Sobha Developers: Muted outlook in the near term

The company is looking at smaller ticket sizes and expects its core market of Bengaluru to stay resilient going ahead

Bengaluru-based Sobha Ltd’s stock is down by about 20 per cent over the last one month on concerns of a slowing Bengaluru market, the company’s reliance on luxury projects and higher debt.

PropEquity residential sales data for January indicates that the Bengaluru market had sales of Rs 2,630 crore (all players) down two per cent over December 2014. Even in volume terms, sales were down about one per cent over the previous month. The metropolis, which had been one of the mainstays of the realty market, had reported sales value at an average of Rs 3,200 crore per month over the January-September 2014 period.

  From October, this number is at about Rs 2,700 crore. Even for Sobha, the Bengaluru market, which accounts for about 65-70 per cent of sales for the company, sales value for the nine months ended December 2014 were down 15.5 per cent year-on-year to Rs 1,468 crore, while volumes over the same period also fell by a similar quantum to 2.25 million.

J C Sharma, vice-chairman and managing director, says while there might be short-term volatility, demand is still there and Bengaluru continues to be one of the robust markets given the type of customers, reasonable price points and largely white collar base.

Samar Sarda of Kotak Institutional Equities believes the company has already taken some corrective steps such as the pre-launch of its ‘Aspirational Homes’, starting at Rs 35 lakh a unit, and could change its offerings in other markets, though its recent launches in Pune, Kochi and Kozhikode have been in the super-luxury segment. Given the sluggish sales, it makes sense to reach out to a larger audience, says Sharma, while adding that there has been no compromise on amenities (retained the core brand for this product as well) and only the size of the units has been reduced.

The other issue is the rise in net debt, which in the December 2014 quarter had risen by Rs 82 crore to Rs 1,760 crore on higher commercial capital expenditure (Capex) related to mall completion, while operational cash flow was hampered given weak pre sales. While there could be spikes in the near term, Sharma says the debt levels are not alarming and the company has a long-term debt to equity target of 0.6 times, even as the current levels stand at about 0.71 times.

Analysts at BNP Paribas say earnings momentum and cash flow story are likely to return in FY16 for Sobha, mainly driven by launches aimed at the middle income segment. While the company has been making positive cash flows from operations before land payments until the December quarter of 2014, Sarda of Kotak Institutional Equities expects the negative trend to continue for a quarter or two before returning to normalcy.

Analysts expect Sobha’s FY15 earnings to grow by seven per cent to Rs 25 per share and by 31 per cent in FY16 to Rs 33 per share. At current levels of Rs 400, the PE is undemanding at about 12 times. Investors could use the correction to accumulate the stock.