Why Sobha Was The Worst Performer Among Peers In The Last One Year

Shares of Sobha tumbled 40 percent over the last 12 months compared with a 28-44 percent gain among peers. The benchmark Nifty Realty Index rose 9 percent during the period.

India’s real estate developers have been struggling to raise funds as lenders turned selective following defaults at IL&FS triggered a liquidity crisis, making refinancing difficult. That, coupled with an economic slowdown, stalled a nascent recovery from Prime Minister Narendra Modi’s decision to outlaw 86 percent of currency overnight in November 2016 and rollout of a stricter housing law aimed at protecting homebuyers from frauds, leading to a huge inventory.

To tide over the crisis, well-funded developers either took over or helped complete stressed projects. That even helped Sobha as its sales rose for the first time in three quarters in the October-December.

But lower cash flows due to mounting debt and lack of new launches plagued the Bengaluru-based developer, dragging down the company’s stock.

Here’s what have been hurting Sobha…

Rising Debt

Sobha’s debt rose for the eighth straight financial years to Rs 3,208 crore as of December 2019. That pushed its leverage to the highest ever level of 1.3 times, according to the company’s exchange filing, as payments towards land and capital expenditure rose.

Higher debt also led to an increase in the company’s finance costs, Amit Agarwal, research analyst at Nirmal Bang, said in a report.

Adverse Cash Flows

Rising debt put a strain on Sobha’s cash flows. The company’s net operating cash flow fell to Rs 55 crore as of December from Rs 500 crore as of March 2019. Its net cash flow, according to filings, has been negative for more than a year.

Cash flows fell as manufacturing expenses rose and advances for projects it builds on contracts remained stagnant, chief financial officer Subhash Bhat said in the conference call. The company also accounted for expenses on certain pre-RERA projects in the current financial year, further hurting the cash flows, he said.

According to Nirmal Bang’s Agarwal, poor realisation also hurt Sobha’s cash flows.

Launches Dry Up

Sobha’s new launches fell to 1.4 million square feet as of December from with 8.2 million square feet last year. The company is not pushing for pending approvals as it’s looking to exhaust its backlog, barring in the four cities—Delhi, Trivandrum, Hyderabad and Pune—where it doesn’t have any unsold stock, the management said in the conference call.

Parikshit Kandpal, analyst at HDFC Securities, said in a report that Sobha was focusing on monetising its inventory of 14.8 million square feet. But capex on buying land despite having a robust inventory is a key risk.

To be sure, Sobha is planning to launch 18 projects with a total area of 14.1 million square feet and a commercial space of 0.4 million square feet, according to an exchange filing. It, however, didn’t provide any timeline for the launch.

Lack Of Income-Generating Assets

Peers such as Prestige Estates Projects Ltd., Brigade Enterprises Ltd. and DLF Ltd. have income-generating commercial assets. Sobha, on the other hand, derives 97 percent of its revenue from residential real estate and contract manufacturing for projects, which are concentrated in Bengaluru, according to its investor presentation.

CFO Bhat, however, said the company’s commercial project “1 Sobha” had been completed and should start generating rental income from the first quarter of the financial year ending March 2021.

To be sure, Godrej Properties, too, has minimal exposure to income-generating assets. But Mohit Agrawal, analyst at IIFL, said the company’s Rs 3,100-crore reserve from two fundraising will help it tide through the tough times. Also, the developer’s recent deals have been accretive, he had told BloombergQuint.

Yet, analysts are undeterred.

Of the 22 analysts tracking Sobha, 20 recommend a ‘buy’, while one each suggest a ‘hold’ and ‘sell’. The Bloomberg consensus estimates an 84 percent upside to the stock in the next 12 months.

Given the industry-wide consolidation and overall strong performance of the South India realty market and Bengaluru in particular, Parvez Akhtar Qazi, analyst at Edelweiss Securities, expects Sobha’s robust execution capabilities to aid growth. An improvement in its balance sheet would be another stock catalyst, Qazi said.