Buy Sobha; target of Rs 647: HDFC Securities

HDFC Securities' research report on Sobha

2QFY20 Revenue/ EBITDA/ APAT grew 19/19/9% higher YoY to Rs 7.8/1.7/0.7bn. The company maintained pre-sales momentum with 1.03mn sqft of sales by volume (flat YoY) in 2QFY20 valued at Rs 6.8bn. SDL expects the sales momentum to build-up during 2HFY20E. Bengaluru continues to be the key pre-sales driver with pre-sales volume/value of 0.78mn sqft/Rs 5.2bn. During 1HFY20, the company witnessed sustained demand for the affordable and mid-ticket segment with 30% of the sales in the <Rs 10mn price bracket and 49% of the sales in the Rs 10-20mn price bracket. These two segments witnessed 32% YoY growth by area sold and 30% YoY growth by value during 1HFY20. Net debt has increased by Rs 2.3bn QoQ to Rs 29.8bn and net D/E is now at 1.29x (vs 1.19x QoQ). SDL spent Rs 216mn towards land during 2QFY20 (Rs 1.8bn during 1HFY20). Accumulation of incremental land bank is expected to taper during 2HFY20E with the company expected to spend ~Rs 4bn during 2HFY20. SDL has guided that debt may increase marginally from current levels but the company aims to maintain net D/E around 1.1x levels at the end of FY20E.

Outlook

Sobha delivered a Rev/EBITDA/PAT miss of 34/30/31% respectively on the back of 49% QoQ revenue dip in the Real Estate segment with Contracts and Manufacturing segment holding steady. We maintain BUY with a reduced TP of Rs 647/sh.