Sobha Developers stock rating: ‘Reduce’, says Kotak as pre-sale momentum continues to strengthen

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Updated: January 15, 2018 4:09:03 AM

Sales from luxury/super-luxury projects contributed more, reflecting in high blended realisations of Rs 8,045 /sq. ft. Two projects were launched during the quarter, one of which was added in 3QFY18.

Blended realisations high given sale of more premium units; while sales are getting better, CMP factoring in more; rating & TP unchanged.

Sobha’s pre-sales momentum continued to strengthen for the fourth quarter as it reported sales of 0.93 million sq. ft for a value of Rs 6.1 bn during 3QFY18. Sales from luxury/super-luxury projects contributed more, reflecting in high blended realisations of Rs 8,045 /sq. ft. Two projects were launched during the quarter, one of which was added in 3QFY18. We expect debt to stay stable/reduce adjusting for the buy-back in 3QFY18. Maintain rating and target price.

High blended realisations as more luxury units sold

Sobha sold 0.93 million sq. ft of area in 3QFY18 for a value of Rs 7.5 bn (value of Sobha’s share of sales was Rs 6.1 bn). Blended average realisation was high at Rs 8,045/sq. ft which reflects higher sales contribution from premium projects. While Bangalore continues to dominate sale contribution, share from non-Bangalore markets increased by 300 bps to 31% during 3QFY18. Higher blended realisations on gross sales (versus lower sales value to Sobha) during the quarter reflect better sales in JDA and JV projects, especially new ones (Sobha HRC Pristine is revenue sharing where Sobha’s share is 62%). Sales momentum remained strong at Sobha City, Gurgaon and The Marina One JV, Kochi, which contributed 21% to its total sales (higher in value terms). While Sobha didn’t record any sales from the Pune market (with no live project to offer), other markets maintained a steady sales momentum.

Sales are improving; but CMP is factoring much more

We maintain our sales estimate of 3.4 and 3.8 million sq. ft of pre-sales for FY2018 and FY2019 respectively from the ongoing and forthcoming projects from the existing land bank. Any new acquisition with possible quick monetisation (for instance Sobha HRC Pristine) will add up. Of our September 2019E based NAV of Rs 510/share, a high 40% comes from Sobha’s land bank and another 10% is assigned for new business development. We believe Sobha needs to add more projects in markets like Chennai, Pune and even Hyderabad to achieve its 8-9 mn sq. ft /year sales target. Project mix should also change for developing some mid-income projects. For 3QFY18 results, we estimate debt to remain stable/marginally reduce versus 2QFY18 and monies from OCF will be utilised for buy-back. State of Karnataka is scheduled for elections in 2018, which could see certain approvals in the next two to three months, before slowing.

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