Debt reduction is key to Sobha’s recovery

The company’s residential strategy will continue, but geographic diversification will also be explored. Investors should note that currently Bengaluru sales account for around 70% of total Sobha sales.

“It helps that Nanganeni has been part of Sobha for a long time and his business growth goals would be consistent with the prior strategy,” an analyst at a national brokerage said on condition of anonymity.

Nanganeni has been associated with Sobha since 2009 in senior strategic and operational roles. Even so, for investors in Sobha stock, maintaining its quarterly selling pace and reducing debt remain the main triggers, the analyst mentioned above said.

“Continued focus on debt reduction remains key,” analysts at IIFL Securities Ltd said in a March 21 report.

Sobha was able to reduce his debt by ₹440 crore in the past two years since its peak in operating cash flow, the report points out.

Its cost of borrowing fell 39 basis points (bps) during 9MFY22, the company said in its December quarter results (Q3FY22). One basis point equals 0.01%. A crucial metric, the debt-to-equity ratio, stood at 1.07x in Q3FY22, down from 1.13x in the same period a year earlier. Sobha previously indicated that she aims to reduce her debt ratio to less than 1x, in the future.

It sold 1.32 million square feet (msf) in Q3FY22. The company is also expected to maintain its quarterly sell rate of 1.3 msf in Q4FY22, analysts said. However, with input costs soaring, its impact on margins and the ability to raise prices without hurting sales remains to be seen. In general, a slowdown in residential demand is a risk for the title.

So far in CY22, Sobha stock has fallen 17%, much more than the 8% drop in the S&P BSE Realty Index. “Sobha’s CFO and Managing Director saw a shift in FY22 causing some volatility in the stock,” said analysts at Jefferies India Pvt. Ltd in a March 18 report.

That said, the search house sees the promotion of internal candidates for both roles as a positive.