Why Sobha is a good real estate pick

The real-estate sector, which had a lot of expectations from the Budget, was disappointed as there was no concrete Budget proposals to boost the ailing sector. However the Reserve Bank of India in its latest monetary policy announced several measures that would help lower the lending rates on home loans and offer respite to commercial real-estate projects.

As such, the affordable housing segment remained in focus in the Budget. Realty companies, including large developers operating in this segment, are in a favourable spot, given the demand for affordable houses and buyers’ preference to quality developers. Thus, nearly 55 per cent of the project launches in 2019, according to a report by property consultant JLL, had been of low-ticket housing projects.

Against this backdrop, Sobha, a Bengaluru-based realty player, is well-positioned to benefit from the favourable market conditions. The company witnessed sustained demand for its mid-income projects, with 38 per cent of sales during the nine months ended December FY20 coming from the less-than- ₹1-crore value properties. Despite the macro-economic slowdown, the company has reported good sales volume and value growth in the same period.

Sobha has various new projects lined up in the coming quarters along with low levels of unsold inventory. It operates primarily in the residential segment, with a presence across categories — super luxury, luxury, premium and affordable housing. The stock has corrected 15 per cent over the past year, and offers a good opportunity for investors with a two-three year perspective. A robust launch pipeline is expected to boost Sobha’s revenue growth in the next three to four quarters. Also, the firm’s sizeable land bank in favourable locations bodes well for its growth in the future.

At ₹338, the stock trades at 10 times its trailing 12-month earnings, lower than its three-year average (21 times).

Low-ticket projects

Sobha derives nearly 70 per cent of its revenue from the residential segment and predominantly operates in the luxury and premium housing segments.

However, in the last two years, it has expanded its portfolio to cater to the demand in the low- and mid-income housing segment.

In Q1FY19, nearly 32 per cent of the area sold by Sobha was in the less-than-₹1- crore category, but the sales in this category expanded to over 53 per cent in Q3FY20, with the launch of projects including Sobha Dream Heritage (GIFT City, Gujarat), Sobha Dream Gardens (Bengaluru) and Dream Acres (Bengaluru) in the last two years. In the December quarter, the company registered a volume growth of 17 per cent y-o-y and sales growth of 4 per cent, driven by higher sales from projects priced ₹50 lakh-1 crore.

But the realisation declined to ₹6,811 per sq ft in Q3FY20 (from ₹7,689 per sq ft last year), mainly due to the company’s focus on low-ticket projects.

However, with Sobha’s competitive pricing and favourable locations, realisations could improve going ahead.

Launches lined up

Sobha has launches of about 13.64 million sq ft in the pipeline across cities, including Bengaluru, Chennai, Thrissur, Gurugram and Ahmedabad.

In the nine months ended in December, the company launched about 0.79 million sq ft of residential projects.

Though most of Sobha’s projects (about 70 per cent) are in Bengaluru, it has lined up projects in four new geographies — Delhi, Hyderabad, Hosur and Thiruvananthapuram — to de-risk and reduce dependence on any single market to drive growth. This, along with 0.44 million sq ft of four commercial projects in Bengaluru, is planned to be launched as part of the company’s expansion plans. Already, the firm has two ready commercial projects in Bengaluru (One Sobha), with an expected rental of ₹175 per sq ft per month, and in Thrissur (Sobha City Mall) with lease rental of ₹75-90 per sq ft per month.

In the contracts and manufacturing segment, the company has 10.51 million sq ft of on-going projects across nine cities, including Bengaluru, Indore, Chennai and Pune. This segment registered a revenue growth of 25 per cent y-o-y during M9FY20.

Stable financials

During the nine months ended December 2019, the company reported a revenue growth of 38 per cent y-o-y to ₹289.8 crore and a profit growth of 26 per cent y-o-y to ₹231 crore. Though rising debt is a cause for concern, due to land payments, the management expects the debt levels to fall with improvement in cash flow going ahead. The debt-equity ratio stands at 1.3 times.

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