Realty player Sobha's December quarter result of the financial year 2022-23 (Q3FY23) appears to have surprised brokerage firms due to strong sales volume, thanks to the recovery in the Gurugram market.
Most of them have come out with positive reviews on the stock after the December quarter numbers and expect the stock to see a strong jump in the medium term.
In a BSE filing on February 7, the company said it witnessed the highest sales value of ₹1,425 crore with the best average price realisation of ₹9,653/sft, up 22 percent year-on-year (YoY).
It also witnessed the highest-ever quarterly sales volume of 1.48 mn sft, up 12 percent YoY.
Consolidated revenue witnessed a healthy rise in the December quarter of the current financial year.
Revenue from operations for the December quarter stood at ₹868.2 crore, up 39.51 percent YoY against ₹622.3 crore in the same quarter a year ago.
Sobha, however, reported a 48 percent YoY fall in consolidated profit at ₹31.8 crore for Q3FY23 against a profit of ₹61 crore in the corresponding quarter last year.
The stock has been under pressure for the last one year. Data shows it has fallen nearly 35 percent over a year against a 10 percent fall in the BSE Realty index and a 5 percent gain in the benchmark Sensex.
Brokerages see an up to 48% upside in Sobha
Brokerage firms are optimistic about the prospects of Sobha stock.
Motilal Oswal Financial Services has retained a 'buy' recommendation on the stock with a target price of ₹855, implying a 48 percent upside in the stock price.
The brokerage firm highlighted the company's debt level has been falling sustainably and it has put a renewed focus on new land investments.
"Sobha restarted investment in new as well as existing land, spending ₹70 crore in Q3. The company intends to continue spending on land as it prepares for the launch pipeline beyond FY25," said Motilal Oswal.
"Surplus cash flows of ₹120 crore were utilised for debt reduction (at ₹1,770 crore), leading to a debt-to-equity ratio of 0.72 times. The absolute debt level is likely to remain steady or decline marginally hereon," said the brokerage firm.
Motilal highlighted the management commentary as per which, the company continues to see good demand despite rising mortgage rates.
While it is difficult to predict the future trend, it remains mindful of the fact that rising cost coupled with increasing interest rates has affected the cost of ownership, the brokerage firm underscored.
"Sobha is progressing well on the pre-sales growth trajectory. The steady cash flow is enabling debt reduction and a renewed focus on new land investments. However, we believe material re-rating triggers are at least a year away, as the company is preparing for project launches at a couple of its large land parcels in Hosur and Hoskote, which will drive re-rating in the implied land valuation," said Motilal Oswal.
Brokerage firm Nirmal Bang also maintained a ‘buy’ call on the stock with a target price of ₹800, implying a 39 percent potential upside.
"We maintain ‘buy’ on Sobha with a revised target price of ₹800 (earlier ₹870) based on Sept’24E NAV. Our revision in the target price is predicated on: (1) revision in the discount rate from earlier 9 percent to 9.5 percent given the inflationary environment, and (2) change in estimates due to rising construction costs from contractual projects," said Nirmal Bang.
Brokerage Nuvama Institutional Equities also maintained a ‘buy’ call on the stock with a target price of ₹815, implying a 41 percent upside.
Nuvama said with demand being strong and launches likely to pick up, Sobha’s focus on cash flows will hold it in good stead. The brokerage firm expects buoyancy in sales to sustain, riding the revival in housing demand.
Nuvama also highlighted Sobha's debt reduction.
"The quarterly collections at ₹1410 crore (up 33 percent YoY, 5 percent QoQ) were the best-ever and enabled the company to pare ₹120 crore QoQ net debt to ₹1,770 crore in Q3FY23. Debt levels have reduced by ₹1,280 crore in the last nine quarters out of internal accruals," Nuvama observed.
"Net debt-equity ratio declined to 0.72 times (0.77 times at end-Q2FY23). Net cash flows declined QoQ due to an increase in land-related payments ( ₹74.4 crore). The management indicated that land-related Capex will depend on the need to build a strong project pipeline to cater to the strong demand; nevertheless, it is committed to cash flow management and hence, net debt/equity should continue to decline, going ahead," said Nuvama.
Disclaimer: The views and recommendations given in this article are those of the broking firms. These do not represent the views of MintGenie.
