Sobha covers more ground in Q2; volume growth expected to be steady

Street,however, worried over debt

The stock of Sobha gained nearly 6 per cent after the company reported steady sales in the September quarter, and given that valuations had turned attractive following a recent correction.
 
Over the last couple of weeks, the stock had lost close to a fifth of its value. In an operational update, the firm announced new sales of a million square feet, marginally higher than sales in the year ago period.
 
The growth in sales was led by the Bengaluru market, which registered growth of 11.3 per cent. It is the single largest market for Sobha, and accounts for 75 per cent of volumes.
 
Chennai saw strong volume growth on account of a project launch in the quarter. The disappointment was caused by a 46-70 per cent dip in volumes in Gurugram and Mysuru. Realisations per square foot fell 9 per cent year-on-year, due to a change in product mix.
 
Sales in Gurugram, which has higher realisation as compared to other key markets, declined, thus pulling down overall realisations. 
 
The company remains hopeful of a strong second half, on account of the festive demand and lower impact of floods in the smaller micro markets. Sobha, which has grossed new sales of just over 2 million sq ft, has a target of 5 million sales for FY20.
 

Parvez Akhtar Qazi and Archit Ranka of Edelweiss Research say that while the performance of the company in H1FY20 was muted, it will  improve in the second half, driven by a robust launch pipeline, a diversified land bank and Real Estate Regulation Act-driven consolidation.
 
While volume growth is expected to be steady, the Street is worried about the increase in debt.
 
Net debt increased by Rs 320 crore to Rs 2,750 crore on a sequential basis in the June quarter. Given the strong launch pipeline, analysts fear the net debt-to-equity levels may worsen from the current 1:1 ratio.

Amit Agarwal of Nirmal Bang Institutional Equities Research says the June quarter results fuelled concerns over the weakening balance sheet, amid very weak operating cash flows. The June quarter operational cash flow, after tax and interest cost, was the lowest in the past 16 quarters.
 
Investors should await an improvement in sales and debt reduction, before considering the stock.