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May 27, 2024
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Real Estate

This underperforming real estate stock is Motilal Oswal’s top pick for 2024

Shares of Sobha Ltd rallied 18% to hit an all-time high of 1,334.70 in Thursday’s trade after the realty firm featured in domestic brokerage house Motilal Oswal’s top pick for 2024 in the real estate sector. The brokerage has revised its target price on the counter to 1,400 per share, suggesting a further upside of 25% from the current market levels.

Motilal expects Sobha to outperform in terms of growth after underperforming peers. “After underperforming its listed peers on pre-sales growth over FY21-23, we believe Sobha is set to outperform in terms of growth given its focus on unlocking its vast land reserve and exploring external growth opportunities through its healthy balance sheet. The outperformance is also expected to be driven by improvements in profitability,” it said.

Further, the brokerage said that project launches on its large land parcels in Bengaluru and Tamil Nadu will drive re-rating for its existing land valuation.

Motilal expects higher launches from the company over FY24-26. The brokerage has revised its pre-sales estimates by 4% and 12% for FY24 and FY25, respectively as it believes Sobha’s focus on sustainable growth (revenue growth, healthy profitability, and steady cash flows) will put the company on a long-term growth path.

Strong order pipeline

The company has outlined 15 million square feet (msf) of launches, of which 3-4 msf was launched in the third quarter of this fiscal and the remaining will be launched over the next one and a half years.

Through its vast land reserves of 200 msf, Motilal said that Sobha plans to launch 30-40 msf of projects over the next three to four years. These launches also include an initial phase of its projects on its large land parcels at Hosur (Tamil Nadu) and Hoskote (Bengaluru).

The brokerage expects Sobha to scale up launches to 9-10 msf by FY26, which will lead to a 25% CAGR in pre-sales to 10,000 crore through FY23-26.

Margin improvement to be one of the key re-rating triggers

The company’s EBITDA margins dropped to 11% in FY23 from 21% in FY22 as EBIT margins for the residential segment halved to 23%. The contractual segment managed to breakeven at the operating level owing to the impact of sharp inflation.

Margin contraction, especially in the residential segment, despite pricing 10-15% premium over its peers, has been one of the key concerns for investors. Thus, margin improvement will be one of the key re-rating triggers, Motilal noted.

EBIT margins for the contractual segment have now stabilised at 15% in the second quarter of this fiscal as guided by the company. The residential segment’s EBITDA margin may likely recover to 25-30% in the fourth quarter of FY24.

The company had earlier faced closed scrutiny from enforcement agencies during FY23 and IT searches for alleged non-disclosure of income. This may have impacted business performance over the last few years, including its future expansion plans.

Resolution of ongoing cases might take time

Gurugram ED case: The Enforcement Directorate has concluded its investigation and the case will go through the judicial process once filed in the court. Sobha is confident of a favorable outcome but the timeline is difficult to ascertain.

Chennai IT raid: The management is yet to hear from the Income Tax Department about the findings of the raid and will accordingly assess if the judgement needs to be contested, hence it expects the case to run a little longer.

Sobha City OC issue: The management admitted lapses in the documentation of the project and it proactively took action to get it corrected. The company is ready to accept the penalty levied for the same, but it will not be material.

Key risks, as per Motilal, include a slowdown in residential absorption, delay in monetisation of large land parcels, and inability to sign BD deals.

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