INSTITUTIONAL EQUITY RESEARCH

(SOBHA IN) Sobha Ltd

Recovering sales + positive cash flow = Better-than-expected FY21

INDIA | REAL ESTATE | Quarterly Update 10 August 2020

Top takeaways from Q1FY21  Sobha posted revenue/EBITDA/PAT of Rs 3.5bn/1.9bn/66mn; yoy change of -70%/- BUY (Maintain) 15%/-93% yoy and qoq of -61%/-24%/-87%. CMP RS 230 / TARGET RS 430 (+87%)  We expect operational performance during the remaining nine months of FY21 to SEBI CATEGORY: SMALL CAP be better than Q1FY21.  COVID moratorium interest availed for Q1 was Rs 474mn, which has been COMPANY DATA accounted in gross debt for the quarter. O/S SHARES (MN) : 95 MARKET CAP (RSBN) : 21 Bookings: MARKET CAP (USDBN) : 0.3  Bookings: 0.65mn sq. ft. -39%/-29% yoy/qoq. 52 - WK HI/LO (RS) : 549 / 120  Value terms bookings: Rs 4.88bn, -38%/-30% yoy/qoq. Marginal improvement in average LIQUIDITY 3M (USDMN) : 1.4 realisation of Rs 7,498 psf (+3%/-2% yoy/qoq). PAR VALUE (RS) : 10  Broadly, the southern micro-markets (ex-) performed better than Pune, SHARE HOLDING PATTERN, % GIFT City and Gurgaon for Sobha, indicating that there was better performance for Jun 20 Mar 20 Dec 19 PROMOTERS : 0.1 51.8 51.8 Sobha in areas less impacted by COVID-19. FII / NRI : 51.9 23.4 25.9  sales stood at 0.49mn sq. ft., -35%/-24% yoy/qoq. FI / MF : 51.9 15.5 16.8  Gurgaon sales lagged; stood at 30.7k sq. ft., -54%/-64% yoy/qoq. NON PRO : 30.4 3.4 0.9  Chennai sales stood at 21,000 sq. ft., -46% yoy/qoq. PUBLIC & OTHERS : 10.3 6.0 4.7  , Coimbatore, and micro-markets proved relatively resilient. KEY FINANCIALS Contractual and manufacturing vertical: Rs mn FY20 FY21E FY22E  Revenue stood at Rs 1.27bn for Q1, -63%/-59% yoy/qoq, primarily on account of Net Sales 37,539 23,896 41,003 EBIDTA 11,151 8,722 10,133 lower construction activities and factories remaining shut. Net Profit 2,815 1,358 2,747  Contractual vertical (standalone) revenue for Q1 was Rs 0.9bn, -59% yoy; order EPS, Rs 29.3 14.1 28.6 book remains strong at Rs 23.66bn. PER, x 7.4 15.4 7.6  Manufacturing vertical (standalone) revenue for Q1 was Rs 370mn, -68% yoy – of EV/EBIDTA, x 4.6 5.4 4.4 this, glazing- and metal-works division at Rs 160mn, interiors and furnishing division P/BV, x 0.9 0.8 0.7 at Rs 0.16bn, and concrete products division at Rs 50mn ROE, % 11.6 5.2 9.7 Debt and Cash Flow: Debt/Equity (%) 127.8 112.3 95.5  Net debt remained steady at Rs 30.21bn (includes Covid moratorium interest CHANGE IN ESTIMATES availed at Rs 474mn), – reduction in debt in Q1 was offset by impact of moratorium __Revised Est. __ __% Revision__ availed. Rs bn FY21E FY22E FY21E FY22E Revenue 23,896 41,003 0% 0%  Cash flow: Weak cash inflows due to COVID-19-led shutdowns, but it remains EBITDA 8,722 10,133 0% 0% positive at operating and net levels. PAT 1,358 2,747 0% 0%  Operational cash inflow was Rs 5.5bn, -32% yoy, -42% qoq. EPS (Rs) 14.1 28.6 0% 0%  Cash flow from residential vertical for Q1 was Rs 3.36bn, -36% yoy/-44% qoq.  Cash flow from the contractual vertical for Q1 was Rs 2.1bn, -25% yoy/-39% qoq. Dhaval Somaiya, Research Associate

