Sobha’s key market, Bangalore, is in a difficult position. The city is facing pressure on absorption, which is down 16% YTD on a y-o-y basis. Recent data released for January once again points to a decline of 13% yoy.
The outstanding inventory is rising and now stands at 30 months from <24 months in past years. There have been significant launches over FY11-FY14 (110 msf/ year vs 75 msf/ year of absorption on an average), which could start seeing completions now. This inventory will now compete with unsold inventory of developers.
Guidance miss likely, yet again. The company is likely to miss its sales guidance for the third year now. We believe achieving sales by volume guidance of 4 msf for FY16 looks difficult (only 2.5msf achieved till 3QFY16).
Downgrade to Reduce. We are 16% below consensus EPS estimates. We cut our FY16-FY18e EPS by 18-37% as we factor in lower sales both from existing projects and new launches. We calculate a 12m fwd fair value by applying a 38% disc. (unchanged) at 0.5SD below mean to our NAV estimate of `401 (down from `566). The 12m fair value is then discounted back by one year to reflect the current fair value TP of R220 (down from R310).