SMC Global Securities has a buy call on Sobha with a target price of Rs 578.
The current market price of Sobha is Rs 500.
Time period given by the brokerage is one year when Sobha price can reach the defined target.
Investment rationale by the brokerage: Sobha is one of the fastest growing and foremost backward integrated real estate players in the country. It is primarily focused on residential and contractual projects. Real Estate segment had contributed 68 per cent and Contractual & Manufacturing segment had contributed 32 per cent of total operating cash inflow during the quarter ended December 2019.
As on 31st December 2018, it has delivered 100.31 million square feet of residential and contractual projects. Currently, ongoing contractual projects aggregating 8.89 msft and Residential projects aggregating to 39.09 msft of developable area. The company has completed 301 contractual projects with a developable area of 47.79 msft & 135 residential projects with a developable area of 52.52 msft.
During the quarter ended December 2019, it has launched SOBHA Dream Gardens affordable housing project with saleable area of 1.76 million square feet in Bengaluru, Sobha Raj Villas residential project with saleable area of 0.36 million square feet in Bengaluru and Sobha Isle residential project in Kochi with saleable area of 0.89 million square feet, totalling to 3 million square feet launches during the quarter.
The company is planning to launch 7.7 msft of saleable area spread across 11 projects in next 3-4 quarters and of which about 4.35 msft in Bangalore, 1.34 msft in Thrissur, 0.92 msft in Chennai, 0.51 msft in Pune, 0.11 msft in Coimbatore and 0.47 msft in Gujarat.
Cost of borrowing for Q3FY19 was 9.57 per cent compared to 9.30 per cent in Q2FY19 and 9.31 per cent in Q1FY19. Increase in average cost of borrowing is due to increase in MCLR/PLR of banks & FI’s.
For affordable housing projects, the benefit under the provisions of Section 80IB-A (100 per cent deduction on gains from these projects) has been extended for one more year, until 2020. This will provide further impetus to this segment.
Risk: Slowdown in economy and interest rate risk.
Valuation: With domain expertise, strong financial capability, quality product and strong customer focus, the company is well placed to cater to this demand and grow consistently in the coming years. Despite the challenging macro-environment, its sales volume and total sales value have grown by 18 per cent and 16 per cent respectively during the calendar year 2018 vis-a-vis the calendar year 2017. The company plans to continue launching new projects in the current financial year and aims to again clock double-digit growth in terms of sales volume and value. Thus it is expected that the stock will see a price target of Rs. 578 in 8 to 10 months time frame on the P/Bx of 2 times and FY20 BVPS of 288.75.