Key takeaway: Sobha’s operating performance stayed strong in 3Q as evident in an Op. CF surplus driven net debt decline of 4% QoQ/11% YoY to a near 3-year low. Pre-sales performance was also good, driven by core Bangalore. Management is confident of accelerating new launch pace over next ~5 quarters to take advantage of the strong housing markets. We readjust our target multiple, driving PT lower to Rs 1,025. Maintain ‘buy’ as the housing upcycle unfolds.

3Q P&L below estimates. Sobha’s 3Q net profit of Rs 0.33 billion, -32% QoQ/ 51% YoY, was below estimates on real estate revenues miss. Revenues, at Rs 6.9 billion, -16% QoQ/-1% YoY, were a miss as real estate revenues -32% QoQ/-4% YoY at Rs 4.5 billion, were below estimates on lower project deliveries. Contract and manufacturing revenues were 30% QoQ/ 1% YoY to Rs 2.4 billion. We note the lumpiness in real estate project revenues will take time to smoothen and company highlighted a large Rs 78 billion of pre-sales yet to be recognised as revenues.

Bangalore drives sales performance. Sobha’s 3Q pre-sales (gross, pre-declared) of Rs 10.5billion, 18% YoY/ 2% QoQ were the second highest ever. The core Bangalore market sales volumes at 0.96m sf ( 20% QoQ/ 22% YoY), were the highest ever. The non-Bangalore sales (-34% QoQ) were impacted due to weather and Covid-related challenges in the Kerala market. Gurgaon ( 97% YoY) also did well.

Positive outlook on resi markets. Launch guidance increased. Strong performance of the Bangalore market has led the company to increase its launch pipeline in the city by 40% to 8.3m sf, in the near term. Overall launch pipeline of 13.7m sf/17 projects, spread across six cities, should help maintain sales momentum as management hopes to launch these projects by FY23-end.

Even as the third wave has led to some loss of momentum in pre-sales in the key Bangalore and NCR markets; management expressed hope of recovering the momentum by quarter- end. Strong demand is being seen across geographies and ticket-sizes. Management also mentioned that enough price hikes have been taken to tide over the impact of higher input costs.

Strong cash flows generation, more deleveraging ahead. Sobha’s real estate cash inflows were up 16% QoQ/27% YoY to a record Rs 8.4billion. 3Q Op.CF of Rs 2.1billion was 18% QoQ/ 15% YoY to a 3-quarter high. There were some inflows recorded from a land deposit paid back; which led to negligible net spends on capex. Net-debt declined by Rs 1.2billion QoQ to an 11-quarter low of Rs 26.5billion. Gearing is now down to an 15-quarter low of 1.07x and management expects cashflow generation to drive net gearing below 1.0x in 1-2 quarters; and likely lower going ahead.

Target price of Rs 1,025 (1.090).