Debt reduction is key for Sobha’s uptick

So far in CY22, the Sobha stock has fallen by 17%—much higher than the 8% decline of S&P BSE Realty Index

2 min read . Updated: 23 Mar 2022, 01:58 AM IST Harsha Jethmalani

Sobha has been able to pare its debt by ₹440 cr in the last two years since its peak from operational cash flows

Bengaluru-based Sobha Ltd recently announced the appointment of Jagadish Nanganeni as managing director (MD) effective 1 April. The company’s management held a call with analysts where the incoming MD broadly reiterated Sobha’s long-term growth plan with an increased thrust on generating strong cash flows.

The company’s residential strategy will continue, but geographical diversification will also be explored. Investors should note that at present sales from Bengaluru account for about 70% of Sobha’s total sales.

“It helps that Nanganeni has been a part of Sobha for a long time and his goals for the company’s growth would be consistent with earlier strategy," said an analyst with a domestic brokerage house requesting anonymity.

Nanganeni has been associated with Sobha since 2009 in senior strategic and operational roles. Even so, for investors in the Sobha stock, maintaining its quarterly sales run-rate and debt reduction remain the key triggers, said the analyst mentioned above.

“Continued focus on debt reduction remains the key," IIFL Securities Ltd’s analysts said in a report on 21 March.

Sobha has been able to reduce its debt by ₹440 crore in the last two years since its peak from its operational cash flow, the report pointed out.

Its borrowing cost reduced by 39 basis points (bps) during 9MFY22, the company said in its December quarter (Q3FY22) earnings. One basis point is 0.01%. A crucial metric, the debt-to-equity ratio, stood at 1.07 times in Q3FY22 compared with 1.13 times in the same period in the previous year. Sobha had earlier indicated that it aims to reduce its debt-to-equity to below 1 times, going ahead.

It sold 1.32 million sq. feet (msf) in Q3FY22. The company is expected to maintain its quarterly sales run-rate of 1.3 msf in Q4FY22 as well, analysts reckoned. However, with input costs rising steeply, its impact on margins and the ability to raise prices without hurting sales remains to be seen. In general, a slowdown in residential demand is a risk for the stock.

So far in CY22, the Sobha stock has fallen by 17%—much higher than the 8% decline of S&P BSE Realty Index. “Both the chief financial officer and managing director for Sobha have seen a change in FY22, causing some volatility in the stock," analysts at Jefferies India Pvt. Ltd said in a report on 18 March.

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That said, the research house sees the promotion of internal candidates for both the roles as a positive.

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