Jefferies lower outlook on Sobha, says weak margins

Jefferies said strong operations in the March quarter helped real estate developer Sobha, achieving 34 per cent sales growth and 30 per cent net debt reduction in FY23, but said margins have been a drag for Sobha. Execution has picked up, as reflected in 16-quarter high revenue and that profits should follow, the company said in its latest note.

Debt reduction is still likely in FY24, Jefferies said, but felt it should be less than Rs 700 crore that Sobha saw in FY 23.

4 Q pre-sales gross, pre-declared of Rs 1,460 crore, up 3 percent QoQ 32 per cent YoY, were a record. Realisations were 17 per cent higher, partly on mix higher NCR FY 23 presales were up 34 per cent YoY to Rs 5,200 crore, with strong performance from the core Bangalore market Rs 3300 crore, up 33 per cent YoY and the Gurgaon project Rs 1,060 crore, up 48 per cent YoY being the key driver.

For the year to date, profitability was down 40 per cent YoY, down 40 per cent YoY, with a low PAT margin of 3 per cent. The contract business incurred a loss in the year, and even the real estate business project margins were low, Jefferies said. Jefferies said low inventories and strong demand imply 15 - 20 percent FY 24 pre-sales growth target is highly launch-dependent. The foreign broker has lowered its price target from 750 to 683 from a previous range of 650 to 683.

On Tuesday, the shares were trading at a gain of 4.87 per cent at 532.20 on the BSE. At this price, Jefferies' price target suggest a 28 per cent potential upside for the stock.

The weak margin performance drives a 4 percent cut to FY 24 earnings, and we lower our target to Rs 683 as we build in slightly lower margins on residential business. Presales forecasts upped by 4 per cent for FY 24 and 5 per cent for FY 25. stronger cash generation debt reduction over the past 2 years remains the key positive, said the National Bank of Canada.

On May 30, 2023, traders recommended stocks of ICICI Lombard, BHEL, Birla Corporation, BHEL, BHEL and ICICI Lombard.