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Aiming for higher scale with strong balance sheet

Targeting sustainable growth with healthy cash flows and profitability

After underperforming its listed peers on pre-sales growth over FY21-23, we believe SOBHA is set to outperform in terms of growth given its focus on unlocking its vast land reserve and exploring external growth opportunities through its healthy balance sheet. The outperformance is also expected to be driven by improvements in profitability. Further, visibility in the monetization of some of its large land parcels in Bengaluru will lead to a re-rating in its implied land valuation. SOBHA is our top idea for CY24 with a revised TP to INR1,400, 25% upside potential.

Key risks to our target price include (a) slowdown in residential absorption, (b) delay in monetization of large land parcels, and (c) inability to sign BD deals.

Delivered ~30% CAGR in pre-sales over FY21-23

* Over FY13-22, SOBHA sustained pre-sales at INR20-30b and sales volumes stagnant at ~4msf. However, during FY21-23, the company reported a 30% CAGR in bookings, driven by strong demand tailwinds, increased launches, and rising prices.

* Volumes saw a CAGR of ~20% during the period, aided by a high contribution from NCR, GIFT City, and Hyderabad. Growth in Bengaluru was in line with industry growth.

* SOBHA also reported a 12% CAGR in pricing during the period, led by strong appreciation in markets like NCR (+21%), GIFT City (+16%), and Pune (+10%).

Strong pipeline to support pre-sales growth

* The company has outlined 15msf of launches (period), of which 3-4msf was launched in 3QFY24 and the remaining will be launched over the next one and a half years.

* Through its vast land reserves of ~200msf, SOBHA aims to launch 30- 40msf of projects over the next three to four years. These launches also include an initial phase of its projects on its large land parcels at Hosur (Tamil Nadu) and Hoskote (Bengaluru).

* We expect SOBHA to scale up launches to 9-10msf by FY26, which will lead to a 25% CAGR in pre-sales to INR100b through FY23-26.

Healthy balance sheet to enable growth beyond existing land bank

* Over the last three years, the management focused on bringing down the leverage, which further intensified after Mr. Jagadish Nangineni took over as MD and CEO in Mar’22. During his tenure, net debt has been reduced by INR13b to INR14b as of Sep’23.

* With leverage now at 0.6x, the management aims to scale up its operations by launching more projects on its existing land parcels.

* Further, it also intends to restart investments in land, given healthy cash flows. We expect the company’s OCF to increase to INR13b by FY26, which should provide SOBHA enough firepower to target external growth.

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SEBI Registration number is INH000000412