Sobha Limited. Why the stock of Sobha is a good buy

The stock of Sobha, a Bengaluru-based realty developer, has been on a roll despite the headwinds in the residential real-estate market this year. From its March low of ₹133, the stock has more than doubled. Factors such as favourable locations of properties, ability to command better prices and presence in key cities have kept Sobha afloat amid challenging realty market conditions. The growth prospects of the company going ahead looks bright, thanks to the Centre’s push towards affordable housing, reduction in stamp duty rate in States including Maharashtra and Karnataka, attractive home loan interest rates and stable property prices.

According to a research by ANAROCK, a property consultant, property sales across markets are expected to increase 20-35 per cent in the October-December quarter this year over the September 2020 quarter. Sobha has already witnessed strong new bookings during its September quarter. Also, the company’s focus on mid-income and affordable housing projects and prime location of its properties are key positives that could aid growth.

Investors with a two-three-year perspective can buy this stock. At ₹ 315, it trades at a reasonable 10 times its likely per share earnings for FY22. The stock is relatively cheaper compared to its Bengaluru-based peersBrigade Enterprises (20 times) and Prestige Estate Projects (29 times).

Residential demand improves

For Sobha, residential real estate contributes to over 50 per cent of the revenues of the company. At a time when the demand for house property appears challenging amid pay-cuts and job losses, the company was able to improve its new bookings (volumes) -- up 37 per cent during the September 2020 quarter compared to three months ended June 2020. Strong office space demand in Bengaluru, particularly from IT/ITeS and BFSI sectors, also contributed to the increase in new booking volumes to an extent.

However, compared to September quarter last year, the volumes are yet to recover. Though focused on mid-income and affordable housing, the company’s presence across various residential segments enables it cater to home buyers of all income categories across market cycles.

For instance, during the June quarter of FY21, when the lockdown measures were still in place across country, nearly 11 per cent of its sales came from the ‘greater than ₹ 3 crore’ category of properties, compared to 6 per cent in the same period last year.

Further, Sobha has been able to command better prices for its properties in residential segment due to its location advantages.

During the September quarter, the average realisation registered a growth of 18 per cent y-o-y to ₹ 7,737 per sq ft, predominantly contributed by sales of house property under ₹ 2 crore.

Sobha also witnessed good inquiries, particularly for properties in affordable housing and mid-income segments (properties under ₹ 1 crore) as well during the September quarter. According to the management, the inquiries are back to pre-covid levels. With higher inquiries and access to cheaper home loans, increase in demand would aid the company going ahead.

While residential real estate is the mainstay for Sobha, it derives about 40 per cent of its revenue from contractual and manufacturing segment. Under this category, the company offers services such design and architecture, civil, mechanical, electrical, plumbing, interiors and landscape. It also manufacturers glazing and metal worksand concrete products.

At end of September quarter FY21, it has an order book of ₹ 2,258 crore for this segment in cities including Bengaluru, Thiruvananthapuram , Hyderabad and Mysore. The company has 9.48 million sq ft of contractual projects on-going for the September quarter, relatively higher compared to same period last year (8.61 million sq ft).

Expansion strategy

Sobha’s operations are largely from Bengaluru, but in the last 2-3 quarters, the company has taken efforts to expand its existing presence across nine other cities, including Chennai, Kochi, Thrissur and Gurgaon .

Most of its bookings during the September quarter were primarily driven by Kochi and Bengaluru market. With residential market conditions improving in the country, albeit at a slower pace, Sobha is well-prepared to gain from the trend, with various launches lined up and multiple projects nearing completion.

The company has about 14.22 million sq ft of launches planned in the coming quarters of which 53 per cent of the launches are planned in cities other than Bengaluru. Also, in Bengaluru, in addition to 6.71 million sq ft of residential area, the company also plans to launch two commercial projects of 0.36 million sq ft in the coming quarters.

Financials

For the quarter ended September 2020, revenues declined nearly 32 per cent y-o-y to ₹ 546 crore and its profit declined by 76 per cent y-o-y to ₹ 16 crore during the same period. Slower construction activities and collections can be attributed to the fall.

Sobha also witnessed a lull in project launches due to overall uncertainties in the economy. But Sobha has a strong pipeline of projects to be launched in the coming quarters. Given Sobha’s low levels of unsold completed inventories, there may not be much delay in project launches.. As of September this year, the company has about 0.4 million sq ft of completed units.

Its debt-equity ratio is at 1.3 times.