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* Sobha during the quarter achieved the highest ever pre-sales(volumes) of 1.7mnsft. During the quarter the company registered 22.9% de-growth in pre-sales t0 Rs.15.04bn and collection of Rs.14.98bn. Company reported net sales revenues of Rs.7.63bn in Q3FY24 (-21.7% YoY/-7.6% QoQ). Operating profit for the quarter stood at Rs.741mn (-36.9% YoY/+2.9% QoQ). Margin for the quarter stood at 18.1%. Revenue from the contract manufacturing segment de-grew by 46.4% YoY to Rs.1.45bn. On the launches front, Management expects to launch a total 9mnsft in FY25.

* The Company generated a healthy net operating cash flow of Rs.3.59bn. and real estate cash flow increased to Rs.13.34bn. Net debt has reduced to Rs. 12.62Bn down from Rs. 13.43 Bn in Q3FY24 with the cost of debt marginally increasing to 9.35%. Net debt/equity stood at 0.50X. The current debt equity is at a comfortable level and the management may take new debt for future expansion (land acquisition).

* Right issue of Rs20bn to support future growth: Over the past several quarters, the company has been able to reduce its debt through the healthy cash flow generation and sales as well as by monetizing its land assets. Recently the company has announced to raise Rs20bn via rights issue to support the future growth by way of acquiring land and other project related expenses. Currently land bank prices have increased significantly across Tier-I and Tier II cities, which may impact the overall IRR of the new projects. However, management is confident to achieve a similar level of margin in upcoming projects as well. Going forward, the company aims to keep its debt/equity level below 1x.

* Expanding into new geographies: Sobha is slowly and gradually expanding its presence beyond the Southern market, as it is not in a hurry to increase its inventory within a short span of time. It is looking to consistently increase its yearly sales by 20% from the current ~6.4mnsft to 7-8mnsf in coming years. Corresponding to this, the company has started investing in all the new geographies like Pune and Hyderabad and an increasing presence in Kerala

* Looking for healthy launches: In the launch pipeline for FY24 and FY25 most of the projects have average sales price upwards of 11000/sft in a fast growing region like NCR, Kerala and Bangalore. Company is aiming to add another 9mnsft in FY25, on top of 17.6mnsft forthcoming launches. We believe, Sobha is on the cusp of generating healthy pre-sales in coming years, led by a robust launch plan, low inventory, and increasing presence in the non-Bengaluru markets like Hosur, Gurugram,Pune,GIFT city and also plans of gradually penetrating the MMR market too. Further, NCR region contributes 22% on sales volume front and 38% on sales value front. With the new launch pipeline from the high ASP region we expect Sabha to generate healthy sales growth in FY25 as well. 

Outlook & Valuation: Currently the company has low levels of inventory and is looking to add a launch pipeline up to 40mnsft (17.6mnsft+24.4mnsft new) over the next few years with most of the launches where Sobha’s share will be 90%+. Management is raising a fund by way of rights issue to tap the real estate upcycle opportunity without leveraging the balance sheet. We recommend REDUCE rating on the stock with a SoTP price target of Rs.1861, by factoring all the positives such as healthy Launch pipeline, increase in ASP due to change in mix, and similar level of margin.

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