Timing and size of acquisition have worked for us, says Oberoi Realty CFO

Oberoi Realty’s Chief Financial Officer Saumil Daru believes that the best way to run a real estate business is to keep things simple and ride out the storm.

He should know, having steered the company through an industry-wide slowdown to post comparatively stable financials and zero debt. Business Line caught up with Saumil Daru to check into the launch of the company’s two main projects in Mulund and Worli in Mumbai, and the unutilised Rs 1,500 crore cash in its kitty.

Your earnings before interest, taxes, depreciation and amoritzation has fallen on a year-on-year basis to 62.05 per cent for FY13. PAT margins too, have softened to 43.99 per cent in FY13. How has this happened?

There has been a change in estimates from what we had budgeted for and what we ended up spending, because of additional cost incurred by us, which had to be recognised this fiscal. This additional cost was an increase in the cost of construction and also an increase in average tax liability to 26 per cent in FY13 from 23 per cent in FY 12.

Our Splendor project in Andheri, Mumbai, which was earlier contributing significantly towards our topline in terms of tax benefits, went out of the picture with its complete sale this fiscal. The entire impact of the additional cost incurred by us due to these two reasons had to be recognised in FY13. Next year, we will see both EBITA and PAT margins bounce back.

There has been a huge jump in customer advances in the fourth quarter to about Rs 500 crore against Rs 151 crore, while cash flows have been flat. Has the company set aside cash for acquisitions, for its capex?

Customer advances are coming in from our Esquire project, in Goregaon, Mumbai, where we haven’t done revenue recognition. So, that ends up going on our balance sheet as customer advance. We have done revenue recognition in two main projects Exquisite (Goregaon) and Splendor Grande (Andheri), and in both these cases, a lot of customer advances had come in the earlier years.

Moreover, we have also purchased Transfer Development Rights worth Rs 150 crore which has gone out of our cash flow, but will not show any revenue recognition. These factors have contributed to the mismatch in customer advances and cash flow as of now.

How is Oberoi Realty planning to deploy its cash balance of about Rs 1,500 crore, since subsiding capital efficiently has been an issue with the company?

We would always like to buy land and are looking at opportunities. The value of the real estate sector lies in land.

The construction cost is not any different from our peers, so the entire viability and profitability of the business primarily comes from the timing of the land acquisition. We would like to time our acquisition in such a way that over a four to five-year period, it becomes a sustainable project.

Our strategy for acquisition is determined by the timing and the size of the acquisition. Till then, we rather have cash invested in low-yielding deposits than buy land which collapses in value.

Our eventual goal is to use the cash. We would be evaluating acquisition opportunities in Mumbai with mill land sales, Dharavi and Eastern Seaboard land (Mumbai), as and when they come up, apart from exploring new markets such as NCR and Bangalore.

The Oberoi Realty scrip has been under pressure and seen a correction from earlier levels of Rs 290 to about Rs 250 recently. What could be the reason for the fall in stock valuation?

We feel the market does not reflect our sense of intrinsic valuation of our company. The two big breaks for us are going to be the Mulund and Worli projects and the moment these two come on board, we will see things move.

Either way, our value of the business is not derived from what we see in the stock markets. In the last 2.5 years we have been answering questions to our shareholders and investors on our cash balances and our plans, we have never got desperate to deploy the cash and buy land.

Since you have not announced any new launches since September 2011, how do you expect to sustain your cash flows?

We have enough activity going on in Oberoi Exquisite and Oberoi Esquire (both Goregaon) and will be looking at a third phase in Goregaon, which is going to come onstream.

The Mulund project depends on the approval of the Ministry of Environment and Forests. In the case of the Worli Hotel project, it is just a matter of closing the documentation work with the operator. The project will get launched in this quarter itself. Cash churning is important for us. Unlike our peers, we have an ability to slug it out for the long-term. In a typical three to four year real estate project, there are temporary headwinds. But we can’t keep changing our course.

How have you managed to keep your financials stable (zero debt) at a time when the industry has been hit by slowdown?

One thing that has worked is that we have been in the right locations, so all the assets that we have built, be it school, malls, office building and hotels, continue to healthily churn cash along with our residential projects. This is reflected in our cash flow from operations. All the money we have collected, we are ploughing into construction and execution.

Are you planning any shift in strategy?

We want to buy land at the appropriate price. Though construction cost is even across the sector, we might spend five per cent more than competition, for the quality we deliver.

If we are able to manage land acquisition, we have fundamentally conserved or grown value in the company. That is what we would look at and continue to aim for as a business strategy.

manisha.jha@thehindu.co.in