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Benefitting from market buoyancy

Sobha reported a healthy 2QFY23 with its highest-ever quarterly sales value of INR 11.64bn (+13% YoY; +2% QoQ) along with highest-ever price realisation of INR 8,709/sqft (+14% YoY; +3% QoQ). Sales volume came in at c.1.34msf and net operating cash flow of INR 3.61bn (+104% YoY; +93% QoQ). Sales were largely driven by 0.88msf of new launches in Bengaluru and Kerala (Thiruvananthapuram, Kochi, Thrissur and Calicut) and over 2HFY23 the management expects to better the 1HFY23 sales run rate and close the year with possibly 5.5-6.0msf of sales. Sobha has also reported its highest-ever quarterly operational collections at INR 13.35bn (+46% YoY; +19% QoQ). On the cash flows front, over the last few quarters, land spends have been muted and, going forward, growth might pick up, thereby reducing the pace of debt reduction. In this quarter, net debt reduced by INR 2.21bn to INR 18.89bn (0.77x net debt to equity). We feel the current momentum in residential market augurs well for Sobha as it targets c.15-20% sales growth over FY22. We introduce FY25 estimates and roll forward to Sep’23. Maintain ‘BUY’ rating with a Sep’23 TP of INR 760. Key Risks: interest rate hikes and slower-than-expected project launches.

* Bengaluru and Kerala launches drive an operationally strong quarter: Sobha reported a strong quarter on the back of 0.88msf of new launches in Bengaluru (Insignia – 0.08msf, Meadows – 0.20msf and Brooklyn Towers – 0.60msf). Total sales volume came in at 1.34msf while booking values came in at INR 11.64bn (INR 9.61bn Sobha share, +2% QoQ & +13% YoY; highest-ever quarterly sales value). Realisation improved to INR 8,709psf (INR 8,431psf in 1QFY23). Bengaluru contributed c.78% of volumes in 2QFY23 (1.04msf; +30% YoY; down 2% QoQ; on account of new launches) and continues to be the company’s strongest market. Gift City, NCR, and Chennai saw QoQ and YoY decline in area sold while Coimbatore and Pune showed QoQ growth.

* Deleveraging continues but likely to slow down: In 2QFY23, cash collections in Sobha’s real estate business came in at INR 10.82bn (+49% YoY; +22% QoQ) resulting in net operating cash flow of INR 3.61bn (+104% YoY, +93% QoQ). Collections in contractual and manufacturing business improved to INR 2.53bn (+34% YoY; +11% QoQ) further boosting cash flows. Healthy operating cash flows led to debt reduction by INR 2.21bn to INR 18.89bn (0.77x net debt to equity). Cost of borrowing marginally increased to 8.57% (8.45% in 1QFY23). Over the past 10 quarters, Sobha barely had any land spends and it is likely to increase, going forward, leading to slower deleveraging.

* Reported financials: Revenue recognition came in at INR 6.67bn (down 14% YoY; +18% QoQ) and Sobha has also restated financials of prior periods as recommended by new auditors. EBITDA margin came in at 13.8% (down914bps YoY; +92bps QoQ) while PAT was INR 193mn (down 70% YoY; +322% QoQ).

* Maintain ‘BUY’; Sep’23 TP of INR 760: The current market buoyancy is helping Sobha opportunistically monetise land banks and deleverage balance sheet. We roll forward estimates and maintain ‘BUY’ rating with a Sep’23 TP of INR 760.

* Forthcoming project pipeline: Sobha has a healthy launch pipeline of projects with 11.25msf in area (10.93msf of residential + 0.32msf commercial) to be launched in multiple phases over the coming quarters. Most of them are expected to be launched over FY23 / FY24. Presently, Sobha has a pipeline of 23.23msf of projects (4-5 years of sales potential). The launch pipeline spans across Bengaluru, Gurgaon, Chennai, Trivandrum, Thrissur, Hosur, Gift City, and Hyderabad.

* New launches: 

- In 2QFY23, the company launched three new residential projects, two in Bengaluru and one in Thiruvananthapuram with a total saleable area of 0.88msf:

* Sobha Insignia – A boutique super luxury residential project with a saleable area of 0.08msf in Bhoganahalli, South East Bengaluru.

* Sobha Meadows (Whispering Hill) – A luxury apartment project in Thiruvananthapuram with a total saleable area of 0.20msf.

* Sobha Brooklyn Towers (Town Park) – Launched 297 apartments of 3 & 4 BHK configurations near Electronic City, Bengaluru, with a saleable area of 0.60msf.

* Other details: i) Completed Sobha Meadows in Mysore. Partially completed Sobha Gardenia in Chennai and Sobha HRC Pristine, Sobha Dream Acres and Sobha Forest Edge in Bengaluru, ii) Hosur land has seen positive developments while Hosokte land parcels remain back-ended, iii) auditor-related recommendations pertain to: land and land advances, interest and interest advances and recognition of additional revenue / costs for part of land owner.

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