Stock Fundamentals

Sobha: Good foundation - Buy

Bavadharini KS | Updated on June 02, 2019 Published on June 02, 2019

Landbank in favourable locations and robust launches in the pipeline are positives for the company

The re-elected Modi government is expected to continue its focus on infrastructure development; this could have a positive rub-off on the real estate sector too. Also, the demand in this sector started its slow recovery in the early part of 2018, thanks to higher transparency in transactions, correction of prices and improving mechanisms for dispute redressal.

In this context, Sobha, a Bengaluru-based realty developer, stands to benefit from favourable market conditions; it has healthy financials, various new projects lined up in FY 2020 and its levels of unsold inventory are coming down. Sobha operates primarily in the residential segment, with presence across segments — super-luxury, luxury, premium and affordable housing. Its key market is Bengaluru; it accounted for almost 70 per cent of sales in FY 2019.

Sobha’s stock held its own over the past year and rallied smartly in the past few weeks, despite tight-liquidity concerns for the sector at large. The stock is up about 7 per cent the past year. But growth opportunities for the company could translate into upside for the stock. A robust launch pipeline is expected to boost Sobha’s revenue growth in the next three to four quarters. Also, the company’s sizeable landbank in favourable locations bodes well for growth in the future.

The stock presents a good buying opportunity for investors with a long-term perspective. At ₹544, the stock trades at 17 times its trailing 12-month earnings, lower than its three-year average (20 times).

Strong launch pipeline

Sobha has nearly 73 on-going RERA registered projects which translate into saleable area of about 28.74 million square feet. The company sold 4.03 msf in FY 2019, with volume and value growth of 11 per cent and 9 per cent Y-o-Y, respectively. The company had an average price realisation of ₹8,152 per sq ft during the March 2019 quarter. This is better than the average price of ₹4,681 per sq ft in the Bengaluru market, as per a report by real estate consultant Knight Frank.

The company’s presence across housing segments hedges the business to an extent, in case of demand fluctuations in individual segments.

Over 65 per cent of Sobha’s residential projects are in the Bengaluru region. The demand for its properties is expected to stay buoyant thanks to strong commercial activities (IT/ITeS and Start-up) in the Bengaluru region that drive residential demand.

In the next three to four quarters, the company plans to launch eight projects with saleable area of 4.19 msf with four of them (with 2.09 msf saleable area) in Bengaluru. With the demand for residential segment stable in Bengaluru, the company should be in a position to increase its sales, going ahead.

The company also has projects in other cities, including Chennai, Pune and Thrissur, to be launched in FY 2020. It also has plans to increase its presence in the Gurugram region.

The company is looking at launching residential projects in Badarpur and Manesar regions, though it is yet to receive approvals for the same. It also has plans to launch 25,000 sq ft of commercial space at St Marks Road in Bengaluru.

Sobha has one of the largest land banks among realty players in the country (2,292 acres); this should help in future project launches.

Healthy outlook

The company derives nearly 70 per cent of its revenue from the residential segment and 30 per cent from contracts and manufacturing services, which includes construction, civil, electrical, interior and landscaping work.

Most of Sobha’s projects are in the luxury residential segment (with ticket size between ₹1 crore and ₹2 crore). In FY19, nearly 42 per cent of the sales value was contributed by this segment and the company’s management is confident of continued demand from this market. Favourable property locations should aid the company’s realisations.

On the contract division side, the company has 8.59 msf of projects on-going across 10 cities, including Bengaluru, Indore, Chennai and Pune; 55 per cent of the projects is being undertaken for Infosys.

Good financials

In FY19, Sobha reported revenue growth and profit growth of 24 per cent and 36 per cent Y-o-Y, respectively, to ₹3,442 crore and ₹297 crore. But note that the company has adopted IND AS 115 (from the June 2018 quarter and, as such, the numbers are not comparable with the previous years. Under the new system, revenue can be booked only after the project is completed and the customer has taken possession of the unit.

The company’s debt-to-equity ratio under the new accounting standard is a reasonable 1.09 times as of March 2019.

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