Dreaming big
In our Sobha (SDL) deep dive note ‘R’eset, ‘R’estart, ‘R’efocus = ‘R’erating, we had premised our investment thesis on a strong demand undercurrent in the Bengaluru market and SDL hitting the Reset-Restart button. Since then, the stock has more than trebled (3.4x), business development has taken a big leap, and the launch pipeline has fattened. With an ongoing, upcoming and tied-up BD pipeline of 45 sq ft in volume and INR 500bn+ GDV, SDL is well placed for FY24-30E presales CAGR of 27.6% to INR 280bn+. Rights issue INR 20bn fundraise reiterates promoter confidence in India business (promoter infusion INR 10bn+) and Indian real estate. We expect a larger part of the internal annual FCF of INR 10bn+, Rights proceed of INR 20bn and leverage to get deployed towards new growth locations like MMR and Pune. NCR may see further BD consolidation as the demand undercurrent remains strong. SDL brand enjoys huge client loyalty, differentiated design/architecture in premium offerings, inhouse construction, novelty factor and 15-25% brand premium. Valuation comfort, robust FCF generation, and likely deleveraging are key near-term triggers for further rerating. We maintain BUY and increase our NAV/sh to INR 2,639/sh, given new growth drivers, 10-15% better pricing and fundraising.
▪ The group is targeting INR 300bn/100bn presales overall/MMR by FY30E: Given the upcycle in Dubai real estate, Sobha’s parent company is expected to generate robust cash flows. A part of this surplus is being allocated (INR 10bn+) as growth capital in the Indian listed entity through the INR 20bn rights issue. We see this as positive signalling and promoter confidence in Indian real estate demand. The Dubai real estate ticket size mirrors premium MMR and NCR real estate and can be seen as a more secular growth story than highly cyclical Dubai real estate. A large part of the fundraising is expected to be deployed towards non-South regions viz. MMR, Pune, NCR, and Gujarat. In recent media interactions (link), management indicated plans to enter the Mumbai micromarket, which is expected to significantly contribute to achieving its annual sales target of INR 300bn from FY30 onwards, with Mumbai accounting for one-third of this target at INR 100bn.
▪ Customer centricity, brand pull, in-house construction and high-value delivery to help retain pricing premium: SDL over the years has standardized delivery of quality houses at 15-25% 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.
▪ Valuation supportive, at discount vs. peers, risk-reward favourable: SDL is trading at 1x NAV vs. peers trading at 1.3-1.5x NAV. We believe that further 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 sees shrinking headwinds on the denominator and expansion in tailwinds on the numerator, which can lead to a robust rerating.
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