Geojit Financial Services has issued an ACCUMULATE rating for Sobha Ltd., setting a target price of Rs 1,802, representing an 11% upside from the current market price of Rs 1,622. Sobha Ltd., a prominent name in India’s real estate market, faced a challenging Q2FY25 with a 32% YoY decline in pre-sales and a 45% drop in sales volume. However, the company remains optimistic, supported by a pipeline of 5.5 million square feet (msf) in launches for H2FY25 and a strong landbank across multiple cities. Despite risks, the company’s premium positioning and anticipated demand recovery make it a viable investment option.

Q2FY25: Key Financial Highlights

1. Decline in Pre-Sales and Volumes:

Pre-sales fell 32% YoY to 0.9 msf in Q2FY25, impacted by limited traction from recent launches.
Sales volume dropped significantly by 45% YoY, signaling a subdued market sentiment.
2. Growth in Revenue Despite Margin Pressure:

Sobha posted a 26% YoY increase in revenue, driven by a 28% YoY rise in completions to 0.9 msf.
EBITDA margins, however, contracted by 192 basis points (bps) to 8%, reflecting rising input costs and operational inefficiencies.
3. Improved Realization per Square Foot:

Average realization surged 56% YoY, partially offsetting the impact of lower sales volume.

Future Outlook and Launch Pipeline

1. Robust Launch Pipeline:
Sobha plans to launch 5.5 msf of residential space in H2FY25, focusing on a diverse range of ticket sizes, from 1BHK to 4BHK, to cater to varied customer preferences. This adds to its extensive pipeline of 19.3 msf, highlighting a strong growth trajectory.

2. Revenue Recognition Potential:
The company expects to recognize revenues of Rs 14,500 crore over the next 4–5 years, with an anticipated margin of 33%, reflecting its premium positioning in the real estate market.

3. H2FY25 Expectations:
With robust inventory in ongoing projects and new launches, Sobha anticipates better performance in H2FY25, driven by improving demand and government initiatives in urban infrastructure development.

Valuation and Investment Metrics

1. NAV-Based Valuation:

Geojit values Sobha Ltd. based on its Net Asset Value (NAV) per share, arriving at a target price of Rs 1,802, implying an 11% upside from the current price.
The NAV computation includes:
Real estate development value: Rs 16,888 crore
Rental assets value: Rs 389 crore
Construction and manufacturing business value: Rs 324 crore
2. Historical Performance and Current Metrics:

The stock has delivered an 80% return over the past year, significantly outperforming the Sensex, which rose 21% in the same period.
Sobha trades at a forward P/E of 72x for FY25E, which, while high, reflects market confidence in its premium real estate offerings.

Risks to Consider

1. Demand Moderation:
As a premium real estate player, Sobha is vulnerable to any slowdown in real estate demand, particularly in urban markets.

2. Regulatory Delays:
Delays in obtaining approvals for new projects could impact the company’s ability to launch planned inventory, affecting revenue visibility.

3. Margin Pressures:
Rising construction costs and increased competitive intensity could compress margins further in the near term.

Technical Analysis: Key Support and Resistance Levels

1. Current Price and 52-Week Range:

CMP: Rs 1,622
52-Week High: Rs 1,802
52-Week Low: Rs 852
2. Fibonacci Retracement Levels:
Using Fibonacci retracement from the 52-week low to the high:

23.6% Level: Rs 1,599 (Immediate Support)
38.2% Level: Rs 1,477
50% Level: Rs 1,327
61.8% Level: Rs 1,177
3. Support and Resistance Zones:

Immediate Resistance: Rs 1,750
Major Resistance: Rs 1,802 (Target Level)
Immediate Support: Rs 1,599
Major Support: Rs 1,477

Actionable Insights for Investors

1. Short-Term Trading Strategy:

Entry Range: Rs 1,600–Rs 1,625
Target: Rs 1,750
Stop Loss: Rs 1,590
2. Long-Term Investment Strategy:

For long-term investors, accumulating the stock at current levels offers exposure to India’s growing urban real estate market.
Suggested Buy Range: Rs 1,550–Rs 1,600
Long-Term Target: Rs 1,802–Rs 2,000
3. Diversified Portfolio Approach:
Pair Sobha Ltd. with DLF Ltd. and Prestige Estates Projects Ltd. to ensure diversified exposure to the real estate sector, balancing premium and mid-market offerings.

Conclusion

Sobha Ltd.’s strategic focus on premium residential offerings, backed by an extensive landbank and a robust launch pipeline, positions it as a strong contender in India’s real estate market. While short-term challenges remain, including margin pressures and slower pre-sales, the company’s long-term outlook remains promising. With an ACCUMULATE rating and a target price of Rs 1,802, Sobha offers an attractive proposition for investors seeking exposure to the high-growth urban real estate sector. Monitoring support and resistance levels will be key to optimizing entry and exit points.