Sobha: In a favourable spot - Buy
A slew of launches and presence in luxury and affordable segments are positives
The introduction of the GST and RERA laws took a toll on the realty segment for the better part of last fiscal. Now, with the adverse impact of these acts tapering down, Sobha, a Bengaluru realty developer, stands to benefit from the favourable market conditions with project launches picking up and unsold inventories coming down.
The company has reported good sales volumes and value growth in the first quarter of this fiscal, a continuation of the trend seen in the last couple of previous quarters of FY18. Sobha’s foray into affordable housing is likely to boost its earnings in the coming years.
It operates primarily in the residential segment, with presence in both luxury and affordable housing.
The company has a strong launch pipeline, with various projects set to be rolled out by the end of FY19.
Sobha’s land bank in favourable locations bodes well for any future realisations. Sobha has healthy financials. Investors can buy this stock with a two to three year perspective, given the healthy growth prospects for the company. At ₹466, the stock trades at 20 times its trailing 12-month earnings, slightly lower than its three-year average.
Strong revenue flow
The company’s main focus is on the luxury residential segment (with ticket size over ₹1 crore). The management is confident of continued increase in sales in this category, given that nearly 29 per cent of the sales value is contributed from the ₹1-2 crore category. Sobha reported steady volume and value growth of 18 and 22 per cent Y-o-Y respectively in the recent June quarter.
The company derives nearly 70 per cent of its revenue from the residential segment and 30 per cent from development of commercial properties and providing contract manufacturing services such as civil, electrical, interior and landscaping. Favourable property locations would aid the pricing power of the company and bolster realisations.
For instance, in the June quarter, Sobha launched ‘Sobha Meadows’ (premium residential) near Mysore electronic city and was able to sell nearly 60 per cent of the area since its launch.
Also, the company released about 0.8 million sq ft (msf) of saleable area from all its existing projects such as Sobha Arena, Pebble court and The Square, which would help sales growth in the coming quarters.
The company also launched a luxury residential property — Lake Gardens in Bengaluru — in July this year with 0.89 msf of saleable area.
The company has obtained RERA approvals and nearly 25 per cent was sold according to the management. Sobha also witnessed good traction in NCR and Gujarat (GIFT city) regions. With the headwinds in the realty sector receding, the company had an average price realisation of ₹6,373 per sq ft, which is better other realty player such as Brigade.
Strong launch pipeline
Sobha has planned about nine projects in the next three to quarters, with total saleable area of 9 million sq ft. The company hopes to clock annual sales volume of 6-7 msf a year.
In the affordable housing category, it plans to launch properties at ₹5,000-5,200 per sq ft. The affordable housing project by Sobha is likely to take off by October 2019.
The company also plans to launch affordable housing properties in Gujarat GIFT city in the coming quarters.
The company gets to sell the first 5,000 apartments to investors outside GIFT city (provided it is rented to people working in GIFT city). This will aid the company’s growth.
The company is also expanding to new territories such as Hyderabad, Trivandrum and Ahmedabad for residential projects. Sobha has one of the largest land banks among realty players (2,285 acres).
On the contract and manufacturing projects, the company could take the contract billing to ₹1,500-2,000 crore from the current ₹1,200 crore.
Sobha’s revenue grew 28 per cent Y-o-Y in FY18 to ₹2,836 crore and registered robust profit growth of 35 per cent Y-o-Y (₹216 crore) in the same period.
Note that the company has adopted IND AS 115 (Indian Accounting Standard) from the June quarter and, as such, the numbers are not comparable with the previous years. Under the new system, the revenue can be booked only after the project is completed and customer has taken possession of the unit.
This means, the company has to write back the revenue and projects booked in the previous quarters; this would impact profit and revenue. The company expects to maintain an EBITDA margin of above 25 per cent on real estate projects.