Strong Q2 sales performance despite headwinds a positive trigger for Sobha

Its ability to reduce debt is crucial for further gains

The stock of Bengaluru-based real estate major Sobha was up 10 per cent in trade on Tuesday, after the company reported a steady sales performance in the September quarter. 

Despite multiple headwinds for the realty space, the company reported 1 per cent year-on-year (YoY) increase in sales value to Rs 690 crore. Brokerages highlighted a resilient performance by the company for the second consecutive quarter after the June quarter sales of Rs 488 crore. 

Though there was a lockdown in Bengaluru in July, the company saw healthy momentum in Q2FY21. The city usually accounts for 70-75 per cent of Sobha's total sales. Bengaluru's proportion in Q2 came down to 60 per cent because of the lockdown in the city. Higher volume contributions from Kochi and Gurugram aided the sales performance. Realisations were up 17.5 per cent to Rs 7,737 per square — a five-quarter high because of the higher unit prices at Gurugram.

Though sales volumes at just under 900,000 square feet were 14 per cent lower than the year-ago quarter, this figure was achieved without any new launch in the past couple of quarters. Analysts at Kotak Institutional Equities, while accepting that recent sales would have come with limited up-front cash commitment and could be susceptible to more cancellations, highlighted the strength of the brand to be able to garner sales in difficult circumstances. 

While the ongoing consolidation in the sector has led to market share gains for Sobha and enquiries at pre-Covid levels are positive, the Street will keep an eye on cash flows and the pace of debt reduction. The company indicated it had sufficient liquidity, was able to manage cash flows efficiently, and reduced the cost of borrowing in the quarter. 

Mohit Agrawal of IIFL Securities said the company’s ability to meet its guidance of bringing down overall debt exposure in FY21 would be key to the stock performance and outlook. Net debt at just over Rs 3,000 crore was stable on a sequential basis in the June quarter, while net debt-to-equity at 1.24x was on the higher side.