Sobha Limited (SOBHA) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome to India Morgan Stanley Conference 2022. I am [ Trisha ]. I'm part of the property team at Morgan Stanley. And today, we have with us the management team of Sobha Limited. We have Mr. Jagadish, who is the Managing Director; and Soumyadeep, the Head of Investor Relations. Welcome to you, sir. So for today's discussion, why don't we begin with some opening remarks, and then we can open up the floor for Q&A. Over to you, sir.

Sure. Thank you. Thank you, [ Trisha ], for arranging this virtual meet. As all of you know, that Sobha has been known for world-class quality developments and products, whether it's residential homes, contractual projects, manufactured and retail products, interiors, metalworks, concrete products, recently furniture and furnishings. We'll -- our current plan is to continue on the path to deliver these -- the same focus and passion. We intend to pursue growth in a disciplined manner, which is a disciplined growth strategy, striking a good balance between growth, profitability and financial gearing. As you would have seen last year, we have done, from a sales perspective, about 4.9 million square feet and -- which is roughly about 22.5% over the previous FY '21. And we think that we will continue on elevated sales level with new launches -- with pursuing new launches and selling from the existing project inventory. In the Contractual and the Manufacturing side also, I think that the next couple of years seem to be on a growth path, given the pipeline that we have in terms of projects and the order book that we have. The third, with respect to the cash flow that we have been focused on in the last couple of years, we had been very rigorous in terms of debt reduction and which you can see the result, which we have reduced the debt -- overall debt by about INR 685 crores in the last 2 years. And I think we are reasonably better in terms of financial gearing, which is we are at now debt to equity at 0.93. And we will plan to reduce that even more as we continue our -- the operations. The focus now will be more calibrated in terms of balance between both debt reduction and the growth investment that we will need to do to pursue a higher volume going forward, both in resi and in other businesses. So that's -- so overall, the market looks very good in terms of the demand. Our leading indicators seem to be -- continue to be promising. There has been a concern in terms of -- in the costs as well, which proactively we have addressed it through price hikes in the last 8 to 9 months, which we think that the market has taken it well, and the customers seem to be continuing to express interest and we continue to do sales in a stable manner. So the overall demand environment seems to be reasonably good as of now.

Thank you, Jagadish. We see Yogesh Bansal, the Chief Financial Officer, has joined us. Hi, Yogesh and good afternoon. I think Yogesh you're on mute.

Hello, [ Trisha ]. Good afternoon, [ Trisha ]. Sorry, sorry, I was [indiscernible].

No worries. So that was like a good opening remark. The floor is now open for Q&A. If anybody wishes to ask a question, they can raise the hand and go ahead. Hi, [ Prateek ], yes, please go ahead.

My first question is on that you're seeing that the demand trend is sustaining at this point in time. So well you said that the [ run rate ] that you saw in Q4, is it like the similar run rate that you're seeing? Or is it better than that?

[ Prateek ] that seems to be consistent. See, if -- what we have from the way we looked at it, emphasis in this financial year is going to be more on the absorption of the calibrated price increases that we have done or if required, we will do across all projects in future. The effect of the same we thought that it will be clear in a quarter 2. And also, there are other factors also playing in increase in interest rates as well. Right now, the prioritization for us between significant volume growth versus margin protection, would choose the latter considering that we are operating on a higher base. The goal is to have a good balance of growth and profitability. Having said that, the -- if I look at the -- even the last couple of months, and the overall leading indicators are still very stable. So I think we are good for the time being. But we need to be very watchful on how these new developments are going to affect in future. So which I think will become clear in a quarter or 2.

Okay. Okay. And what's the quantum of price increase that you have taken?

See, last year, on an average, we have done a price increase of about 6% and this calendar year, also, we have done certain price hikes. And I think this price -- this year also, we would do a price increase of about roughly similar, which would largely cover our cost of construction for the future sales.

Okay. Okay. Coming to your new launches, you have a very good pipeline this year. So if you can just help us understand the time line of these launches, will it be a bit of back ended in H2? Or do you have some launches planned in H1 also?

Yes. So we have, like in our investor presentation, we have clearly mentioned that we have about -- new launches of about 13 million square feet. So that, I think, largely is in the next 12 to 15 months, close to 8 million to 9 million square feet, we will be able to launch. And it is not back ended. It's largely -- we have a continuous pipeline for that. So this quarter, we have launched certain projects. We will launch new projects in the subsequent next quarter also, we have a pipeline for that. So quarter-on-quarter, we have -- I think it's not like -- I would not say it's exactly even, but we will keep seeing new launches every quarter.