 Total cash outflow was Rs 4.54bn, -42% yoy/-38% qoq; overall reduction in cash Vaibhav Agarwal, Research Analyst outflow was led by lower construction activity and factories remaining closed.  Net operational Cash Flow for Q1 was Rs 0.92bn; better because of lower ad-and- marketing expenses and central overheads.  Net cash flow was Rs 486mn (against cash loss of Rs 3.1bn yoy; profit of Rs 0.7bn in previous quarter). Net cash flow remained positive because of no land payments and no capex spends in Q1. Outlook and valuation: We maintain our estimates for FY20/21. We have assumed (as laid out on page 3) the bookings write backs to be spread over FY17-20 and re-bookings over FY21- 22. We expect sales momentum to improve in coming quarters and achieve near normalcy by Q4FY21-Q1FY22. We continue to believe that with its strong brand name, execution capabilities, access to liquidity and strong project pipeline, Sobha remains better placed for possible turbulent times ahead, and should be a beneficiary of an expected pickup in consolidation over the medium term. We continue to maintain BUY.

Page | 1 | PHILLIPCAPITAL RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.

SOBHA LTD QUARTERLY UPDATE

Conference call highlights:

 Level of inquiries are back to Pre-COVID levels yet deal closures aren’t yet back to normal levels, expects Q2’s performance to improve.  Bangalore sales in July were lower than June due to one-week lockdown and non-working Sundays as per state government guidelines.  and Gurgaon micro-markets have performed better in July.  From 30-35% last quarter, the labour force has gone up to 60% in July. Normalcy should be restored by Q3.  Major cost saving was because of savings on employee benefit costs primarily due to: (1) senior directors not taking salary during the quarter, (2) salary cuts and (3) some employees being put under furlough  Sobha plans to service debt from September.  Q1 trends indicate a lower demand for smaller-ticket-size housing, sub Rs 10mn and a better demand for higher-ticket-size housing owing to favourable interest rate environment  Manufacturing vertical: (1) Mattresses are being sold online and witnessing a reasonable recovery. (2) Interiors-and-furnishing division is currently seeing 60% pre-COVID run-rate. (3) Glazing-and-metal-works division is at around 2/3rd. (4) Concrete blocks division is at c.50%.  Contractual vertical: Orders from Infosys for this year haven’t started yet, so in the near term, the contractual vertical is likely to be impacted.

Assumptions: For taking 2mn sq. ft. of contingent cancellations into account* Particulars Total Probable cancellations (mn sq. ft.) 1.93 Total Probable cancellations (Rs bn.) 12.4 Amount already collected (Rsbn.) 2 Amount received in form of penalty of cancellations (Rs bn.) 0.5 5% of balance 10.4bn Blended price appreciations (Rs bn.) 0.5 5% of balance 10.4bn Total collected (Rs bn.) 3 % recovered from cancellations/price appreciation + Amount already collected 25% Balance sale written back (75% of 1.93mn sq. ft.) 1.45 Write back assumptions mn. sq. ft. 2017 10% 0.15 2018 20% 0.29 2019 30% 0.44 2020 40% 0.58 *Although these cancellations are expected to drag performance, we believe disclosure of these probable cancellations is a sound reporting practice Source: Company, PhillipCapital India Research

Upcoming annuity portfolio breakup Total Leasable Sobha Share of Leasable Project Name Status Area(in sq.ft) Area(in sq. ft) Sobha City Mall, Thrissur Completed 3,38,493 2,58,247 One Sobha, Bangalore Completed 2,25,334 1,50,974 Sub-Total 5,63,827 4,09,221 Sobha City, Bangalore Forthcoming 58,320 58,320 Bhoganahalli, Bangalore Forthcoming 74,699 74,699 Yadavanahalli, E.City Bangalore Forthcoming 2,37,838 1,81,946 CVS Tech Park, Bangalore Forthcoming 65,385 65,385 Sub-Total 5,63,827 4,09,221 Grand Total 10,00,069 7,89,570 Source: Company, PhillipCapital India Research

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SOBHA LTD QUARTERLY UPDATE

Operational Highlights

Segment Wise Segmental Breakup 1QFY21 1QFY20 4QFY20 Real Estate Operations 2,229 8,317 4,307 Change (% yoy) -78% +131% +47% %qoq -73% -18% -25% Contracts & Manufacturing Revenue 1,271 3,066 5,090 Change (% yoy) -65% -12% +56% %qoq -75% +41% +52% Source: Company, PhillipCapital India Research

