Sobha Limited's rating outlook revised to 'Stable', ratings reaffirmed

CRISIL Ratings has revised its rating outlook on the long term bank facilities of Sobha Limited (Sobha; flagship company of the Sobha group) to 'Stable' from 'Negative' and has reaffirmed the rating at 'CRISIL A+'. The short term rating has been reaffirmed at 'CRISIL A1'.

The outlook revision reflects the belief that Sobha will maintain its credit risk profile over the medium term backed by steady saleability and collections, and gradual reduction in debt, supporting improvement in debt protection metrics.

Sobha witnessed significant recovery in sales and collections in the second half of fiscal 2021, with the group achieving sales of 24.71 lakh square feet (sq ft) valued at Rs 1,960 crore. This reflects increase of 38% and 25% year-on-year (y-o-y), respectively, despite the overall industry witnessing a sharp contraction because of the pandemic. Strong sales momentum and upswing in construction resulted in improvement in collections in the third quarter of fiscal 2021; collections from residential real estate business rose to Rs 664 crore, against Rs 336 crore and Rs 502 crore in the first and second quarters, respectively. The momentum is expected to have continued in the fourth quarter as well. For fiscal 2021, sales volume and value were 4.01 million sq ft and Rs 3137 crores respectively that is an increase of 1% and 13% y-o-y respectively.

The group generated surplus cash flow of Rs 104 crore for the nine months ended December 31, 2020, against negative Rs 660 crore for the corresponding period of the previous fiscal, driven by price increase, cost cutting measures and controlled outflow towards land banking and capital expenditure (capex). Gross debt is estimated at below Rs 3,000 crore as of March 31, 2021, compared with Rs 3,208 crore in December 2019. Net gearing was ~1.23 times as of December 31, 2020, as compared with 1.30 times as of December 31, 2019. The net debt level is expected to continue to reduce going forward as well supported by limited outflows towards land purchases and capital expenditure (capex); net gearing is expected to reduce to 1.1 times in the near term.

CRISIL Ratings expects saleability for the first quarter of fiscal 2022 to be moderately impacted on account of the second wave of the pandemic and resultant curfews/lockdowns by state governments. Nevertheless, demand will be deferred to the remaining quarters of the fiscal, in line with the trend observed in fiscal 2021. Planned launches for fiscal 2022 are unlikely to witness material delay. Furthermore, there have not been any restrictions on construction activity; the group has sufficient labour on site following all Covid-19 protocols.

Given the limited impact on construction, collections from ongoing projects will not be impacted significantly. Receivables stood at Rs 3,127 crore as on December 31, 2020, which covers 79% of the balance project cost to be spent for ongoing projects. Hence, the impact of the current disruptions on cash flow is likely to be limited, unlike the first quarter of the past fiscal when projects had come to a standstill. Having said that, prolonged closures may cause weak saleability, leading to an adverse impact on collections and weakening the credit risk profile of the group. Extent of the second wave, continuation of construction activity without any major disruptions and the ability to maintain operational stability will be closely monitored. The group also has term debt obligation of Rs 778 crore in fiscal 2022, which will be partly refinanced and funded through a mix of unutilised bank lines and cash flow from operations.

The ratings continue to reflect the Sobha group's healthy business risk profile, supported by strong execution capabilities and established brand position, and moderate, but improving, financial risk profile, aided by strong refinancing ability. These strengths are partially offset by high debt level stemming from debt-funded land acquisitions in the past, sizeable debt obligation over the medium term, and exposure to risks and cyclicality in the real estate industry.

Shares of Sobha Limited was last trading in BSE at Rs.458.5 as compared to the previous close of Rs. 463.4. The total number of shares traded during the day was 16726 in over 886 trades.

The stock hit an intraday high of Rs. 468.65 and intraday low of 455.8. The net turnover during the day was Rs. 7711055.

Source : Equity Bulls

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