Oberoi Realty: Ramping up - Hold

Oberoi Realty has a long pipeline of projects coming up over the next two years in Mumbai, which could boost its revenue and profits. Its financials are healthy with low debt to equity levels and high operating margin, compared with peers. Lower valuations compared with its historical levels as well as its ability to post better sales and profit figures even in a lacklustre market make the stock a good long-term buy.

Oberoi Realty is a Mumbai-based real-estate player focused on premium residential, retail, hospitality and office space. Over the next few years, it is expected to develop another 10 million square feet (msf) across its projects, mostly in Mumbai and Pune as against 6.5 msf developed till date.

At the current price of ₹305, the stock quotes at a price-to-earning multiple of about 22 times, a tad below its three-year average of about 24 times.

While the Oberoi Realty stock has run up 25 per cent since this April, there seems to be more potential for upside. The company has projects to the tune of 5.9 msf coming up over the next two to three years as against 1.3 msf sold in 2015-16. Its projects at Mulund, Borivali and Worli are high-value launches that could contribute to earnings in the coming years.

While the response has been lacklustre for its recently launched ultra-luxury project Three Sixty West (Worli) — where rates are about ₹43,000 per sq ft — it is still early days and there is sufficient time to rake in the buyers. Also, given its ability to post better sales growth figures even in a lacklustre market, the company is well-poised to benefit from any revival in the Mumbai property market.

While the Mumbai High Court order this year stayed new constructions in Mumbai, the management said that it had all approvals in place for its existing projects.

Oberoi Realty’s sales grew 53 per cent year-on-year to ₹1,408 crore in 2015-16 and net profit 34 per cent to ₹416 crore. The company’s sales in the recent June quarter rose 52 per cent Y-o-Y to ₹328 crore, thanks to higher revenue recognition for its ‘Esquire’ project in Goregaon, Mumbai. Its profit, however, was up by only 13 per cent during the quarter to ₹106 crore, with doubling of its operating costs. However, going forward its costs and margins are expected to stabilise.

Oberoi Realty’s operating and net margins were 50 per cent and 30 per cent respectively in 2015-16 as against 58 per cent and 30 per cent a year earlier. Over the years, the increasing share of residential projects — which typically enjoy relatively lesser margins than leasing and hospitality — had an impact on operating margins.

Operating margin is expected to be in the range of 45-50 per cent. While its operating margins are in line with industry averages – its net margins are superior to that of its peers by a wide margin (10 percentage points) .

The company’s debt to equity ratio is just about 0.18 times, much lower than industry standards of 0.6 times. The debt as on March 2016 was ₹641 crore.

On an overall basis, residential projects contributed 76 per cent of revenue in 2015-16, while lease rentals and hospitality contributed another 12 per cent and 9 per cent respectively. The lease and hospitality business is a relatively stable business with high monthly rentals and healthy occupancy. Currently, the company has four operational assets — Oberoi Mall, Commerz-I, Westin Hotel and the recently commisioned Commerz-II Phase I. The occupancy ratio of its Oberoi Mall and Westin Hotel were 91 per cent and 77 per cent respectively, while it was 88 per cent for Commerz-I.

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