Company is benefiting from RERA-led consolidation

With no significant change in market-wide volumes, the constantly rising scale is a sign of RERA-led greater end-user preference for regulated real-estate developers. This, thus, augurs well for Sobha’s projects and a number of planned launches, including two in affordable housing. We expect operating CF to be healthy as encouraging volumes are expected and as the contractual segment gains gradually. De-leveraging, though, seems contingent on quantum of land spend. We retain our sanguine outlook as its recent performance is a clear sign of it benefiting from consolidation. Besides Bengaluru’s 15% y-o-y growth, even stronger growth in markets such as Gurgaon, Mysuru, Coimbatore and Chennai (in order of growth contribution) helped volumes grow a strong 20% y-o-y (to 1m sqft). If not for unfortunate floods in Kerala, it indeed could have been the best-ever quarter in Sobha’s history. Two launches in H1 are likely to be followed with a number of launches in the short-term, incl. two in affordable housing (one each in North Bengaluru and Gift City, Gujarat). Affordable housing with Sobha’s quality standards suggest exciting times ahead. North Bengaluru in Q3 (phase-I of 0.4m sqft of a total of 1.8 m sqft) is likely to be the first off the block, followed by Gift City. Notwithstanding positive CFO and FCF, on healthy volumes and as the contractual segment reaps the benefit of the larger OB, dividend payout is expected to take net debt up Rs 0.3 billion. Management clarified that it is mindful of capital intensity involved with commercial real estate developments and, thus, APMC is the only large-scale commercial real estate development for now. Sobha’s Q2FY19 volumes were 1m sqft, up 20% y-o-y as demand at its existing projects seems to have persisted and as it continues to reap the benefits of RERA-led consolidation.