Fair point. In the earnings call, if I -- correct me if I'm wrong, you said that the sales that you did last year that was I think one of the highest sales that Sobha achieved. This year, on that base, being a very high base, growing on that base seems a bit difficult. Correct me if I'm wrong there. How are you thinking about that? And what kind of growth that you are targeting this year on a full year basis?

So like I just mentioned, [ Prateek ], if this -- in this year, if I have to pick between significant volume growth versus absorption of price and margin protection, would choose the later because we are operating on a high base, our cash flows are very steady. The -- our ability to reduce our debt or incrementally invest is good. So I would not chase very high volume just for the sake of it, where there is -- we are still -- I'm still [indiscernible] a little bit about the inflation till the time there is some kind of stability there. I would choose that rather than this. So the demand seems to be, like I mentioned, very stable. So I think that if I can achieve far higher, nothing like it, but my priority is this as well. So given that we have a balance -- I would like to have a balance of both growth and profitability. This financial year, this is what I would like to do. But at the same -- that's very short term, right? But our goal -- if you look at how we have been performing, we have been consistent at a yearly sales run rate of about 4 million square feet, right? And then we jumped to about 4.9 million square feet. And over the next 3 to 4 years, we would like to reach a consistent volume of about 7 million to 8 million square feet. And for that to achieve -- it's -- there would be certain kind of, of course, rigorous execution of bringing from a land stage to the project stage and also some incremental investments going forward. And that we are not depending on any kind of external capital. So hence, our focus on cash flow is also very -- both cash flow and margins is also very high.

And as you said that your target for next 3 to 4 years is to take this number to 7 million to 8 million square feet. So I believe that, that can happen on your own land bank. You don't need to acquire additional land bank for that. Is that understanding correct?

So [ Prateek ], there, we will see -- we have existing land bank and certain deals that we have already done earlier. So that aside, we will keep doing new business development. We will keep acquiring. It's an ongoing business for us. So it's not necessarily that everything will come from only from the existing land bank. So the existing land bank, we have started monetizing it. And in order to monetize, we will have to do a bunch of things, which is including incremental investment, some consolidation, some activities to make sure that they come to the best use. So that's an ongoing process. So it's not necessary that it's only from the existing land bank, but it will be a combination of both going forward, like we are doing even today.

Okay. So your existing land bank, what is the near-term monetizable? I think Hoskote in Bangalore is something that you're looking at? Any additional land that you can highlight on which monetization can happen?

Yes, [ Prateek ]. We have -- in one of the launch pipeline that we have, we have -- we are coming up with a project of about 3.4 million square feet in Panathur. That's from an existing land bank. Hoskote, we are consolidating and hence, in a couple of years, 2 to 3 years, we will be able to start launching projects there as well. And we are -- in small bits and pieces, we are just about to launch another small project, which is again in the Southeast Bangalore from existing land bank. So there are -- so there are a bunch of activities, which are -- wherever we are able to do launches on projects, so we are actively taking those up. And wherever they require some kind of incremental investment and for consolidation that also we have initiated, which I believe that given that we had these land parcels for quite some time, and there are some sticky issues, which we have started resolving those. In another 2 to 3 years, we should be able to start doing that as well. So which I think we are fairly comfortable in terms of how to address both the existing land bank and how to monetize it through project, through best use of the land. And second is also through new launches. So Hoskote is definitely on the radar. You will start seeing some action in a couple of 2 to 3 years in the form of project. But meanwhile, we have enough inventory, both in existing and as future launches. If you look at our overall inventory, both from existing inventory in the current projects, unreleased inventory plus new launches, all put together, it's in the north of close to -- I mean, 20 million-plus square feet. So hence, I think it's about -- we are at a run rate of even 5 million, 6 million square feet. We are there for another -- inventory level is reasonably there. So it's a matter of how we continue to do new -- continue to monetize our existing land bank and also new business development such that we can have that in a disciplined manner.

Okay. And coming to the incremental investment that you've just spoken about. What could be the kind of outlay that you have in your mind that you will be able to spend maybe on an annual basis or maybe over the next 2, 3 years, given the balance sheet spend that we have on the debt and equity ratios that we are [ currently ] at? So how are you thinking about that? How much incremental investment can you make out of it on an annual basis?

