Sobha shares: Jefferies lowers stock price target, still sees 28% potential upside

Jefferies said strong operations in the March quarter helped real estate developer Sobha achieving 34 per cent sales growth and 30 per cent net debt reduction in FY23, but noted that margins have been a drag for Sobha. Execution has picked up, as reflected in 16-quarter high revenues and that profits should follow, it said in its latest note.

Debt reduction is still likely in FY24, Jefferies said but felt it should be less than Rs 700 crore that Sobha saw in FY23.

"4Q pre-sales (gross, pre-declared) of Rs 1,460 crore, up 3 per cent QoQ/32 per cent YoY, were a record. Realisations were 17 per cent higher YoY, partly on mix (higher NCR). FY23 presales were up 34 per cent YoY to Rs 5,200 crore; with strong performance from the core Bangalore market (Rs 3,300 crore, up 33 per cent YoY) and the Gurgaon project (Rs 1,060 crore, up 48 per cent YoY) being the key driver.

For FY23,  profitability was weak at Rs 100 crore, down 40 per cent YoY, with a low PAT margin of 3 per cent. The contractual business incurred a loss in the year, and even the real estate business project margins were low, Jefferies said. The management said that as the legacy contract projects move out of revenues and newer residential launches enter, PAT margin should rise to 6 per cent-plus by end-FY24; with the medium-term target at 10 per cent PAT margin.

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Jefferies said low inventories and strong demand imply 15-20 per cent FY24 pre-sales growth target is highly launch-dependent. The foreign brokerage has revised its price target downward to Rs 683 from Rs 750 earlier. 

On Tuesday, the stock was trading 4.87 per cent higher at Rs 532.20 on BSE. At this price, the Jefferies price target suggest a 28 per cent potential upside for the stock. 

"The weak margin performance drives a 4 per cent cut to FY24 earnings, and we lower our target to Rs 683 as we build in somewhat lower margins on residential business. Presales estimates upped by 4 per cent for FY24 and 5 per cent for FY25. Strong cash generation/debt reduction over the past 2 years remains the key positive," it said.

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