Here are a host of key highlights that were rating drivers as per Ind-Ra:
Continued Strong Credit Metrics: The company had a net debt/net adjusted working capital (inventories + receivables + other current assets + assets including long-term assets pertaining to contracts and manufacturing business - payables - other current liabilities) of 0.59x at end-1HFY22 (FY21: 0.60x, FY20: 0.58x, FYE19: 0.57x). Ind-Ra expects the ratio to reduce below 0.55x by FYE22 owing to a decline in the net debt.
Healthy Sales Velocity: The company had adjusted pre-sales (including collections from contracts and manufacturing business) to net debt ratio of 1.28x in FY21 (FY20: 1.29x; FY19: 1.56x). The agency expects the ratio to improve to 1.54x in FY22 as sales recover after the pandemic. Despite the COVID-19 led economic disruption, the company’s pre-sales rose yoy to Rs31.37 billion in FY21 (FY20: Rs28.81 billion), as buyers preferred tier-1 real estate players, resulting in significant market share gains for builders such as Sobha.
Large Scale and Good Diversification: The company has average annual real estate pre-sales of over Rs30 billion over FY19-FY21. In FY21, the manufacturing and contract business accounted for 28% (FY20: 35%) of collections and 27.5% (23%) of operating profit. The agency believes that the inclusion of manufacturing and contract business provides some diversification benefit to the earnings of Sobha, which is generally not present in most other real estate companies.
Strong Brand and Market Positioning: The company has a track record of several decades in real estate. It has completed more than 60 million square feet (msf) of floor space and has over 30msf of floor space under construction. It enjoys a strong brand image, and is one of the top builders in most of the geographies it operates in.
Positive Free Cash Flow Leading to Decline in Net Debt: The company's net debt (including letters of credit payable) peaked at Rs33.11 billion in 1HFY21. The same reduced to Rs30.39 billion in 1HFY22 as a result of positive free cash flow (FCF) generation.
Liquidity Indicator – Adequate: At FYE21, the company needed to spend Rs44,160 million to complete the projects that it had already launched and offered for sale. Pending receivables from the already sold units stood at Rs34,820 million. In addition, the company has Rs63,060 million of unsold inventory in these projects. At FYE21, the company had cash and equivalent of Rs1,637 million, and Rs11,499 million of undrawn debt facilities.
Ind-Ra expects the company to generate sufficient cumulative FCF before interest expenses, and the agency believes the FCF and starting cash and undrawn limits should be enough to satisfy the debt servicing requirements.
Ind-Ra said that the Indian real estate industry is highly cyclical with volatile cash flows. The sector is also subject to multiple regulatory approvals, and the timely receipt of the same is critical for launching new projects within the scheduled timelines and for future sales/collections.
"A third wave of COVID-19 infections, with or without further lockdowns, may derail the expected recovery in real estate demand," Ind-Ra added.