Buy Sobha; target of Rs 1024: HDFC Securities

HDFC Securities' research report on Sobha

Over the last year, SOBHA Ltd. (SDL) has underperformed the Nifty Realty Index by 38% and peers Brigade and Prestige Estates by 33%/53%. Whilst negative news flow on enforcement agencies’ (ED/IT) actions (during FY23) has led to de-rating, SDL judiciously strengthened its balance sheet by reducing INR 15bn net debt. SDL scale/size has lagged peers over FY20-23 with the Bengaluru presales CAGR of 16% vs. 29%/34% for Brigade/Prestige. 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 INR 8-10bn of residual capex). The SDL brand enjoys huge client loyalty, differentiated design/architecture in premium offerings, in-house construction, novelty factor and 15-25% brand premium. Valuation comfort, robust FCF generation, and likely deleveraging are key near-term triggers for rerating.

Outlook

We maintain BUY and increase our captive land price assumption by 10-15% (in-line with market) resulting in our NAV/sh increase to INR 1,024/sh.

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