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On a strong footing

As per Sobha’s business update, the company has achieved its best ever quarterly volumes in Q2FY22 with gross sales bookings of 1.35msf worth Rs10.3bn which were up 51% YoY in volume terms and 49% YoY in value terms driven by Bengaluru, Gurugram and Pune markets.

While Q1FY22 saw a muted performance owing to the second Covid wave across India, the improved Q2FY22 performance reflects the strong demand in South India driven hiring in IT/ITeS sector accompanied by salary hikes and low mortgage rates of 6.5-7.0%. We expect this momentum to continue into H2FY22 and beyond and we model for 4.8/5.3/5.4msf of sales volumes in FY22/23/24E.

We revise our SOTP based target price to Rs774/share (earlier Rs540) as we assign higher value to the company’s land bank owing to an expected upcycle for residential housing in South India in the medium term. However, we downgrade our Rating to HOLD from ADD post the 55% appreciation in stock price over the last three months. Key risks to our call are a slowdown in residential demand and rise in the company’s debt levels.

* Bengaluru and Gurugram markets enable strong operational performance: Sobha’s Q2FY22 gross sales bookings of 1.35msf worth Rs10.3bn were up 51% YoY in volume terms and 49% YoY in value terms. In Q2FY22, the Bengaluru market was the key contributor with sales volumes of 0.8msf and contributed 59% of the total volumes. During the quarter, the company launched two projects including the Manhattan residential project in Bengaluru (0.88msf launched in Jul’21) and Arbor residential project in Chennai (0.29msf launched in Sep’21). The Gurugram market also saw an 181% YoY volume uptick to 0.19msf and contributed 14% of sales volumes for the quarter with the Pune and GIFT City markets also seeing traction.

* Expect improved showing to continue in H2FY22-FY24E: We believe that the company’s Q2FY22 sales performance is commendable considering the second Covid wave impact across India, and expect sales momentum to sustain heading into H2FY22E as well on the back of new launches. Listed developers including SOBHA have lined up a number of launches across Tier I cities.

Low mortgage rates, stable property prices and robust hiring outlook for IT/ITeS and financial services, especially in South India and continued Work-from-Home is expected to support residential housing demand in FY23-24E as well. With developers keeping pricing discipline with price hikes of 4-5% on a like-to-like basis in new phases of ongoing projects, we expect single digit price hikes annually to protect EBITDA margins of South based developers which range between 20-25%.

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