Despite the second wave, Sobha clocked ~.9msf pre-sales in Q1FY22 (up 38% y-o-y, down 33% q-o-q) its share in new sales was Rs 5.7 bn (+45% y-o-y/-35% q-o-q). Net debt edged down to ~Rs 28.2 bn (Rs 28.5 bn in Q4FY21). Management indicated launches are most likely to choose up and the organization will continue to focus on money flow management to lower net debt: equity (at the moment 1.15x).
We count on buoyancy in sales to sustain riding revival in housing demand and Sobha’s robust ~12.6msf launch pipeline. Retain Buy with a revised TP of Rs 709/share (Rs 574 earlier) factoring in a reduction in WACC, removal of NAV discount and a valuation rollover to Dec-22e.
Sales resilient regardless of second wave
During Q1FY22, the organization reported new sales of ~.9msf with sales volume increasing y-o-y across main cities such as Bengaluru, Pune, Gurugram, and Kochi sales in Bengaluru recovered 37% y-o-y (down 26% q-o-q). Other cities that reported robust y-o-y development contain Pune (165% y-o-y), Gurugram (119% y-o-y) and Thrissur (95% y-o-y). There have been no formal project launches through the quarter the organization has a robust launch pipeline of ~12.6msf projects more than the next four–six quarters. It expects to launch projects in Bengaluru, Chennai and Gujarat quickly.
Debt reduction continues
Aided by wholesome collections (up 31% y-o-y), the organization managed to lower its net debt q-o-q to Rs 28.2 bn in Q1FY22. Cash flows have been aided by minimal land-associated payments. Mgmt indicated it is committed to money flow management going ahead and therefore land-associated capex will stay contained (~Rs .75-.80 bn annually). Incremental land acquisition will be funded by means of internal accruals. Along with project launches, totally free money flow and debt repayment will be the crucial focus regions. It is targeting to bring down net debt:equity to 1–1.1x.
Outlook: Cash flows paramount
With demand recovering and launches most likely to choose up, we think Sobha’s focus on money flows will hold it in great stead. We continue to comply with the old AS and retain ‘BUY/SN’ with a revised TP of Rs 709/share (on a par with its
NAV of Rs 661/share for the realty small business and adding Rs 47/share for contractual small business).