Down 15 percent in the last 1 year, Sobha (SDL) has underperformed the Nifty Realty index by 38 percent and peers Brigade and Prestige Estates by 33 percent and 53 percent, respectively. This comes on the back of the negative news flow on enforcement agencies’ (ED/IT) actions (during FY23), which has led to de-rating. However, on the back of strong growth potential, healthy financials, valuation comfort, and debt reduction, domestic brokerage house HDFC Securities has retained its ‘buy’ call on the stock with a target price of ₹1,024, implying a potential upside of over 66 percent.
"With the regulatory overhang largely behind, the robust financial health of the parent, and a strong demand undercurrent in Bengaluru market, SDL has hit the Reset-Restart button. There is a clear refocus on deleveraging, tying up new business development (15msf new launch pipeline, 20msf advance stage tie-up), and ramping up new launches (with minimal incremental ₹800-1000 crore of residual capex). The SDL brand enjoys huge client loyalty, differentiated design/architecture in premium offerings, in-house construction, novelty factor and 15-25 percent brand premium. Valuation comfort, robust FCF generation, and likely deleveraging are key near-term triggers for rerating," said the brokerage. The firm has also judiciously strengthened its balance sheet by reducing net debt, added HDFC Securities.
Stock price trend
Following this bullish outlook, the stock jumped almost 11 percent in trade today, September 8, to ₹681.
It is currently over 9 percent away from its 52-week high of ₹750.85, hit on September 9, 2022, but has advanced over 65 percent from its 52-week low of ₹412.10, hit on March 29, 2023.
It has gained over 18 percent in 2023 YTD, giving positive returns in 6 of the 9 months in the current calendar year so far. The stock rose the most in July, up 15.4 percent and lost the most in March, down 27.3 percent.
In comparison, the Nifty Realty index rose 25 percent in the last 1 year and 37 percent in 2023 YTD.
It has also underperformed its peers. Only 1 stock (Indiabulls RE) in the Nifty Realty index underperformed Sobha; the rest all outperformed the realty major. DLF, Macrotech Developers, Prestige, Godrej Properties, Brigade Ent, and Oberoi Realty rallied between 35 and 44 percent each.
The trend was exactly the same in the last 1 year as well and only SunTeck Realty underperformed Sobha. Macrotech Developers, Prestige Estates, DLF, and Phoenix rose over 30 percent each.
Investment Rationale
Headwinds largely priced in, risk-reward favourable for further rerating: As per the brokerage, SDL has faced close scrutiny from enforcement agencies during FY23, followed by an IT Dept search. This may have impacted business performance over the last two years, including future expansion plans. It now sees receding regulatory headwinds and business reorientation towards growth.
Group not averse to scale, parent company amongst Top 3 developers in Dubai: The brokerage noted that given the upcycle in Dubai real estate, Sobha’s parent company achieved ₹24,200/14,000 crore presale during CY22/5MFY24 (post exchange rate) and may achieve over ₹30,000 crore presales for CY23 (annualizing 5MFY24 presales, by far the highest vs any individual Indian real estate company). CY22 EBITDA stood at ₹2,900 crore, while 1.5-2x EBITDA/DEBT and FCF of ₹1,100-3,300 crore are the annual forecasts by a rating agency. With such a huge scale, the Indian entity is well-placed to learn from its parent and accelerate growth in the Indian markets, stated HDFC Securities.
Likely to retain pricing premium: The brokerage further pointed out that SDL over the years has standardised delivery of quality houses at 15-25 percent premium vs. peers. Despite setbacks, SDL has not seen any slowing in demand for its products. Financial institutions continue to support and ably so as the company has significantly deleveraged its balance sheet and is on course to be net cash positive (largely residential developer—upcycle to accelerate FCF, no major commercial capex) in the absence of any major land capex, it added.
Outlook
"SDL is trading at the highest NAV discount of -22 percent vs. the long-term average of -17 percent. We believe that rerating will be contingent on presales outperformance, robust cash flow generation, achieving net cash status, and acceleration in new launches from captive and new land capex/tie-ups. The rerating equation is seeing shrinking headwinds on the denominator and expansion in tailwinds on the numerator, which can lead to a robust rerating," said the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
