TP up to Rs 774 from Rs 540; downgraded to ‘Hold’ given rise in price in last 3 months
As per Sobha’s business update, the company has achieved its best ever quarterly volumes in Q2FY22 with gross sales bookings of 1.35msf worth Rs 10.3 bn which were up 51% y-o-y in volume terms and 49% y-o-y in value terms driven by Bengaluru, Gurugram and Pune markets. While Q1FY22 saw a muted performance owing to the second Covid wave, the improved Q2FY22 performance reflects strong demand in South India, driven by hiring in IT/ITeS sector, which was accompanied by salary hikes and low mortgage rates of 6.5-7.0%. We expect this momentum to continue into H2 and beyond and we model for 4.8/5.3/5.4msf of sales volumes in FY22/23/24e.
We revise our SOTP based TP to Rs 774/share (earlier Rs 540) as we assign higher value to the company’s land bank owing to an expected upcycle for residential housing in South India in the medium term. However, we downgrade to Hold from ADD post the 55% appreciation in stock price over the last three months. Key risks to our call are a slowdown in residential demand and rise in the company’s debt levels.
Expect improved showing to continue in H2FY22-FY24e: We believe that the company’s Q2FY22 sales performance is commendable, and expect sales momentum to sustain heading into H2FY22e as well on the back of new launches. Listed developers including SOBHA have lined up a number of launches across Tier-I cities. With developers keeping pricing discipline with price hikes of 4-5% on a like-to-like basis in new phases of ongoing projects, we expect single digit price hikes annually to protect Ebitda margins of South based developers, which range between 20-25%.