Cash Flow Cash Flow details (Rs m) 1QFY21 1QFY20 4QFY20 Real Estate Operations inflow 5,466 5,208 9,452 Contractual & Manufacturing inflow 3,359 2,799 6,001 Total operational Cash inflow 2,107 8,007 3,451 %qoq -38% -1.3% 18% Real Estate Project Expenses 2,091 4,310 3,825 %qoq -45% +7.6% -4% Contracts and Manufacturing expenses 1,777 2,831 2,482 %qoq -28% -7% -18.2% Advertising & Marketing Expenses 127 225 188 Total operational Cashflow 927 55 7,311 %qoq -56% -95% -1.4% Total Financial Outflow 421 823 999 %qoq -58% -10% 7.8% Finance Cost 379 722 924 %qoq -59% -7% 6.9% Capital Outflows 20 2402 435 Change (% yoy) -99% 68% -25% %qoq -95% +312% -45.7% Land Payments 0 1537 Dividend Including Tax - - - Capex- General 0 84 70 Capex- Commercial Real Estate 2 703 4 Net Cash Flow 486 (3,181) 707 Debt to Equity Ratio 1.3 1.19 1.23 Net Debt 30,230 26,625 30,230 Average Cost of borrowing 9.65% 9.8% 9.69% Source: Company, PhillipCapital India Research

