Sobha Ltd – Trusted Developer Of South


Company Name – Sobha Limited (Sobha)


Current Share Price – INR 685 (August 23, 2022)


Market Cap – INR 6,498 cr


 

1. What is interesting about the stock?

Bangalore, the Silicon Valley of India, is the 2nd fastest growing metropolis in India. It was also named as the most livable metro city in India in 2020. The city alone accounts for 38% of India’s IT exports, making it the land of aspirations for the vast number of engineering graduates churned out each year by the Indian educational system.


It is also the startup hub that has seen the rise to prominence of many famous start-ups like Swiggy, Ola, Redbus, etc. Many MNCs also have their offices and manufacturing plants in and near the city including Bosch, Mercedes Benz, Volvo, GM, L&T, Honda, ABB, HAL, Dell, Nokia, Wistron, and many others.


All this translates to a massive population influx into the city which has given rise to many big real estate companies in Bangalore including Brigade Enterprises, Prestige Estates, Sobha, and others.


Sobha is one of the largest real estate developers based out of Bangalore. The company has developed projects and real estate totaling 120 million sq feet as of June 2022. It has expanded its presence to 27 cities in 14 states including Kozhikode, Chennai, Cochin, Coimbatore, Gurugram, Mysuru, Pune, and Thrissur.


But unlike other real estate developers in the country, Sobha also boasts of a very strong project execution capability and enviable track record which has also seen the company develop over 160 real estate projects and many landmark external projects including the corporate houses of Infosys, WIPRO, HCL, Dell, Bosch, Biocon, Taj Group of Hotels and ITC Hotels.


So, what is it that sets Sobha apart from the rest of the pack and has so many big brand names trust this developer with the monumental project of making their headquarters?


The X Factor for Sobha lies in their backward integration model. This was also the subject of a famous Harvard Business School case study which was dedicated to its success with this business model.


This business model not only helps the company save on costs and procurement but also helps ensure the quality of all the products that it uses in its projects. Starting from design, architecture, concrete blocks, woodwork, or metal works, all elements are done using products made by Sobha itself.


The company has 2 main revenue divisions which are:

  • Real Estate: Including sales of housing and leasing of commercial property (74% of Q1FY23 revenues)

  • Contract manufacturing and project execution: Development of external projects and the making of products for interiors, glazing and metal works, and concrete products (26% of Q1FY23 revenues)

Sobha has inventory visibility of 25.6 million sq ft.


Industry Overview


The real estate sector in India is expected to grow 5 times in the coming decade from a market size of USD 200 billion in 2021 to USD 1 trillion by 2030 according to IBEF. The sector is expected to contribute to 13% of the total GDP of India by 2025.


There are several factors that are expected to facilitate the rise of the industry including:

  • Rising income and favorable demographics

  • Rapid urbanization

  • Affordable housing policies by the Govt

  • Access to easy financing

  • Rising investments from both domestic and foreign investors into the sector

The 2 direct competitors of Sobha with a major presence in Bangalore are:

  • Prestige Estates

  • Brigade Enterprises

Key MOATs

  • The biggest advantage for Sobha is its backward integrated business model which provides it with many advantages like control over the quality of products, minimizing procurement risks, and enabling them to act as a one-stop solution for developing real estate projects. This strength was demonstrated very well during the pandemic when supply crunches had rocked the industry, but Sobha was faring much better than its competitors as it had direct access to all the building materials it required to complete its projects. This has also resulted in them being a preferred choice for contract development of real estate for many companies in Bangalore.

  • The 2nd big advantage of the company is that around 75% of its customers are salaried professionals which is a massive advantage in terms of collections. Most of these professionals are from the IT sector and thus the demand for Sobha’s homes is somewhat shielded from the impact of the traditional real estate cycles due to constant and rising demand from this demographic.

  • The company’s manufacturing business also provides it with a separate revenue source reducing its dependence on selling its real estate units which take a long time to generate a return on investment.

2. Key Historical Financials



In terms of historic performance, the company has seen a 7% sales CAGR in the past 10 years while growing PAT at a -7% CAGR in the same period. In the past 3 years, however, the sales CAGR was at -7% while the PAT CAGR was up to -32%. This anomaly is mainly due to the big impact on revenues in FY21 from COVID-19.


3. What is my view on company valuation?


Sobha has seen a rise in its share price of 78% in the past 5 years vs the NIFTY Realty Index which has risen 53% in the same period.


This shows that the company has outperformed the real estate industry benchmarks and the general market which has grown 75% in the last 5 years.


But its direct rivals Brigade Enterprises have also shown good performance in the same period with Brigade registering a growth of 176% in the last 5 years.


Based on Ind accounting standard 115, the company is passing notional interest on the customer advances as part of the interest cost leading to depressed earnings and hence higher P/E multiples. Thus using PE to judge valuations of real estate players who are doing the above is not justifiable.


In terms of EV/EBITDA, Sobha is trading at close to 8.9x vs. 17.2x of Brigade, & 11.9x of Prestige. In terms of P/B, Sobha is trading at 2.6x vs. 3.9x of Brigade and 2.0x of Prestige.


The difference in valuation trends between these 3 companies can be seen as an indication of market reputation and brand trust for these 3 real estate developers based out of Bangalore.


The company’s growth is expected to come slowly and steadily as the real estate sector comes back to pre-covid levels. But given the strong demand for homes in the markets that the company operates in, especially Bangalore, & the policy support and easy financing for the housing sector, Sobha can be expected to maintain a decent growth rate of 12-15% CAGR near the projected industry CAGR of 15-17% projected by IEBF.


Sobha looks interesting for the long term and investors should evaluate entering it at lower levels which would provide a better margin of safety.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • The company’s operations are largely concentrated around Bangalore where ~80% of their revenues comes from. Thus, the company is vulnerable to any local level disruption risks arising from political disruptions, natural disasters, and real estate cycles in the area.

  • The continued rise of Bangalore’s economy and real estate market has attracted a lot of competition for Sobha with all national real estate players like DLF, Oberoi, Godrej Properties, and others expanding their Bangalore operations to get a slice of this steadily expanding pie.

  • The real estate industry has a big payback period and thus large amounts of capital are always stuck in projects for long amounts of time. Any external delays and disruptions can result in the payback period increasing, putting additional strain on the company’s capital.

 

About the Author


I have over 6 years of experience in the Investment sector and have been an active prop trader in European Bond Futures in the past.


I graduated from the Master of Finance Program from Cambridge University in 2016 after completing my Bachelor of Engineering program from Jadavpur University, Kolkata in 2011.


I am an insignificant public investor & have avid interest in following emerging trends both in technology and other fast evolving sectors. I am also a lifelong learner and relish the chance to learn something new all the time.


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

0 comments