After an over 250 percent returns in the last 1 year, domestic brokerage house Geojit Financial Services has initiated coverage on realty stock Sobha with a ‘sell’ call. The brokerage has a target price of ₹1,714 for the stock, implying a potential downside of over 15 percent.
“Sobha’s residential segment stands on a solid footing with a healthy pipeline and strong demand. However, issues like slower revenue recognition, lower margins, and struggling subsegments contribute to uncertainty. Further, the stock has already been priced in the forthcoming projects,” said the brokerage.
It further noted that in FY24, Sobha saw a steady pre-sales growth of approximately 8 percent, with the booking value reaching ₹6,644 crore, marking a 28 percent year-on-year (YoY) increase. The average realisation was ₹10,923 per square foot, reflecting a 19 percent YoY growth. However, Sobha’s revenue declined by around 6 percent YoY in FY24 due to lower project completions, resulting in a 53 percent YoY contraction in profit after tax (PAT), at a margin of 2 percent.
Sobha Ltd., based in Bangalore, is a leading real estate company with a track record of completing 136 million square feet across 546 projects. The company’s operations extend across 14 states, highlighting its significant presence in India’s real estate market.
Stock Price Trend
Similar to the last 1 year, in 2024 as well, the stock has given multibagger returns, zooming 105 percent. It has given positive returns in 6 of the 7 months of 2024. The scrip rose over 3 percent in July, extending gains for the fourth straight month. Before that, it advanced 3 percent in June, 7 percent in May, and 22.6 percent in April. However, it was in the red in March, down 7.4 percent. Meanwhile, in January and February 2024, the stock witnessed robust returns of 47 percent and 8 percent, respectively.
Last month (June 2024), the stock also hit its record high of ₹2,179.81. Currently, the stock is just 7 percent away from its peak. Meanwhile, it has rallied over 276 percent from its 52-week low of ₹537.16, hit in July last year.
Key Factors
Robust Residential Pipeline: As per the brokerage, Sobha showcases a robust pipeline with a total inventory visibility of 24.4msft. This includes 0.22msft of unsold area from completed projects, 5.17msft from ongoing projects available for sale, and 2.16msft from projects not yet opened for sale. Along with that, the company currently holds the highest-ever forthcoming pipeline, totaling 16.85msft, indicating a strong growth trajectory for the company. However, this has already been priced in for the markets, hence it may not impact the stock’s performance tremendously.
Weak Earnings: In the March quarter, Sobha reported an 86 percent decline in consolidated net profit to ₹7.02 crore due to lower income. This is a significant drop from the ₹48.57 crore net profit recorded in the same period last year. Total income also decreased to ₹791.25 crore in the fourth quarter, compared to ₹1,240.14 crore in the corresponding period of the previous year, as per a regulatory filing.
Declining Sub-Segments: Geojit also noted that Sobha’s contracting and manufacturing segments are distressed; the contracting portfolio reported a 15 percent degrowth in FY24, whereas the manufacturing segment posted a 12 percent degrowth. Both segments combined hold an EBITDA margin of 9 percent vs. the residential EBITDA margin of 18 percent in FY24. In addition, both segments show no signs of recovery in the coming years.
Revenue Recognition to Improve: In FY24, the company reported a revenue contraction of 6 percent, primarily attributed to a reduction in project completions. The EBITDA margin was recorded at 9 percent during this period. Going ahead, the company anticipates a rebound in both revenue and margins, driven by increased project completions and better realisation, stated the brokerage. However, one needs to wait and watch for that recovery.
Valuation
According to Geogit, Sobha’s residential segment is on a healthy base with a strong pipeline and potential land parcels. The rights issue will also enable them to capitalise on the ongoing real estate upcycle, but any immediate downturn in the cycle stands as a key risk.
However, significant concerns persist regarding lower margins, distressed contracting and manufacturing portfolios, and delayed revenue recognition.
Considering the forthcoming residential pipeline has already been factored in the price along with uncertainties in Sobha’s portfolios and lower margins, the brokerage has assigned a SELL rating to the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
