Stock Fundamentals

Why should you buy Oberoi Realty shares

Meera Siva | Updated on: Apr 02, 2022

Good pipeline visibility and improving market demand are key drivers for the stock trading at ₹988 levels

With a strong brand name as a premium real estate developer, backed by a solid delivery track record, prudent financial management and diversified revenue stream from residential, commercial and hospitality segments, Oberoi Realty has managed to be a reliable bet for investors. Thanks to this trust, the company’s stock has soared from a low of around ₹300 in April-May 2020 to nearly three times currently. And despite the run-up, the stock is still a buy for investors with a long-term view.  

Strong performance

The stock price increase was thanks to Oberoi’s good operating results in the three quarters of FY22, as many projects got completed and sales gained momentum. The company sold around 0.92 million sq ft (msf) in Q3, which was 70 per cent of the total bookings in the nine months of FY22. Per-sq-ft prices were stable or increased in the recent quarter.

Consolidated revenue for the nine months of FY22 was ₹1,870 crore, up 48 per cent yoy . Residential sales, which account for over 80 per cent share of revenue, were at ₹1,591 crore, up 63 per cent. Hospitality revenue (from Westin Mumbai) increased 148 per cent yoy, with average occupancy increasing to 65 per cent, from 28 per cent a year ago. Average room rates grew from ₹5,669 in Q3 of FY21 to ₹6,918 in Q3 FY22.

Operating margins in the residential segment were stable – at about 40 per cent – in the nine months of FY22. In Q3 FY22, it moderated due to higher contribution from lower margin projects/units. The management expects that it will be able to bump up sale price to maintain margin as projects move towards completion, , to absorb any rise in raw material costs. For example, price per sq ft increased from an average of ₹16,754 in FY21 to ₹18,147 in FY22 in the Sky City project (high-end apartments in Borivilli).

However, rental income from malls fell – to ₹316 crore in the nine months of FY22 versus ₹864 crore in the same period in FY21 – due to a Covid-induced dip in Q2 FY22 with uncollected rents. Area leased and revenue picked up in Q3 FY22 to nearly half the levels in the same period last year and this would continue as post-pandemic normalcy returns. Commercial property rents were stable with good occupancy, albeit at slightly lower rates per sq ft.  With the proximity to the under-construction metro stations, occupancy and rental rates are likely to inch up, going forward.

Operating cash flow was healthy, at ₹7,615 crore in the nine months of FY22 compared to ₹2,975 crore in the same period in FY21.

Good pipeline

Oberoi’s geography is Mumbai and its current residential projects are in the Western suburb. The housing market in Mumbai Metro Region (MMR) has been upbeat – data from research firm Knight Frank showed that the number of residential units registered in 2021 was higher than the previous record of 80,746 units in 2018 by 38 per cent (70 per cent higher yoy). And the Western suburb has been accounting for over half of the sales. The robust infrastructure development of metros and roads will be positive for the city’s property sales and price growth over the next few years.

The company has lined up a strong launch pipeline, providing cash flow visibility. Oberoi will also be foraying into mid-income housing segment with a project in Thane, expected to be launched in the next quarter. The project is likely to contribute significantly to sales in the next two years. Good performance in this project will help open a sizeable market beyond the high-end segment.

Also, subsequent phases of projects in Borivali and Goregaon are likely to start in FY23. The premium joint venture project – Three Sixty West in Worli – is complete and the management expects to get occupancy certificate in Q4 FY22. This can help drive sales, which have been gruellingly slow, as there is a customer preference for completed homes in this price point.  

Oberoi is actively looking at land buying opportunities in MMR as well as expansion beyond the region. In Q3 FY22, a 4.3-acre land was purchased in Bhandup for about ₹115 crore.

Reasonable valuation

At the current price of ₹987.55, the stock trades at 32.5 times the annualised nine-months earnings and 3.5 times its book value (of ₹280 as on December 31, 2021). This is not cheap but the premium is reasonable, as the property sector is cyclical and the outlook is positive, after a prolonged period of lull in the market. Also, not just revenue and margins will grow at a good pace, it is also possible that, given the paucity of quality players, the stock may also benefit from an uptick in its multiple.

Why
Strong operations
Good outlook
Prudent leverage

The management continues to be prudent in managing its finances. It took on debt, at favourable rates through Non-Convertible Debentures (tenures of two-four years) to fund expansion. With a debt-to-equity ratio of 0.28, the company is in a comfortable position with ample room for growth.

The key risk to consider is the slow off-take of its Worli project where Oberoi has a 32 per cent revenue share. Lack of momentum could dampen the price growth outlook. 

Promoters hold 67.7 per cent stake as of December 31, 2021 (unchanged from a year ago); FIIs’ share dropped to 20.49 per cent (from 25.62 per cent) and DIIs’ holding increased to 8.71 per cent (from 4.43 per cent).

The writer is an independent consultant and doesn’t hold positions in this stock.

Published on April 02, 2022
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