The stock of Sobha, a Bengaluru-based realty developer, has been on a roll, rallying 50 per cent from our earlier ‘buy’ call in November last year.The release of pent-up demand after the lockdown in early 2020, the Centre’s push towards affordable housing and state government incentives such as reduction in stamp duty, and low interest rates on housing loans have helped the overall realty market, particularly residential segment.

Sobha’s sales volume grew 48 per cent to 13.37 lakh sq ft (54 per cent in value terms to ₹1,072 crore) during the quarter ended March 2021, when compared to the same period last year.

During the recent March quarter, Sobha was able to launch three residential projects to the tune of 2.77 million sq ft of area and a commercial one in a space of 0.25 million sq ft, driven by improving demand conditions for residential properties.

Sobha also has a strong pipeline for the coming quarters. It has planned launch of 18 new projects (16 are in the residential segment), which should translate into steady collections and revenue growth going ahead. That said, in the near-term, the second wave of Covid induced lockdown across the country is likely to impact new bookings and project launches in the first and second quarters of FY22. However, in the long-term, Sobha is well-placed, considering its strong presence in markets like Bengaluru (contributing 60-65 per cent of revenue).

Therefore, investors with investment horizon of 2-3 years can consider buying the stock. At ₹460 the stock trades at 13 times its FY22 estimated earnings while its Bengaluru peer Brigade Enterprises trades at 35 times its FY22 estimated earnings.

Demand improvement

For the March quarter of FY21, the Bengaluru market registered 36 per cent y-o-y growth in the sales volume. Favourable locations of the properties, along with steady office space demand in this market, particularly from IT/ITeS and BFSI sectors (as occupiers continue to maintain their occupancy despite work from home), contributed to the increase in new booking volumes to an extent. The low base of the March 2020 quarter also helped. The company has multiple on-going projects in several cities, including Gurgaon, Chennai, Kochi, Thrissur, Coimbatore and Pune that witnessed double-digit volume growth in the March quarter as well.

Steady launch pipeline

Sobha plans to launch 13.67 million sq ft in the coming quarters comprising of 16 residential projects (13.35 million sq ft) and 2 commercial projects. Of this, the company plans to launch 7 million sq ft in the next three quarters across residential segments. The company is also expanding its market in other cities.

Further, despite the challenging FY21, Sobha was able to command better pricing across its projects. This is evident from the rise in the company’s average price realisations. For the March quarter FY21, Sobha registered an increase of 5 per cent y-o-y to ₹8,014 per sq ft . Realisations improved by 10 per cent in FY21 to ₹7,817 per sq ft.

Financials

The company had been lowering its debt levels steadily, with disciplined spending on land and other capex. According to the management, the company has almost no committed land payments over the next 2-3 years and has sufficient land parcels for its upcoming launches. The company expects to maintain debt/equity ratio of 1:1 during FY22 (stood at 1.17 times in FY21).

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