Maintain ‘buy’ on Sobha, revised fair value at Rs 480

Sobha reported a strong quarter led by the best ever quarterly sales volume of 1.13 mn sq ft for sales value of Rs 8.8 bn (+22% yoy) and a corresponding rebound in collections to Rs 6.6 bn (+41% yoy) in 3QFY21. Planned launches of 10 mn sq ft in the next three quarters will help maintain the sales momentum even as contractual business is expected to recover fully by March 2022. Maintain ‘buy’ with revised fair value of Rs 480/share (from Rs 440/share).

Sobha reported another resilient quarter with sales activity as well as cash collections showing strong pick-up and exceeding pre-Covid levels even as execution pace for contractual projects remained soft in 3QFY21. Consolidated revenues declined to Rs 6.8 bn (-23% yoy) due to lower project delivery in the development business with revenues of Rs 4.6 bn (-20% yoy), and slow construction activity in the contracts and manufacturing division with revenues of Rs 2.4 bn (-23% yoy).

EBIT margins for the EPC business declined to 11% leading to a decline in blended margin to 26% (from 35.2% in 2QFY21). Operationally, Sobha sold 1.14 mn sq. ft (+6.3% yoy, +27% qoq) of area in 3QFY21 for a value of Rs 8.9 bn (value of Sobha’s share of sales was Rs 6.8 bn). For 9MFY21, Sobha reported 15% yoy decline in sales volume at 2.7 mn sq. ft (3.2 mn sq. ft in 9MFY20), though sales in 2HFY21 are expected to be better than 2HFY20.

Sobha reported strong collections for the quarter at Rs 8.7 bn (+8.2% yoy) comprising of Rs 6.6 bn (+41% yoy) from the real estate vertical and Rs 2 bn (-38% yoy) from the contractual business. Project related cash outflows increased with real estate project expenses at Rs 4.2 bn (+17% yoy) even as contract and manufacturing expenses remained subdued at Rs 1.8 bn (- 40% yoy) leading to positive operating cash flow of Rs 1.8 bn (Rs 1.3 bn in 2QFY21).