Hold ‘buy’ on Sobha with revised TP of Rs 572

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“We appreciate Sobha’s strong presence in the South Indian real estate market and its strong execution capabilities.”

By Edelweiss Securities

Sobha recorded the best presales ever in the fourth quarter of fiscal year21, fueled by strong demand across all segments. Volumes jumped to 1.3 msf (up 18% QoQ and 48% YoY); in value, sales (share of the company) stood at Rs 8.7 billion (up 29% QoQ and 58% YoY) helped by a higher achievement (up to 5% YoY). FY21 sales volume at ~ 4 msf was stable year-on-year, while sales value (company share) was up 4% year-on-year despite the lockdown. The company launched projects of approximately 3.0 million square feet in the quarter (~ 3.2 million square meters in FY21). With housing demand rebounding strongly, we expect sales momentum to remain strong in the near term. Hold “buy” with a revised target price based on the SOTP of Rs 572 (Rs 555 earlier).

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The sales dynamic is gaining momentum: Bengaluru contributed 67%. The new sales volume increased in most cities; sales in Bengaluru recovered 13% of QoQ and contributed 67% to overall sales. Other cities that have experienced strong QoQ growth include Gurugram (91% QoQ), Pune (130% QoQ), and Kochi (268% QoQ). Bengaluru, Gurugram and Kochi accounted for a total of 88% of sales in the quarter. Bengaluru contributed ~ 67% of FY21 sales volumes; With the exception of Bengaluru, the total contribution of other regions to sales in FY21 was the highest the previous day.

Price realization increases by 5% year-on-year: Average price realization during Q4FY21 jumped 5% year-on-year (2% Q / Q) to ~ 8,000 / sft – the highest of the past eight quarters. This is partly explained by the evolution of the product mix and partly by the price increases taken by the company in certain projects. Achievements in FY21 jumped 10% year on year on average.

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New launches, cash flow and debt remain key things to watch: Sobha launched three housing projects covering 2.77 m² and 0.27 m² of retail space during the quarter. He expects launch activity to remain healthy going forward. The company’s focus on cash flow management helped it reduce its net debt during the quarter.
Outlook and evaluations: Key to the balance sheet; maintain “buy”. As highlighted in our full sector report, Real Estate – The Charge of the Consolidation Brigade, the consolidation led by RERA creates growth opportunities for organized players such as Sobha.

We appreciate Sobha’s strong presence in the South Indian real estate market and its strong execution capabilities. Resumption in housing demand (see Hot Property – Rising like a phoenix), Sobha’s focus on cash flow and geographic expansion should hold it in good stead. Improving cash flow is, in our view, one of the main catalysts for equities. We maintain ‘BUY / SN’ with a revised target price based on the SOTP of INR 572 / share while postponing the valuation until September 2022E. We calculate the TP by applying a 10% discount to its net asset value of INR 589 / share for the residential business plus the value of the contract business.

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