We readjust our target multiple, driving TP lower to Rs 1,025.
Key takeaway: Sobha’s operating performance stayed strong in Q3 as evident in an Op. CF surplus driven net debt decline of 4% q-o-q/11% y-o-y to a near 3-year low. Pre-sales performance was also good, driven by core Bangalore. Management is confident of accelerating new launch pace over next ~5 quarters to take advantage of the strong housing markets. We readjust our target multiple, driving TP lower to Rs 1,025. Maintain buy as the housing upcycle unfolds.
Q3 P&L below estimates: Sobha’s Q3 net profit of Rs 0.33bn, -32% q-o-q/+51% y-o-y, was below estimates on real estate revenues miss. Revenues, at Rs 6.9bn, -16% q-o-q/-1% y-o-y, were a miss as real estate revenues, -32% q-o-q/-4% y-o-y at Rs 4.5bn, were below estimates on lower project deliveries. Contract & manufacturing revenues were +30% q-o-q/+1% y-o-y to Rs 2.4bn. We note the lumpiness in real estate project revenues will take time to smoothen and company highlighted a large Rs 78bn of pre-sales yet to be recognised as revenues.
Bangalore drives sales performance: Sobha’s Q3 pre-sales (gross, pre-declared) of Rs 10.5bn, +18% y-o-y/+2% q-o-q were the 2nd highest ever. The core Bangalore market sales volumes at 0.96m sf (+20% q-o-q/+22% y-o-y), were the highest ever. The non-Bangalore sales (-34% q-o-q) were impacted due to weather and Covid-related challenges in the Kerala market. Gurgaon (+97% y-o-y) also did well.
Positive outlook on resi markets: Launch guidance increased. Strong performance of the Bangalore market has led the company to increase its launch pipeline in the city by 40% to 8.3m sf, in the near term. Overall launch pipeline of 13.7m sf/17 projects spread across 6 cities should help maintain sales momentum as management hopes to launch these projects by end FY23.
Even as the third wave has led to some loss of momentum in pre-sales in the key Bangalore and NCR markets; management expressed hope of recovering the momentum by quarter end. Strong demand is being seen across geographies and ticket-sizes. Management also mentioned that enough price hikes have been taken to tide over the impact of higher input costs.
Strong cash flows generation, more deleveraging ahead: Sobha’s real estate cash inflows were up 16% q-o-q/27% y-o-y to a record Rs 8.4bn. Q3 Op.CF of Rs 2.1bn was +18% q-o-q/+15% y-o-y to a 3 quarter high. There were some inflows recorded from a land deposit paid back; which led to negligible net spends on capex. Net-debt declined by Rs 1.2bn q-o-q to an 11-qtr low of Rs 26.5bn. Gearing is now down to an 15-qtr low of 1.07x and management expects cashflow generation to drive net gearing below 1.0x in 1-2 quarters; and likely lower going ahead.
Increase sales and target: Maintain buy. We currently expect a 23% y-o-y pre-sales growth for Sobha in FY22 and a 14% cagr over next two years. A stronger launch momentum and/or project additions can drive upside surprises. We cut our FY22 earnings estimate by 19% on the Q3 miss, but broadly maintain FY23/24 assumptions. Also, considering the rising rate risk in the market, we lower our target multiple to 9x EV/Ebitda vs. 10x. Target price of Rs 1,025 (1.090). Maintain buy.