Demand recovery, new launches help Sobha deliver record performance

Stock gains 16 per cent on Q4 show, expectations of sharp reduction in debt

Led by strong demand and launches, Bengaluru-based real estate developer Sobha reported its highest-ever sales in the March 2021 quarter. The company, which launched 3-million sqft projects in the quarter, reported bookings worth Rs 1,072 crore, up 54 per cent YoY. Volumes in the quarter were 48 per cent higher YoY to 1.33 million sqft. The increase in realisations was on account of a higher proportion of sales in Gurugram and Kochi.

The strong operational performance led to a sharp 16 per cent jump in the stock price on Tuesday.

Thanks to the March quarter performance, the overall volumes for FY21 recovered from a dip in the first half of the year. While sales at Rs 3,140 crore were up 9 per cent on the back of improved realisations, volumes were down marginally (1.4 per cent) for the year. The recovery over the last three months can be gauged from the fact that volumes in the first nine months of FY21 were down 15.5 per cent YoY. While a revival in housing demand is positive, the Street will look for signs of this reflecting in the company’s operations and financials.

Kotak Research expects the company to gain market share on the back of improving demand-supply dynamics in the Bengaluru market and its own planned launches. However, the key catalyst, according to analysts at Edelweiss Research, is cash flow improvement and, therefore, lower debt levels.

While the company indicated there has been a “substantial” debt reduction, given strong cash flow in Q4, and its average cost of borrowing has also come down, the extent of reduction (net debt at Rs 3,000 crore at the end of December quarter) will be important. The operating surplus of Rs 180 crore in the December quarter was negated by interest/tax/capex outgo of Rs 1,150 crore, leading to a marginal reduction in net debt, points out ICICI Secur­ities’ Adhidev Chattopadhyay.

While the sales pipeline is healthy and demand has stayed strong, the gains in Tuesday’s session factor in the near-term benefits. Investors should await better price points before taking exposure to the stock.