On Wednesday, realty developer Sobha Ltd’s stock scaled a 52-week intraday high to touch Rs450. The company’s March quarter performance topped Bloomberg’s forecast on all counts.
What stoked the euphoria was the quarter’s higher contracting revenue. Sobha has always had a niche business in undertaking pure contracting of homes for large corporate customers on a project-to-project basis. This is akin to the engineering, procurement and construction business where costs pass through and there is no risk of completing sales. A sure-shot revenue earner, this business increased by 41% year-on-year during the quarter, to lift overall revenue up by 10-12% above forecasts and about 7% higher year-on-year.
Of course, the firm’s strong brand equity has kept its regular residential momentum up. Sales in this segment too rose as its Gurugram project (in the National Capital Region) clocked decent numbers.
True, expenses rose on the back of higher raw material and employee costs. However, buoyant revenue growth translated into a decent operating profit of Rs132 crore that beat Bloomberg’s average estimate of Rs109 crore and was a bit higher than that for the year-ago period.
Sobha stands out among others in the pack due to its strong operating performance. When the industry was in the doldrums, the firm had positive cash flows for the past seven quarters. This feature, along with cautious new launches and stable sales, has fuelled the stock price by nearly 50% in the last three months.
That said, the Sobha stock stands the risk of a temporary blip in the near term. The management has abstained from declaring a sales guidance for fiscal year 2018 as the sector anticipates hiccups on account of new Real Estate Regulatory Authority guidelines and the impact of the soon-to-be-implemented goods and services tax. However, Emkay Global Financial Services Ltd has pegged a 10% growth in sales volumes over the next two years, although performance may improve only from the second half of the current fiscal year.
Sobha relies mainly on premium housing projects. However, the focus in the coming years, with falling interest rates and sops for middle-class housing, is the mid-segment. Will the firm try to ramp up revenues by cashing in on this opportunity? If so, how will profitability and cash flows pan out are the key questions to be answered.