 "Sobha hits 52-week low; stock tanks 27% thus far in January")
Shares of Sobha hit a 52-week low of Rs 1,148.30, as they declined 6 per cent on the BSE in Friday’s intra-day trade on growth concerns. The stock price of this real estate company fell below its previous low of Rs 1,176.01 touched on March 18, 2024.
Thus far in the month of January 2025, Sobha has underperformed the market by falling 27 per cent. In comparison, the BSE Sensex was down 2.7 per cent, and the BSE Realty slipped 17 per cent during the period.
Sobha, based in Bangalore, is a leading real estate company with a track record of completing ~136msft across 546 projects. The company's operations extend across 14 states, highlighting its significant presence in India's real estate market. Still, Sobha as a premium player in the sector, any moderation in real estate demand is a key risk along with any delay in obtaining approvals, according to analysts.
In December quarter (Q3FY25), Sobha recorded sales value of Rs 1,388 crore supported by new sales area of 1.01 million square feet (msf) at an average price realization of Rs 13,663 per sft. Sales value recorded growth of 17.8 per cent compared to the previous quarter.
However, new sales area declined by 42 year-on-year (YoY) from 1.67 msf in Q3FY24 to 722,886 square feet in Q3FY25.
The company’s dependence on the Bengaluru market (~52 per cent and ~49 per cent of FY2024 and H1FY2025 sales) remains high, which exposes it to any region-specific downturn in demand. Moreover, of the total launches planned in for FY2025-FY2026 (~19 msf), the area planned to be launched in Bengaluru is ~60 per cent, followed by Gurgaon at ~25 per cent and Kerala at ~10 per cent.
In July 2024, Sobha has raised funds through rights issue for Rs 2,000 crore, of which Rs 1,000 crore has been called and the remaining is expected to be called by February 2025. As of September 2024, the company utilised around ~50 per cent of the funds raised via rights issue for debt reduction and it is likely to decrease the debt from the funds yet to be called.
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Nonetheless, the debt levels have historically been high compared to the net working capital gap for its ongoing project portfolio due to the investment in land bank made earlier. Consequently, Sobha’s debt (excluding lease rental discounting (LRD) debt and contractual segment debt)/net working capital remain high. However, with reduction in debt post rights issue, this is likely to improve, according to ICRA.
Sobha’s large expansion plans with an estimated launch pipeline of ~19 msf over FY2025-FY2026 exposes it to execution and market risks. It is further exposed to market risk for the unsold area of ~7.4 msf for the completed and ongoing projects.
However, ICRA takes comfort from Sobha’s track record of project execution and sales. The rating takes note of the modest profitability (profit before interest and tax) in the contracts division over the last 2-3 years. Despite an improvement in the profitability of the contracts and manufacturing division in FY2024, it remains at moderate levels with PBIT margin of around ~10 per cent, the rating agency said in its rationale dated December 31, 2024.