Sobha – Aiming For Higher Scale With Strong Balance Sheet: Motilal Oswal

According to an analysis by Motilal Oswal, Sobha Ltd. is poised for a significant growth trajectory, reversing its previous trend of lagging behind its peers. This turnaround is attributed to Sobha’s strategic emphasis on capitalizing on its extensive land holdings and seeking new avenues for growth, supported by a robust financial foundation. The company’s growth is not only expected to stem from these strategic initiatives but also from a marked improvement in profitability.

Sobha is our top idea for CY24 with a revised target price to Rs 1,400, 25% upside potential.

In their recent report, Motilal Oswal highlights that Sobha Ltd., after a period of slower growth in comparison to its peers during FY21-23, is now on the verge of a growth spurt. This optimistic outlook is based on the company’s proactive approach to leveraging its substantial land assets and pursuing growth opportunities, while maintaining a strong balance sheet.

Moreover, this anticipated growth spurt is believed to be further fueled by enhancements in the company’s profit margins. Additionally, the potential monetization of some significant land parcels in Bengaluru is likely to result in a revaluation of the company’s land assets. For the calendar year 2024, Sobha is touted as a top pick by Motilal Oswal, with a revised target price of Rs 1,400, indicating a potential upside of 25%.

Sobha Ltd.’s shares experienced a surge of 18%, reaching a record high of ₹1,334.70, following its recommendation by Motilal Oswal as a top pick in the real estate sector for 2024. The brokerage firm has updated its target price for Sobha to ₹1,400 per share, suggesting a further 25% upside from its current market price.

Sobha – Aiming For Higher Scale With Strong Balance Sheet: Motilal Oswal

The report from Motilal Oswal indicates that Sobha is expected to surpass its peers in growth. This optimism stems from the company’s dedication to unlocking the potential of its extensive land reserves and exploring new growth avenues, all underpinned by a healthy balance sheet. These strategies are anticipated to not only contribute to growth but also to improvements in profitability.

Additionally, the report notes that Sobha’s upcoming projects, particularly those on large land parcels in Bengaluru and Tamil Nadu, are expected to drive a reassessment of the company’s existing land value.

Over the fiscal years FY24-26, Motilal anticipates an increase in project launches from Sobha. The firm has adjusted its pre-sales forecasts upwards by 4% for FY24 and 12% for FY25, reflecting its confidence in Sobha’s commitment to sustainable growth. This growth strategy focuses on revenue expansion, maintaining healthy profitability, and steady cash flows, positioning the company for long-term success.

Sobha has a promising project pipeline, with plans to launch 15 million square feet (msf) of projects. Of this, 3-4 msf were launched in the third quarter of this fiscal year, with the remainder scheduled for launch over the next eighteen months. Utilizing its vast land reserves of 200 msf, Sobha aims to launch 30-40 msf of projects over the next three to four years. These include initial phases of projects on its large land areas in Hosur (Tamil Nadu) and Hoskote (Bengaluru).

The company is expected to ramp up its project launches to 9-10 msf by FY26, leading to a 25% CAGR in pre-sales, reaching ₹10,000 crore through FY23-26.

A key factor in the company’s revaluation will be improvements in its margins. Sobha’s EBITDA margins fell to 11% in FY23 from 21% in FY22, with the residential segment’s EBIT margins halving to 23%. However, the contractual segment achieved a break-even at the operating level, despite significant inflationary impacts.

The contraction in margins, particularly in the residential segment, has been a major concern for investors, despite the company’s premium pricing over its peers. Therefore, improvements in margins are seen as a crucial factor for revaluation. The EBIT margins for the contractual segment have now stabilized at 15% as of the second quarter of this fiscal year, as per the company’s guidance. The EBITDA margin for the residential segment is expected to recover to 25-30% by the fourth quarter of FY24.

Sobha had previously faced scrutiny from enforcement agencies during FY23 and IT searches for alleged non-disclosure of income, which may have impacted its business performance and expansion plans in recent years.

The resolution of ongoing cases may take time, with the Gurugram ED case concluding its investigation and awaiting judicial proceedings. Sobha is hopeful for a favorable outcome, though the timeline remains uncertain. Regarding the Chennai IT raid, the company awaits findings from the Income Tax Department and is prepared to contest the judgment if necessary. This case is expected to be prolonged.

In the Sobha City OC issue, the company acknowledged documentation lapses and has taken proactive steps for correction. Sobha is ready to accept any levied penalties, which are not expected to be significant.