Sobha: Weak quarter, muted near-term outlook

Despite expected launch of high volume project, it is unlikely to meet FY15 forecast on sales

The December quarter has been a disappointing one for realty player Sobha, recording its weakest sales for a quarter in three years. It reported new sales of 0.66 million sq ft, down 11 per cent over a year, and 21 per cent on a sequential basis.

The company had an annual sales target of four million sq ft, with sales value of Rs 2,700 crore and has achieved 2.3 million sq ft, with sales value of Rs 1,470 crore for the nine months ended December. Given that it has only achieved 57 per cent and 54 per cent of its volume and value expectations, respectively, it is unlikely to meet its forecast for this financial year. It has maintained a cautious note on forecast, as demand continues to be muted. With expectation of weak sales and a muted short-term outlook, the stock has been trending down and over the month is down 12 per cent.

December quarter's sales fell due to lower demand, higher prices and slower pace of approvals. Bengaluru continues to be the key volume driver, fetching 79 per cent of sales. Sluggish approvals in Tamil Nadu and Kerala delayed project launches. During the quarter, it pre-launched two projects — Sobha Halcyon located at Whitefield, Bengaluru and Sobha Elanza at Kothrud, Pune.

The average price realisation was down five per cent over a year to Rs 6,456 per sq ft due to lower sales from the Gurgaon market, where the ticket size is above Rs 3 crore. The company recorded its lowest ever sales in this market in the quarter. Given slowing demand for luxury projects, there is unlikely to be much traction in the near to medium term.

Analysts expect volumes to move up, given its plans to launch lower unit cost project Aspirational Homes in Bengaluru in the March quarter. The company expects the project to lead to a substantial improvement in new sales. Given the estimated price of under Rs 50 lakh per unit, volumes are likely to improve but analysts believe the spurt from sales of this project will still not be able to help the company meet its FY15 target. Debt levels are expected to have increased in the December quarter, given the lower cash flows, but should drop due to proceeds from select land monetisation, believes Samar Sarda of Kotak Securities. Despite near-term concerns, most analysts continue to have a bullish stance on the stock.