Sobha's strong sales buck the trend

Sept quarter performance driven by higher realisations

The stock of Sobha, the real estate company, hit the upper circuit before closing with 17.4 per cent gains on Monday, after the company reported a 14 per cent year-on-year (y-o-y) increase in property sales in the September quarter (Q2). This is the highest level of sales reported in 10 quarters. The company had given an operational update on Friday after market hours. What is notable is that the sales came at a time when the sector is grappling with falling demand and regulatory actions such as the Real Estate Regulation Act (RERA). This has prodded analysts to turn bullish on expectations of higher sales. CLSA, for instance, expects the company to report better growth in FY18 and overcome the downtrend in pre-sales in the past three financial years.

Aided by higher sales in Bengaluru, Kerala and Gurugram, the company sold 0.86 million square feet for Rs 590 crore in Q2. While volumes were up 0.6 per cent, sales grew 14 per cent. This was aided by higher realisations of about 13.6 per cent. Price realisation came in at Rs 6,883 a square feet on the back of near-completion of premium projects and completed projects in Bengaluru. While sales from the Kerala market were higher, given festivals in Q2, a group housing project is boosting sales in Gurugram.

While new rules and sluggish demand are impacting smaller players, these could be a major advantage for organised players. Samar Sarda of Kotak Institutional Equities said the real estate market is going through weak sales and liquidity issues, which provides better possibilities for organised/branded developers to add new projects. The analyst expects Sobha to add projects, especially in Pune and Chennai, where it does have a presence but hasn’t been able to scale up yet. 

Going ahead, sales momentum is expected to come from launches in the mid-income category in north Bengaluru, coupled with premium projects in Chennai and Thrissur. Sales by volume is expected to grow by 11 per cent each in FY18 and FY19, from the FY17 level of three million square feet, and cross the four million-mark by FY20. 

Though debt for the company is expected to rise, given some payments made in Q2, land monetisation and sales from projects nearing completion are expected to keep the debt levels comfortable. The company’s net debt to equity is just under 0.8 times.

Though analysts are bullish given the target price of about Rs 440 and Monday’s run-up, there is no upside from the current levels of Rs 460. Long-term investors can await better entry points to make money on this stock.