Maintain ‘buy’ on Sobha Developers with a target price of R400 per share. Only 42% of the 4 million sq. feet (R2,600 crore) guidance has been achieved till H1FY16. Therefore, we expect another year of operational disappointment unless the company’s Gurgaon launch springs a strong positive surprise. We estimate FY16 pre-sales of 3.4 msf (R2,170 crore). The recent corrections have made the stock attractive, with operational negativity largely factored in. However, re-rating hinges on operational normalcy — which might take another six months to play out. Sobha trades at
8.9x FY17e EPS, 1x FY17e BV and EV of ~7x FY17e cash ebitda.
Sobh’a Q2FY16 pre-sales stood at 0.85 msf (R490 crore) versus 0.84 msf (R500 crore) in Q1FY16 and expectation of R0.9 msf (R550 crore). Sobha Retreat (0.02 msf) at Langford Road (Bangalore), a presidential apartment property with seven units, was the only new launch (at R25,000 psf). Dream Acres continued to remain the key contributor; however, it run-rate appears to plateauing (ASP R4,875 psf). Average realization, consequently, was down ~3% q-o-q to Rs 5,821 psf.
Bangalore mix declined to 71% in Q2 (versus ~83% q-o-q and 75% in FY15), largely due to decline in pre-sales run-rate of key project Dream Acres. However, luxury projects in Bangalore posted sequential improvement (~7% q-o-q). Chennai and Kerala projects recorded an uptick — led by projects such as Lake Edge (Thrissur) and Sobha Evergreen (Chennai) and better NRI demand in Q2. Gurgaon launch is likely by Q4FY16 while uncertainty over Thrissur and Chennai launches persists.