Sobha Q3 Sales: Record Volumes by the company says Jefferies

Sobha reported Q3 FY21 pre-sales volume of 1.13 mn sf, +6% YoY/+27% QoQ, a record. Value wise, gross pre-sales were up 22% YoY/+29% QoQ to Rs 8.9 bn, a seven quarter high. Sobha's share of pre-sales was up 12% YoY/28% QoQ to Rs 6.8 bn. The good sales performance has come through despite no significant new launch (0.1 mn sf in Bangalore), which implies inventory reduction, a positive for cash flows. Sales volumes have picked up pace over the last two quarters, improving from a 39% YoY volume decline in Q1 and 14% YoY decline in Q2.

Sales have been distributed well geographically; though sequential improvement was driven by the core Bangalore market where sales volumes increased 46% QoQ to 0.79 mn sf, as local lock-downs eased. Outside Bangalore, sales were up 41% YoY at 0.35 mn sf. Key markets of Gurgaon (+91% YoY) and Kochi (3x YoY) did well. Better project mix helped drive average realizations to a 6 quarter high of Rs 7830/sf. Management has guided for the second half of FY21 sales to be up YoY.

Sobha is a Bangalore based developer of primarily mid-to-premium end residential developments. Company also has a contractual business and is known for its strong execution skills.

Valuation/Risks of Sobha:

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Jefferies value Sobha based on a SoTP approach with the assumptions:
a) 7.0x multiple to Sep'22 residential business EBITDA
b) 6.0x multiple to Sep'22 construction business EBITDA

Key risks include:

a) repetitive lock-downs delaying project cash flows and reducing multiples
b) high exposure to Bangalore market & thereby the technology industry
c) interest rate risks inherent to real estate business