PLAYING on one’s home ground can be an advantage not merely for cricketers but real estate firms too. But for Sobha Developers even Bangalore is proving to be a dull market, partly driving down sales in Q1FY16 by 20% year-on-year and sending profits to a 12-quarter low. Meanwhile, with operating cash flows turning negative, the debt is piling up and at R2,030 crore is at its highest ever. Sales have been sluggish—pre-sales shrank to 0.33mn sqft—something that chief financial officer Subhas Mohan Bhat attributes to interest rates remaining elevated. But market watchers say the company is becoming too dependent on the Bangalore market even as its trademark offerings—luxury apartments—aren’t seeing too many buyers right now.
Sobha has attempted to tweak its strategy coming up with a mid-range product—Dream Acres, a seven million sq ft project—and that could boost sales provided it’s completed on time. Meanwhile, given that the luxury segment in Bangalore isn’t seeing much traction, it might not hurt to get some projects in Gurgaon, Chennai and Kochi off the ground. To be sure, that is not going to be easy since Gurgaon has been a weak market for the past 24 months now with capital values believed to have dropped off by some 5-6%, according to some estimates.
Sobha’s sales have been particularly weak in Kochi and Gurgaon and unfortunately, it has sunk in a lot of capital in both markets. Analysts say the company should try and alter its forthcoming offerings in these markets to increase sales volumes.
While the Gurgaon market is expected to recover gradually in the next 12-18 months, Kochi could take longer because it’s an equally difficult market, where sales depend on NRI buyers and getting timely permissions is next to impossible. In fact, a couple of players such as HDIL have given up trying to do business here though Prestige Estates is still trying its luck.
Nevertheless the management hopes to launch more apartments in Kochi, Gurgaon and Chennai in the next four to six quarters. And JC Sharma, vice chairman and managing director, Sobha Developers, believes the company can hit its target to sell 4 million sq ft in the current year—a run rate it has not achieved in the last two years. That makes the company’s upcoming launch in Chennai—a mid-range product—critically important.
But it must also try and do better in Bangalore, a market that’s growing at around 15%, according to data put out by Jones Lang La Salle, and in which other players seem to doing well. Analysts say competitors are better placed in that they’re selling apartments that are more reasonably priced. Moreover, some players are operating leased projects where commercial rentals have gained traction. Sobha, on the other hand, has run a big bill having spent on capex for its commercial venture and must wait for clients to move in before the monetisation begins. The firm is also forking out money as interest payments—in FY15, it ended up paying nearly Rs 500 crore for land, interest and capex. And there are more commitments lined up. Sobha simply cannot take its eye off the ball.