Lower demand and sales weigh on Sobha

Significant recovery in share price unlikely soon, given the sluggish environment

The stock of Bengaluru-based real estate developer Sobha has been on a continuous downtrend since February, touching its 52-week low recently on slow off-take and sluggish demand. The lower demand is visible in the sales numbers of the quarter ended September, wherein volumes were up only two per cent and sales by value declined 11.4 per cent compared to the year-ago period.

The volume uptick was largely from Bengaluru and Chennai, with the rest of the nine cities reporting a decline in sales. Since the management is looking at a sale of existing projects, new project launches have been fewer in the recent past.

While the company had a single launch in the September quarter, Sobha Retreat in Bengaluru, most of the sales in that market were generated by its Dream Acres project launched in March, at lower unit prices. While units which are priced above Rs 2 crore have seen a muted response, about half of its sales in Bengaluru are for units priced below Rs 1 crore.

 

 

While the company remains cautiously hopeful of achieving its FY16 volume forecast, with half year gone, it has so far achieved about 42 per cent of the sales targets, its lowest target achieved in the first half in at least four years. In value terms, the company has achieved only 38 per cent of the target, given lower ticket sizes and slowing sales as compared to 45 to 53 per cent of sales target achieved in the past three years.

Given the muted operational numbers with sales volumes up one per cent and revenues down a per cent on a sequential basis, analysts expect revenues to fall nine per cent and net profit to fall over 27 per cent on a sequential basis in the September quarter. There are other consequences, too. Religare analysts expect debt to increase due to weak cash flows.

Analysts at JM Financial say the Dream series reflects a strategy to improve sales velocity, but further visibility on land-bank execution is necessary for operational/financial outperformance. Though the near-term performance is hardly exciting, many analysts have a buy rating on attractive valuations.

At the current price, the stock is available at just 0.9 times its FY17 price to book value. Analysts say about 60 to 70 per cent of the valuations are attributable to the company’s land bank, which is yet to be developed and valued at historical prices.