Sobha - Reset, Restart, Refocus Triggers Rerating: HDFC Securities
Valuation supportive, discount to long-term averages, risk-reward favorable.
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HDFC Securities Institutional Equities
Over the last year, Sobha Ltd. has underperformed the Nifty Realty Index by 38% and peers Brigade Enterprise Ltd. and Prestige Estates Ltd. by 33%/53%.
Whilst negative news flow on enforcement agencies’ actions (during FY23) has led to de-rating, Sobha judiciously strengthened its balance sheet by reducing Rs 15 billion net debt.
Sobha scale/size has lagged peers over FY20-23 with the Bengaluru presales compound annual growth rate of 16% versus 29%/34% for Brigade Enterprise/Prestige Estates.
With the regulatory overhang largely behind, the robust financial health of the parent, and a strong demand undercurrent in Bengaluru market, Sobha has hit the reset-restart button.
There is a clear refocus on deleveraging, tying up new business development (15 million square feet new launch pipeline, 20 msf advance stage tie-up), and ramping up new launches (with minimal incremental Rs 8-10 billion of residual capex).
The Sobha brand enjoys huge client loyalty, differentiated design/architecture in premium offerings, in-house construction, novelty factor and 15-25% brand premium.
Valuation comfort, robust free cahs flow generation, and likely deleveraging are key near-term triggers for rerating. We maintain 'Buy' and increase our captive land price assumption by 10-15% (in-line with market) resulting in our net asset value/share increase to Rs 1,024/share.
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