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Healthy cash flow generation, debt reduction…

About the stock: Sobha Ltd (Sobha) is a leading real estate player with ongoing real estate projects with ~12.3 mn square feet (msf) of unsold saleable area and ongoing contractual projects aggregating to 4.8 msf in various stages of construction. As on Q1FY23, Sobha has delivered ~121+ msf of developable area.

* Sobha has a real estate presence in 11 cities, viz. Bengaluru, Gurugram, Chennai, Pune, Coimbatore, Thrissur, Kozhikode, Kochi, Trivandrum, Gift City and Mysore

Q2FY23 Results: Sobha reported a steady operating performance with the key highlight being healthy cash flows and debt reduction.

* Sales booking value at | 1164 crore (up ~13% YoY) with volume down 0.9% YoY at 1.34 msf and sustained momentum in Bengaluru

* On the financial front, reported revenues were down 14.4% YoY at | 667.3 crore, owing lower revenue recognition in the real estate segment, which was down 28.5% at | 444 crore. PAT was down 70% at | 19.2 crore owing to lower revenues and profitability

* Sobha has managed to reduce its net debt position by | 221 crore QoQ to | 1888 crore (net D/E: 0.77x), aided by strong operating cash flows 

What should investors do? Sobha’s share price has grown at ~4% CAGR over the past five years given the debt and relatively muted sales momentum

* The consistency in sales volumes, collections and debt reduction is a positive surprise. We upgrade from HOLD to BUY rating

Target Price and Valuation: We value Sobha at | 750/share.

Key triggers for future price performance:

* Robust ongoing & completed project with | 5864 crore of potential cash flow

* Huge captive land bank providing enough ammunition to expand overall residential sales volumes trajectory

* Further improvement in leverage

Alternate Stock Idea: Besides Sobha, we like Brigade Enterprise in the realty space.

* A play on Bengaluru residential and commercial real estate

* BUY with a target price of | 620

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