIN Number : L67120MH1986PLC038784

Above views are of the author and not of the website kindly read disclaimer