So for the existing land bank, specifically if you ask the past, then we would need about INR 30 crores to INR 50 crores a year in the next couple 2 to 3 years.

INR 30 crores to INR 50 crores?

Yes.

If anybody has any questions, you can unmute yourselves then go ahead. Meanwhile, the questions are being formed, maybe you could answer something on cost inflation? That is another hot topic right now. So on cost inflation, could you further elaborate on what are the pressure points right now? Is it more towards material or otherwise? And a follow-up would be, you said you would be taking some price increases. Do you think it's going to hurt volumes on the forward? What are your views on that?

Yes. So the cost increases we had seen in the last 12 months, if I look at it, on a typical project. If I have to launch a project 1 year before and today, there has been an increase of -- clear increase of 15% to 16% for us. And that's from -- largely from the material hike, the commodity prices that we have seen, which has -- it seeped through various other materials that we purchase, not just the core material, but also the downstream materials also, downstream material or equipment that we use. So that is one. Second is also -- and it's looking like a lot of that cost can be very sticky in terms of pricing. When I say that, then I mean the commodity prices have pulled off a little bit, like steel has come down a little bit. The cement prices are largely stable or slightly lower. But these contributed for a little bit reduction, but the majority of the other price increases that have occurred, I think those are going to be largely sticky. That's number one. Number 2 is, we are also not yet factoring in a lot of -- we have not factored in a lot of wage inflation that has -- that has start -- which we started already seeing. So hence, we have already budgeted for a higher wages or, let's say, both in all types of works and activities that we do. So since we are a backward integrated firm, our visibility to costs are pretty much in real time. So hence, our ability to understand and probably address those cost increases is -- can be a little bit more proactive. For example, we have done these price increases much before any probably most of the players in the market. And we have done it because it became very clear as we real-time estimate all our costs, that there has been a significant increase and hence, we increased those. Second, we also are trying to -- in parallel, trying to address the cost increases by 2 -- I mean, 2 to 3 ways, which is one is we are looking at alternate materials. We're looking at far more efficient design. Most of our design is in-house. We still are going for peer reviews and seeing if there can be more economies that we can achieve. In some cases, we have done it. So those cost efficiency measures will really help us. So we are rigorously focused on cost right now. so that it's -- because that's the much bigger factor for us going forward rather than just the demand, which we think is fairly stable.

That was very helpful. Let me just go back to the audience and see if anybody has any questions at this point.

This is [ Vihang ] from [ Zapa ]. Just one question from my side. Most of my questions have actually been answered. I mean I recall that a while back, you had mentioned that 65%, 70% of your clientele is mostly like IT professionals in Bangalore, right? So I mean, there was a whole -- like demand from the IT side was actually very buoyant over the last couple of years, which we sort of see it to be softening a bit. So from your side, do you see that as well that IT demand, which is really buoyant a couple of years back is kind of softening now? Or do you still see it to be the same?

Good question, [ Vihang ]. I mean, the -- it's very clear that a lot of factors have contributed to the good demand increase, particularly very high job market. So hence, consumer confidence was extremely high, combined with, of course, high savings that people have done during COVID, low very -- and probably the lowest-ever interest rates and very little supply in the market has contributed a significant growth for us. Now when I still look at the leading indicators, like a number of people visiting our sites, number of inquiries, so those have -- so we -- last year, we were running at a run rate of about the -- last quarter -- I mean, in Q4, we ran at a run rate of about 4,000-plus site visits to all our sites. And even in the last few months, we have seen that, that has not tapered off yet. So I mean, until I don't see that kind of, I mean, the leading indicators drop off, I think, it's fair to say that right now that doesn't seem to affect as much. But having said that, the lowering of the hiring or, let's say, the frenzy that we had seen in hiring is tapering off. That's all anecdotal. We do not have real data on it, but it's definitely there. And if you look at Bangalore as a market, from employment perspective, it consists of IT services, then there is a bunch of KPOs, BPOs and also consumer tech recent ones and also a lot of MNCs that operate out of here. So there I do not see the same level of what you read in the newspapers, which is related to -- particularly with start-up tech issues. So that I don't think that is seen in the actual high-volume jobs, which is in services and in the MNC space. So I think -- and majority of our demand comes from there as well. So considering that, I think we are okay. But you never know, we'll have to watch that carefully. But as of now, it doesn't look to be too different from last quarter.

