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Riding on strong underlying demand…

About the stock: Sobha Ltd (Sobha) is a leading real estate player with ongoing real estate projects with ~20 mn sq feet of saleable area and ongoing contractual projects aggregating to 5.9 mn sq ft under various stages of construction. As on Q2FY22, the company has delivered ~114.7 mn sq ft of developable area.

* The company has a real estate presence in 10 cities, viz. Bengaluru, Gurugram, Chennai, Pune, Coimbatore, Thrissur, Kozhikode, Kochi, Gujarat (Gift City) and Mysore

Q2FY22 Results: Sobha reported a strong operating and financial performance.

* The sales volume of 13,48,864 sq ft (up 51.2% YoY, 30% from pre Covid – Q2FY20) during Q2FY22 valued at | 1030.2 crore (up 49.3% YoY), were primarily driven by good sale numbers achieved in Bengaluru, Gurugram, Pune and GIFT CITY

* On the financial front, reported revenues were up 57% YoY at | 819 crore, driven by strong real estate revenues recognition (up 96% YoY at | 654 crore). Ex- Ind AS EBITDA at | 155.8 crore, was up 24.5% with margins of 19%, down 500 bps YoY. PAT at | 45.4 crore was up 167% YoY

What should investors do? Sobha’s share price has returned 266% over the past five years with most gains being back ended in the last one year.

* We maintain HOLD rating to the company as the recent run up (up ~50% in last three months) restricts meaningful upsides from here

Target Price and Valuation: We value Sobha at | 970/share.

Key triggers for future price performance:

* Robust current ongoing and completed project with | 7213 crore of potential cash flow

* Any improvement in leverage, which currently is at 1.13x net debt/equity

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

Alternate Stock Idea: Besides Sobha, we like Mahindra Life in the realty sector

* A play on expanding residential real estate portfolio

* BUY with a target price of | 335

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