Sobha has corrected in the recent past and offers an attractive entry point again.
Even though the broader market remains weak, sales growth will return for Sobha in FY16. We believe guidance miss in the past two years has prompted the management to be conservative. We exclude a few projects from our valuation matrix for delay in development. We roll over to March 2017 and alter our target price to R545 (from R540); ‘buy’.
Sobha has managed 2-2.3 m sqft of sales per year in Bangalore since FY11 and with increasing value. Management expects to continue this run rate in medium term. We maintain our estimates of sales marginally lower than 2 m sqft from its traditional product. Sobha has expanded to nine markets (from four in 2011) and is also expanding into multiple locations in many cities.
While we advocate business models of expansion into various markets, product type and realisations also hold the key. Here, Sobha’s expensive product offering, along with weak markets, has resulted in slowing sales (down from 1.3 m sqft in FY13 to 0.84 m sqft in FY15).
As already launched projects cannot alter units, we have assumed steady sales; with incremental sales coming from new launches. Improvement in this portfolio is equally important for Sobha if it plans to sell around 7-8 m sqft/year.