Buy Sobha Ltd for the Target Rs 1,900 by Emkay Global Financial Services Ltd
We maintain BUY on Sobha (SOBHA) with an unchanged TP of Rs1,900, based on 8x EV/embedded EBITDA at 19% premium to NAV (the stock is trading at 26% discount to NAV). SOBHA delivered its best-ever 2Q pre-sales of Rs36.6bn (+76% yoy), aided by strong sustenance sales; thus, 1HFY27 pre-sales stood at Rs58.6bn (47% yoy), its best-ever half-yearly pre-sales. With a launch pipeline of 12msf (Rs180bn GDV) for 2HYF27 and unsold inventory of Rs185bn, we expect SOBHA to easily achieve pre-sales of Rs110-120bn (35-45% yoy) in FY27E, against its guidance of Rs106bn. Reported EBITDA margins, which continue to be muted (6.5% in 1HFY27), are expected to improve to +15% from 3Q onward. The key monitorable is reported margins.
2QFY27 snapshot Operational:
2QFY27 pre-sales stood at Rs22bn (up 16% yoy) vs our estimate of Rs20bn. 1HFY27 pre-sales stood at Rs58.6bn (47% yoy). New launches contributed 70% of 1HFY27 pre-sales. Collections and operating cashflow (OCF): Collections remained steady at Rs20.8bn (2% yoy) in 2QFY27 and Rs40.1bn (5% yoy) in 1HFY27. Net operating cash flow moderated to Rs7.5bn (-17% yoy) in 1HFY27. We expect OCF to catch up in 2H. Financial: 1HFY27 revenue stood at Rs22.5bn (-1% yoy), EBITDA at Rs1.5bn (23% yoy), and PAT at Rs0.8bn (-3% yoy). Reported EBITDA margin continues to be muted in low single digits at 6.5% (124bps yoy) in 1HFY27. Net debt and D/E: SOBHA remains net-cash-positive at Rs3.2bn (down Rs4.3bn yoy), with gross debt of Rs15.1bn (up Rs5.0bn yoy).
Significant margin uptick from 3Q onward
SOBHA is expected to report PAT of >Rs3.0 bn in FY27, up 50% yoy. The company has Rs220bn+ of revenue to be recognized, with high embedded EBITDA margins. With key projects such as Sobha Neopolis (owned) and Sobha Manhattan expected to commence deliveries from 3QFY27, EBITDA margins are expected to exceed 15% in 2HFY27 and 20% from FY28 onward. SOBHA targets deliveries of 6msf in FY27, of which 2.5msf was delivered in 1HFY27. Revenue recognition is linked to customer handovers rather than project delivery, although delivery volumes provide an indication of the pace of recognition
Expansion beyond core markets
SOBHA has a well-entrenched presence in Bengaluru and Gurugram, with a growing footprint in Greater Noida, Mumbai, and Hyderabad. Bengaluru and NCR are expected to contribute over 60% of pre-sales over the next few years, compared with over 91% in 1HFY27. The 2HFY27 launch pipeline comprises three projects in Bengaluru and one each in Greater Noida, Chennai, and Hyderabad, with the remaining launches in Kerala, and remains heavily skewed toward Bengaluru. SOBHA continues to expand into newer markets, with project acquisitions in Greater Noida and MMR during 1HFY27.
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