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SOBHA LTD QUARTERLY UPDATE

Financials

Income Statement Cash Flow Y/E Mar, Rs mn FY19 FY20 FY21e FY22e Y/E Mar, Rs mn FY19 FY20 FY21e FY22e Net sales 34,421 37,539 23,896 41,003 Pre-tax profit 4,483 4,330 2,089 4,226 Growth, % 24 9 -36 72 Depreciation 623 723 911 885 Total income 34,421 37,539 23,896 41,003 Chg in working capital 12,546 -3,849 -24 -2,050 Raw material expenses -10,856 -7,216 -5,018 -9,513 Total tax paid -4,662 957 -731 -1,479 Employee expenses -2,359 -2,464 -1,454 -3,801 Other operating activities -8,643 -291 2,484 4,001 Other Operating expenses -14,473 -16,708 -8,702 -17,555 Cash flow from operating activities 4,348 1,870 4,729 5,583 EBITDA (Core) 6,733 11,151 8,722 10,133 Capital expenditure -667 -1,507 -154 -1,279 Growth, % 29.6 65.6 (21.8) 16.2 Chg in investments -627 -290 0 0 Margin, % 19.6 29.7 36.5 24.7 Other investing activities -1,367 735 -916 209 Depreciation -623 -723 -911 -885 Cash flow from investing activities -2,662 -1,061 -1,070 -1,070 EBIT 6,110 10,428 7,811 9,248 Free cash flow 1,686 809 3,659 4,513 Growth, % 31.3 70.7 (25.1) 18.4 Equity raised/(repaid) -5,408 2,021 1,575 2,459 Margin, % 17.8 27.8 32.7 22.6 Debt raised/(repaid) -2,740 2,330 0 0 Interest paid -2,362 -6,816 -6,500 -5,800 Dividend (incl. tax) -284 -288 -288 -288 Other Non-Operating Income 348 288 348 348 Other financing activities 7,079 -4,198 -8,836 -4,499 Pre-tax profit 4,483 4,330 2,089 4,226 Cash flow from financing activities -1,354 -134 -7,549 -2,328 Tax provided -1,512 -1,515 -731 -1,479 Net chg in cash 332 674 -3,890 2,185 Profit after tax 2,971 2,815 1,358 2,747 Net Profit 2,971 2,815 1,358 2,747 Growth, % 37.0 (5.3) (51.8) 102.3 Valuation Ratios Net Profit (adjusted) 2,971 2,815 1,358 2,747 FY19 FY20 FY21e FY22e Unadj. shares (m) 95 96 96 96 Per Share data 31.3 29.3 14.1 28.6 Wtd avg shares (m) 95 96 96 96 EPS (INR) 37.0 (6.4) (51.8) 102.3 Growth, % 235.1 253.3 269.7 295.3 Book NAV/share (INR) 31.3 29.3 14.1 28.6 Balance Sheet FDEPS (INR) 37.9 36.9 23.6 37.8 Y/E Mar, Rs mn FY19 FY20 FY21e FY22e CEPS (INR) 96.7 (24.7) (13.7) 48.8 Cash & bank 1,771 884 3,193 3,208 CFPS (INR) 3.0 3.0 3.0 3.0 Debtors 3,271 3,605 2,291 3,932 DPS (INR) Inventory 65,173 67,045 76,899 69,999 Return ratios 5.4 8.9 6.9 6.9 Loans & advances 5,694 8,310 1,775 6,135 Return on assets (%) 13.3 11.6 5.2 9.7 Other current assets 17,185 14,323 13,552 20,256 Return on equity (%) 19.1 37.6 26.2 27.5 Total current assets 93,095 94,167 97,711 1,03,529 Return on capital employed (%) Investments 5,057 5,347 5,347 5,347 Turnover ratios 0.9 1.0 0.5 0.9 Gross fixed assets 4,759 7,042 7,759 9,259 Asset turnover (x) 0.3 0.3 0.2 0.3 Less: Depreciation -1,918 -2,071 -3,545 -4,651 Sales/Total assets (x) 12.2 11.6 6.1 9.3 Net fixed assets 2,841 4,971 4,214 4,608 Sales/Net FA (x) 0.2 0.3 0.7 0.3 Non-current assets 5,289 5,363 5,363 5,363 Working capital/Sales (x) 34.7 35.1 35.0 35.0 Total assets 1,07,391 1,10,123 1,12,910 1,19,123 Receivable days 691.1 651.9 1,174.6 623.1 Inventory days 149.3 132.3 141.7 132.8 Current liabilities 84,382 82,647 84,169 87,923 Payable days 67.7 100.8 253.8 127.3 Provisions 555 269 269 269 Working capital days Total current liabilities 84,937 82,916 84,438 88,192 Liquidity ratios 1.1 1.1 1.2 1.2 Non-current liabilities 163 2,895 2,584 2,584 Current ratio (x) 0.3 0.3 0.3 0.4 Total liabilities 85,100 85,811 87,022 90,776 Quick ratio (x) 3.1 1.6 1.3 1.7 Paid-up capital 948 948 948 948 Interest cover (x) 109.6 127.8 112.3 95.5 Reserves & surplus 21,343 23,364 24,939 27,399 Total debt/Equity (%) 101.6 124.2 100.0 84.2 Shareholders’ equity 22,291 24,312 25,888 28,347 Net debt/Equity (%) Total equity & liabilities 1,07,391 1,10,123 1,12,910 1,19,123 Valuation 7.0 7.4 15.4 7.6 PER (x) 0.2 (1.2) (0.3) 0.1 Source: Company, PhillipCapital India Research Estimates PEG (x) - y-o-y growth 0.9 0.9 0.8 0.7 Price/Book (x) 1.3 1.4 2.0 1.1 EV/Net sales (x) 6.4 4.6 5.4 4.4 EV/EBITDA (x) 7.1 4.9 6.0 4.8 EV/EBIT (x) 31.3 29.3 14.1 28.6

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SOBHA LTD QUARTERLY UPDATE

Stock Price, Price Target and Rating History 700

600

B (TP 620) 500 B (TP 620)

B (TP 620) B (TP 600) 400

300

B (TP 430) 200

100

0 M-18 J-18 J-18 S-18 O-18 D-18 J-19 M-19 A-19 J-19 J-19 S-19 O-19 D-19 J-20 F-20 A-20 M-20 J-20

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. We have different threshold for large market capitalisation stock and Mid/small market capitalisation stock. The categorisation of stock based on market capitalisation is as per the SEBI requirement.

Large cap stocks Rating Criteria Definition BUY >= +10% Target price is equal to or more than 10% of current market price NEUTRAL -10% > to < +10% Target price is less than +10% but more than -10% SELL <= -10% Target price is less than or equal to -10%.

Mid cap and Small cap stocks Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15% SELL <= -15% Target price is less than or equal to -15%.

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PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance. This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources,

Page | 5 | PHILLIPCAPITAL INDIA RESEARCH

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SOBHA LTD QUARTERLY UPDATE

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