Portfolio

Oberoi Realty sails through March 2020 quarter, but stumbles afterwards

Bavadharini KS BL Research Bureau | Updated on July 16, 2020 Published on July 16, 2020

Near-term looks challenging, but strong balance-sheet and comfortable debt levels are positives

Oberoi Realty, a Mumbai-based realty player, announced the results of both March quarter of FY20 and June quarter of FY21 together on Tuesday. The Covid-19 pandemic has taken toll on the performance of the company. While the March quarter was relatively stable, the impact of measures implemented to contain the spread of the virus were more pronounced during the June quarter of FY21. Following the results announcement, the stock was down 2 per cent. However, it recovered soon after.

The revenue for 4QFY20 grew about 7 per cent to ₹615 crore from ₹573 crore in the same quarter the previous year, with the residential segment registering a growth of 11 per cent y-o-y. But hospitality (hotels) and retail segments took a hit due to mall closures and travel restrictions. The office segment, on the other hand, registered a marginal growth of 2 per cent y-o-y during the March quarter of FY20. During the same period, the company registered profit growth of 61 per cent to ₹251 crore, mainly on the back of lower operating costs. The operating margin too expanded to 60 per cent during the March quarter from 37 per cent from the same period last year.

However, with lockdown being extended till the end of June, disruption in the hotel and other commercial business activities is evident from Oberoi’s June quarter performance. The revenue for 1QFY21 declined nearly 80 per cent to ₹118 crore when compared to same period last year, with hospitality and commercial segment, including office space, registering a steep fall.

However, with stoppage of construction activities and extension of lockdown almost till the end of June, Oberoi Realty was able to save on its operating costs. This helped in boosting margin in June quarter as well. Operating margin (EBITDA) improved to 50 per cent during 1QFY21 from 39 per cent for the same period last year. However, the profit declined nearly 82 per cent to ₹ 28 crore during the June quarter.

Though the construction activities have resumed in many locations, the impact is likely to continue in the coming quarters. The stock has corrected nearly 30 per cent since the beginning of this year.

Outlook

With many facing pay-cuts and in some cases job losses too, revival in residential demand would take 2-3 quarters. This segment is Oberoi’s mainstay, contributing nearly 80 per cent of the revenue. Future cash flows could also come under pressure as the company has more than two-third of the on-going project area in the residential segment. While the company was able to sell 59 new residential units in the March quarter, it sold only 5 units during the June quarter FY21. According to the management, while there are lot of enquiries for residential properties, the company is yet to see conversion to sales.

The hospitality and commercial segment (office and retail), which contributes to nearly 20 per cent of the company’s revenue, could face challenges in the coming quarters as there is no directives from the Government on the re-opening of malls or lifting of travel restrictions. According to the management, the operations of Oberoi Mall and Westin Mumbai Garden City (hotel) were severely impacted. Given the uncertainties related to rental collections, it has not presently recognised revenue of ₹33.17 crore for the quarter ended June 30, 2020 in respect of contracts with lessees in its mall.

On the office space front, with many corporates considering adopting work from home till the end of the year, the company could face slowdown in demand in this segment as well. However, the management is confident of its office property business being stable. Among office space assets, for Commerz (a commercial property), the occupancy level is around 34 per cent currently and the management expects the occupancy level to reach around 70 per cent soon as it has been leased. Oberoi Realty was also able to sign a leasing agreement of about 1.1 million sq ft with Morgan Stanley for its office space - Commerz III building - for 9.5 years. Commerz III is a 2.3 million sq ft building, part of Oberoi Garden City. However, the completion timeline for some of the under-construction commercial properties, including Borivali Mall and I-ven Mall as well as Commerz III, are extended by 3-4 quarters.

While the short term looks challenging, Oberoi has a strong balance sheet with comfortable debt levels and can withstand the headwinds going ahead.

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Published on July 16, 2020
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