Sobha: Stable demand; strong growth. Maintain BUY

Amidst noises of IT slowdown and redundancies, we visited Bengaluru to understand ground level impact of the same. We met property consultants, companies, and financiers to gauge demand undercurrent at current property prices. Over the FY13-21 period, property prices increased from INR 6,500/sqft to INR 7,000/sqft, largely remaining flat with 1% growth CAGR. Post-Covid, in the past five years, we have seen prices increasing from INR 7,000/sqft to INR 12,000/sqft at 14.4% CAGR. Our discussion with consultants suggests prices have now hit the roof and investors may slowly depart from real estate investing. This is also evident from the fact that there are financing schemes like pay 20% now, followed by a two-year payment holiday before EMI starts again. We have seen an unlisted NBFC giving an attractive product like fixed low EMI during period of construction and then regular EMI when OC comes. These kind of schemes have driven demand in the last 3-4yrs. Bengaluru has been largely an end-user market. The recent years’ price appreciation has been mostly due to investor interest, which may start waning off as prices peak. Developers with high investor share in presales will get impacted the most. For end-user driven and premium housing developers like Sobha, the impact should be minimal. Our interactions suggest that Sobha enjoys strong brand equity owing to high quality developments, larger layouts, community living, and more end-user driven demand. Launch momentum remains strong whilst sustenance sales seem to have gathered pace with attractive payment plans (price-adjusted). Sobha seems to be on track with INR 100bn+ new launches in H2FY26, setting the stage for FY26 presales to cross INR 100bn. Valuation comfort, strong FCF generation, and likely robust growth are key near-term triggers for further rerating. Given the robust launch pipeline, strong balance sheet, and stable cash flows, we maintain BUY with a TP of INR 2,459/sh.

Pricing near peak, end-user market now, investor exodus: We saw consistent views across the real estate value chain that prices are near their peak, investors have no upside on new purchases and end-users are now the key demand drivers. Premium housing demand continues to see strong absorption as high income end-users are preferring brands and gated communities as these attract strong community living. Rents are increasing for projects like Sobha Dream Acres, which hardly has 10% tenants and 90% end users. Sobha pricing is 15-20% higher than peers and this has been a factor in low investor demand and more end-user ownership. Property prices nearing peak remove the urgency to buy, resulting in elongated sales cycles. Developers have now accepted this and are trying to come up with financing holidays to attract buyers. A large part of Sobha’s portfolio is premium and the least impacted.

Prices acceleration may pose challenges, product differentiation key: Demand may further consolidate into handful of branded players as buyers may see better value in deep pocketed players with larger layouts, community living, better amenities and financing plans. Apartment sizes have come down by 200sqft to 1,550sqft in Bengaluru for Sobha to address higher ticket size issue. With share of investors reducing and limited financial capital with end users, there will be delay in deal closure, unorganized players may see a larger impact as their target customers are mid-premium and impacted most by property price inflation. Branded players still have an advantage as their target audience are high income, upgrade customers, or buying from wealth as they seek better living.

Well-poised for growth: SDL is expected to clock INR 100bn+ in sales for FY26 (+70% YoY), supported by: 1) a strong launch pipeline in high-growth markets (Bengaluru, NCR, and Pune) and 2) brand-led pricing power and strong execution. While near-term P&L margins may be impacted by CCM accounting, improved execution ramp-up, self-owned land share, and pricing strength should enable embedded profitability in FY26. SDL remains a top pick in the southern premium housing space, with strong recall, expanding geographic footprint, and improving financial metrics.

Disclaimer : This content is only for informational purpose. It does not make any specific recommendation to act or invest. The recommendations given above are general in nature. Do not make any investment based solely on the recommendations given above as the recommendations are not based on your unique risk tolerance and investment objectives.

Source: HDFC Securities Institutional Equities

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