Buy Cash ‘n’ comfort

The slowdown in the Mumbai real estate market has weighed on Oberoi Realty (Oberoi) stock this past year. The company develops high-end real estate in Mumbai. It is debt-free and has been cash-flow positive. The stock underperformed its peers DLF, Prestige Estates and Sobha Developers, in spite of its enviable financial state.

The stock is currently below its IPO price of Rs 260 and trades at a trailing 12-month earnings multiple of 16, lower than its past range of 22-25. At the current price of Rs 253 and assuming sales growth of 25 per cent and net margin of 40-45 per cent, the forward 12-month earnings multiple is around 14.

The stock hence offers potential for moderate gains at the current price and earnings growth multiple levels. Conservative investors can consider entering on dips.

Attractive net margins

Oberoi’s primary project is an integrated development — Oberoi Garden City — at Goregaon, Mumbai. This features a mall, luxury hotel, school, multiple commercial and residential projects.

Residential property sales account for around 80 per cent of Oberoi’s revenue, and income from the mall, hotel and commercial property accounts for the rest. The company also derives additional income from revenue-sharing arrangements with 13-14 per cent of mall tenants, including Starbucks. The pressure in Mumbai’s real-estate market reduced Oberoi’s net margin by 7 percentage points in the last nine months, but sales grew by 30 per cent in this period. The National Housing Board (NHB) Residex index, an indicator of residential property price, rose to 200 in the December quarter for Mumbai’s Goregaon segment.

The index was at 191 in December 2011 and had touched a low of 184 in September 2012. With more price stability expected in Oberoi’s primary market of Mumbai, sale prices and profits may inch upwards.

Good revenue visibility

Besides its ongoing project at Goregaon, Oberoi is also looking to expand within and outside Mumbai. It owns land in Goregaon, Andheri, Worli, Mulund and Sangamwadi in Pune, which can help sustain development for the next six-seven years. The company has so far completed 36 projects covering over 6.5 million square foot. In the December quarter, Oberoi’s average price for its residential projects was a healthy Rs 21,000 per sq ft.

The company has around 1.7 million sq ft of inventory in ongoing projects. Planned construction in Mulund of 3.2 million square feet in the next four to five years is expected to have a sale value of Rs 4,800 crore, at an estimated sale price of Rs 15,000 per square foot.

Considering the price resilience of the company’s high-end target segment and factoring in new launches, the company is likely to grow annual sales by around 25 per cent during the next few years.

Besides growth in residential sales, rental income provides good visibility, as the annuity portion may contribute around 20-25 per cent of income.

Risks and mitigators

Oberoi’s cash coffer of Rs 1,100 crore as on December 2012 is being perceived as a weakness as it is invested in low-yielding deposits. However, the company has lined up development plans and is also exploring re-development projects in Mumbai and a foray into NCR. Progress on expansion and projects that offer high return on capital can allay concerns.

Obtaining clearances is taking time and the launch of Mulund project has been postponed. The company expects the approvals to come through soon.

Also, the company is yet to find a partner for its proposed hotel in Worli. Construction is in progress and providers such as Ritz Carlton are being explored.

Oberoi Realty stated that lease rates offered currently for its commercial property are marginally below expectation.

The company also plans to convert some of its commercial development to residential. Mumbai’s commercial rental segment is yet to recover fully; however, Jones Lang La Salle expects supply to be lower and absorption to be higher by over 10 per cent in 2013.

Financial performance

Oberoi’s December quarter sales grew by 42 per cent compared with a year ago. Over the nine-month period, the company’s sales grew by 30 per cent.

Unlike most other real-estate players, Oberoi has positive cash flows from operations. The company’s dividend of Rs 2 per share in FY12 (yield of 0.74 per cent) was double that of FY-11.

The company plans to continue dividend payments at levels that can be sustained over the long-term. Oberoi plans to reduce the promoter’s holdings from 78.5 to 75 per cent. For regulatory compliance, the sale must happen before October 2013, three years from stock IPO date.

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