If I just may extend the previous question a bit and then if you could give a deeper color on the demand outlook from different geographies. Your key markets, Bangalore, you already spoke about, but how are you -- how are the demand trends working in Gurgaon and other markets, Kochi, et cetera? Any color on that?

So in NCR, which has contributed -- which has seen a significant rise in the last FY '22, it seems to be that our projects, they have continued to see similar demand. And largely, it's coming -- yes, you're right, that it's not a similar customer profile, but this action of good job creation and strong consumer confidence is there even in non-IT or other services sector also. And hence, that seems to be driving even for us. See in Gurgaon, the kind of the projects that we have on Dwarka Expressway that's majority of the customers are actually end users, again, and that too from Delhi. And Delhi having a very huge population base, which is of 16 -- 17 million people. So the incremental demand there is all flowing to peripheral locations, like Gurgaon. And this being closer to Gurgaon -- so hence, we are seeing demand from both from Gurgaon itself and also from the Delhi side as well. So it's a good mix. So hence, the overall base of -- customer base is much larger than if you are deep inside in Gurgaon. So that's been very helpful to us previously, and we have seen a heightened activity there. Now coming to other cities, which is like we have a project in Pune. Pune also has done similarly very well considering that there has been an increased economic activity in Pune, similar factors like it's in Bangalore. When we look at other geographies, like Chennai, Chennai, although it seems that there is a good pickup in the job market there as well, but it's not translating to the kind of demand that we have expected. So it's been largely stable or we did not see any significant spike there. And Kerala. Kerala, again, there is no big trigger like we have seen in Bangalore, Pune or NCR. So there also, it seems to be stable. And these are the markets that we have seen. And of course, we have also seen in GIFT City, we have a small project there. That also has seen a good uptick in the volumes.

Got it. Just getting back to the audience and checking if anybody has any questions at this point. If not, maybe I can ask one final from my end. I could -- I would just want to go back to my cost inflation question. And I would want to understand your views on thoughts regarding the mortgage rate movements. And do you think that is going to affect -- that is going to impact demand per se? Any risk from a customer perspective?

The interest rate increase has occurred recently. After the 0.4% increase, we have not seen significant change in the way a customer has been thinking. And second, even in -- with the recent 0.5% increase, I think that percentage increase probably is with the other side of the demand growth and confidence that we are looking at. Probably it might not dent or dissuade customers as much. But I -- but that's something that we have to wait and watch. I don't have enough data to see how it's going to -- how much -- how and how much -- how it's very clear, probably it will have a negative effect, but how much -- I don't think it should have so much impact considering that the outflow will typically on a per crore basis, it will not increase more than 5,000 to 6,000 a month and with the salary increases and the kind of savings that people had and put in as down payment. So I think that's not going to impact as much. But what is -- I would like to actually wait and watch more, not on the impact of the interest rate increases, but it is through the increase in the pricing that we have done.

Just a reminder that we have last 15 minutes for the session left. And if anybody has any questions, you can go ahead.

[ Trisha ], if there are no further questions, you can wrap it up.

Sure. So in interest of time, sir, any closing remarks you would want to make before we close the session.

Yes, [ Trisha ]. So like I mentioned in the initial remarks, our emphasis will continue to be on a disciplined growth, wherein we are very clear that we would like to have a very strong cash flow management system and which has helped us in the last 2 to 3 years, and we'll continue to pursue that. While we are also pursuing now from here on a growth plan as well in -- so the launch pipelines that we have are reasonable -- we have reasonable visibility to that. And I think we will be able to clearly achieve those -- some kind of similar kind of numbers and which would result again in good cash flows. So -- and from an overall -- from a business perspective, it seems to be a very robust market with respect to demand and the way we are able to even sell, collect and also the way we are able to even execute now because largely operational challenges that we had encountered in the last couple of years also have reduced. So hence, our ability to spend more and get corresponding milestone payments and also complete our obligations in terms of deliveries for the customers. All of them seem to be going very strong on all fronts. So that's on the real estate front. In addition to this, of course, we are doing a little bit far more activity in terms of new business development and also consolidation that we have in the land bank. Coupled with this, in both our Manufacturing and Contractual businesses, we have a good pipeline in both order book and the demand that we are seeing. So that also seems to be going well. So net-net, I think we are reasonably stable, and we have good visibility for the near to medium term.

Thank you. That was very helpful. So thank you very much, team. Jagadish, Yogesh and Soumyadeep. And thank you, everybody else for joining. Have a wonderful day ahead.

Thank you, [ Trisha ].