Sobha shares jump over 19%, hit 52-week high. Here's why

Shares of Sobha jumped over 19% to hit their 52-week highs of Rs 1,334.70 on the NSE on Thursday after domestic brokerage Motilal Oswal picked the real estate company as its top idea for FY24 and revised its price target to Rs 1,400, implying a 25% upside in the counter.

Motilal's review of the stock comes on the back of a 10% rally on Wednesday. In the last two sessions, the stock has clocked gains of over 30%.

The brokerage report highlighted the company's focus on sustainable growth with healthy cash flows and profitability.


"After underperforming its listed peers on pre-sales growth over FY21-23, we believe Sobha is set to outperform in terms of growth given its focus on unlocking its vast land reserve and exploring external growth opportunities through its healthy balance sheet," the brokerage note said.

The outperformance is also expected to be driven by improvements in profitability and further visibility in the monetisation of some of its large land parcels in Bengaluru that could lead to a re-rating in its implied land valuation, the Motilal note said.

However, Motilal has also flagged key risks associated with the above target price, including a slowdown in residential absorption and a delay in the monetisation of large land parcels among other things.

The multibagger stock has given returns of 131% over the last 12 months which is higher than the Nifty Realty index and broader Nifty at 94% and 19%, respectively.

Motilal said that the stock is trading at 6.5X its FY25E EV/EBITDA, which is a 25-40% discount to its comparable midcap/smallcap peers Prestige Estates Projects, Brigade Enterprises, Mahindra Lifespace Developers and Sunteck Realty.

Top 5 triggers:
1) The company delivered 30% CAGR in pre-sales over FY21-23 driven by strong demand tailwinds, increased launches, and rising prices. Volumes saw a CAGR of 20% during the period, aided by a high contribution from NCR, GIFT City, and Hyderabad. Growth in Bengaluru was in line with industry growth.

2) Sobha reported a 12% CAGR in pricing during the period, led by strong appreciation in markets like NCR (+21%), GIFT City (+16%), and Pune (+10%).

3) Motilal Oswal expects Sobha to scale up launches to 9-10 million square foot by FY26, which will likely lead to a 25% CAGR in pre-sales to Rs 10,000 crore through FY23-26.

4) The management focussed on bringing down the leverage over the last three years, which further intensified after Jagadish Nangineni took over as MD and CEO in March 2022. The company intends to restart investments in land, given healthy cash flows. The company’s OCF could increase to Rs 1,300 crore by FY26.

5) Contracts margin stabilised, residential margins to improve from FY25.

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