Sobha Developers: Sales slip on approval delays, FY14 guidance at risk

Analysts believe that the company will be able to achieve about four million square feet of sales for FY14

The Sobha Developers’ stock was down seven per cent in the past two trading sessions, after the company declared disappointing new sales volumes for the December quarter. The company sold property worth Rs 502 crore, down six per cent year-on-year and 21 per cent sequentially, due to delays in getting approvals. As a consequence, sales volume at 0.74 million square feet was down 18 per cent on a sequential as well as year-on-year basis and was its lowest in 10 quarters.

While the company launched new projects in Coimbatore and Mysore, there were none in its key market of Bangalore which accounts for about 70 per cent of its revenues. The approval delays in Bangalore and sluggish sales in National Capital Region were responsible for the poor volume show.

The company had forecast sales of 4.2 million square feet aggregating to Rs 2,600 crore for FY14. It has achieved 2.66 million square feet valued at Rs 1,737 crore in the first nine months. So far, the management was hopeful of achieving it but has turned cautious. Given what the company has achieved so far, it would require another Rs 863 crore of sales in the March quarter to reach its guided figure of Rs 2,600 crore for FY14. This, say analysts at Morgan Stanley, appears difficult; the highest quarterly sales to date is Rs 670 crore.

Analysts believe the company will be able to achieve about four million square feet of sales for FY14. Though sales (value as well as volume) for the quarter were disappointing, the company managed to improve its realisations to Rs 6,786 per square feet on the back of a higher proportion of premium projects such as Indraprastha, Palladian as well as an uptick in prices.   

While the December quarter sales numbers for Sobha Developers were below expectations and the stock saw some correction, most analysts believe it is a blip and continue to have a Buy rating as they expect sales to rebound in the coming quarters.

 Jefferies analysts led by Anand Agarwal say demand in its core market of Bangalore continues to remain robust and channel checks suggest good enquiry for the company’s coming Bangalore launches. Operating cash flows remain positive and continue to improve, while gearing levels are expected to stay flat, they add. Analysts such as HDFC Securities’ Adhidev Chattopadhyay believe quarterly aberrations due to delayed launches and softening of demand are not major concerns.

“Given a significant exposure to a stable south Indian property market and diversified customer base, investors should use any correction in stock price as an opportunity to buy into the stock,” he says. Target prices of most analysts are in the Rs 420-475 range. From the current levels, this gives an upside of 35 per cent over the next year.