Bangalore-based real estate company Sobha Developers reported sales of 3.6 million sq ft for FY16, missing its guidance of 4 million sq ft, according to company disclosures. This is the third year Sobha failed to hit the 4 million sq ft sales mark. Its fourth quarter performance, which is typically a strong cyclical quarter, saw its weakest performance compared to the four previous fourth quarters.
It has been a tough year for the company right from the first quarter when its sales nosedived, profits plummeted to 12 quarter lows, operating cash flows turned negative and debt piled up to its highest level ever. First quarter presales of 0.33 million sq ft was alarming and indicated that the company will fall much short of its 4 million sq ft annual target. From that point of view, the company has done well to come this close to its goal, one analyst commented.
Time and again, analyst reports have pointed out Sobha is getting the short end of the stick because of its over dependence on the Bangalore market and its trademark luxury apartments, a segment practically devoid of meaningful demand at the moment. Also the company does not have an exposure in the commercial segment, which has witnessed healthy absorption rates, especially in Bangalore, has not been able to off set Sobha’s muted performance.
Bangalore comprises 76% of Sobha’s product mix. To be sure, Sobha tweaked its strategy, coming up with a mid-range product—Dream Acres, a seven million sq ft project. The first phase, 2.04 million sq ft, which came with a less than R1 crore did well too. But the company cannot possibly overhaul all its ongoing projects and reduce configurations on a large scale. According to its investor presentation last December, 22% of its projects are priced in the less than R1 crore bracket.
As much as the first phase of Dream Acres has been a hit, its contribution is expected to become slower, a HSBC report stated.
“Slower sales are anticipated in new phases due to slow markets with little room for price increases,” the report added. Sandipan Pal, an analyst at Motilal Oswal Securities said that it is not a bad tactic to halt new launches, instead make an attempt to clear existing inventory levels. In fact new launches have dropped by over 70% in the past two years according to an estimate released by Cushman and Wakefield in January.
Sobha is present in Gurgaon, Chennai, Mysore, Thrissur, Pune, Coimbatore, Calicut and Cochin. Gurgaon is the worst hit market.