Real estate: Why you should accumulate the stock of Oberoi Realty (₹556.85)

The demand in real estate is picking up, especially in the luxury housing segment, where companies such as Oberoi Realty, have a major presence. The stock of Oberoi Realty, a Mumbai-based realty developer, has gained over 6 per cent from pre-Covid levels till now.

Other factors, including stamp duty reductions by the Maharashtra Government and reduction in construction premium, bode well for developers in the State. For Oberoi Realty, in addition to favourable Government support, location advantages and ability to command better prices have kept the company relatively better positioned amid challenging realty market conditions. Given the multiple ongoing projects nearing completion, the company could witness steady cash flows going ahead.

Also, low home-loan rates places Oberoi Realty in a good stead for its revenue growth. The company registered strong new sales growth volume (over 200 per cent) in its recent December quarter of FY21 compared to same period last year.

However, most of its sales were likely driven by stamp duty cut and release of pent-up demand. The momentum of the company’s revenue growth, going ahead, depends on the traction towards new project launches and continued demand for completed luxury/premium properties. But the sustained rise in Covid-19 cases in Maharashtra, resulting in any kind of restrictions, could dampen the realty market sentiment.

Therefore, investors with 1-2 years perspective can accumulate the stocks if prices correct further. The stock is now trading reasonably at 26 times its trailing 12-month earnings, while the company’s peer Sunteck Realty is trading at 45 times.

The company’s debt position is comfortable with debt-to-equity ratio at 0.2 times, giving room for expansion.

Revenue to grow

Oberoi Realty’s mainstay business is residential segment and it derives about 80 per cent of its revenue from it. Since the lifting of lockdown restrictions, the company’s sales had been slowly improving in the last two quarters. Oberoi Realty, in its recent December quarter of FY21, achieved 0.51 million sq ft of sales volume, compared to 0.15 million sq ft in the same period last year. Demand uptick and the company’s drive to reduce unsold inventories played a key role.

Given the higher preference for completed inventories for home buyers, the company is better placed to cater to the demand. As most of its projects including its projects in Borivali (Sky city), Worli (Three Sixty West), and Mulund are getting ready for completion, it would aid in its revenue growth going ahead.

The company has plans to launch about 4-5 million sq ft in the coming quarters in Borivali, Goregaon and Thane. .

Rental business to improve

The company derives about 20 per cent of its revenue from its commercial segment as well. It includes office space, malls and hotel businesses. While hotels and mall segment took a hit due to the lockdown measures , the office space had been more or less stable in terms of occupancy and rentals. In its recent December quarter, commercial segment registered a growth of about 13 per cent y-o-y. The revenue per sq ft per month, for the company’s two operational office assets -- Commerz and Commerz-II-- increased about 4 per cent and 11 per cent y-o-y to ₹149 and ₹148, respectively. Commerz II was able to maintain an occupancy level of 96-98 per cent since June last year.

The company’s plan to dilute a minority portion of its commercial property has been put on hold temporarily. According to the management, it is due to a gap in valuation expectations. But the prospects for the company’s commercial segment look bright. The company has two key on-going commercial projects Commerz III (office space) and Sky City (Mall), for which leasing has already started. Both projects are likely to be completed by March 2023 and June 2022 respectively.

Financials

The December quarter performance for Oberoi Realty was strong, aided by re-opening of economy and favourable demand conditions. The company registered revenue growth of 56 per cent y-o-y to ₹828 crore while the company’s profit grew 93 per cent y-o-y to ₹287 crore. But the company’s nine-month performance was impacted by the Covid-19 during June and September quarters. Its revenue fell about 20 per cent y-o-y while profit registered marginal growth of 3 per cent y-o-y due to lower operating costs. On the other hand, for Sunteck Realty, a Mumbai-based developer, for the December quarter of FY21, the revenue grew 20 per cent y-o-y but its profit fell 12 per cent y-o-y.