BSE SENSEX S&P CNX 18,682 5,684 Bloomberg OBER IN Equity Shares (m) 328.2 52-Week Range (INR) 323/205 1,6,12 Rel. Perf. (%) 13/-7/7 M.Cap. (INR b) 88.3 M.Cap. (USD b) 1.6 22 October 2012 2QFY13 Results Update Sector: Real Estate CMP: INR269 TP: INR320 Buy (OBER IN) reported 2QFY13 results above our estimates. Revenues stood at INR2.6b (v/s est of INR2.1b), up 16% YoY/29% QoQ. Higher revenue booking is attributable to better-than-expected construction progress in Exquisite (6% QoQ v/s 4% in 1QFY13) and Grande (13% QoQ v/s 7% in 1QFY13) and higher sales at Splendor. Rental income from Commerz, Oberoi Mall and Hotel Westin accounted for ~INR518m (down 5% QoQ). Hotel Westin witnessed 5% QoQ decline in revenues, led by a seasonal weakness, albeit up 10% YoY, along with ~8.6pp YoY increase (down 1.7pp QoQ) in occupancy and 7.1pp YoY uptick (down 2.9pp QoQ) in EBITDA margins. EBITDA grew 19.5% YoY to INR1.5b, while margins were up 1.1pp/6.2pp QoQ/YoY to 58.1%. Core EBITDA (ex hotel) was stable QoQ at 61%. PAT grew 11.6% YoY to INR1.2b due to lower other income (due to a decline in cash balance at INR11.1b). Sales momentum improved marginally to 0.13msf (INR2.2b) v/s 0.12msf (INR2.1b) in 1QFY13. Esquire accounted for ~50% of sales value. Average realizations stood at INR17,077/sf (up 2% QoQ, 37% YoY), led by the double 10% price hikes taken in FY12. We are estimating sales estimate of 1msf (INR14b) for FY13, which assumes the launch of Mulund and Worli projects. Customer collections are down across projects to INR1.6b v/s INR2.3b in 1QFY12 and INR2.9b in 2QFY12, which led to negative operational cash flow of INR580m v/s +INR604m in 1QFY13. Weak collections are due to (1) decline in collection pace at Grande and Exquisite (as these projects have already reached slab casting stage and the typical Oberoi's aggressive collection curve peaks out here) and (2) slower execution in Esquire due to pending construction approvals (a key risk to our FY13 revenue estimate as Esquire's recognition may be delayed till 1QFY14). Going forward, we believe the key to cash flow uptick would be driven by (1) new launches (2) progress in Esquire and (3) incremental sales in ongoing projects, as collections from pre-sales of Exquisite and Grande would remain weak. Sandipan Pal (Sandipan.Pal@MotilalOswal.com); +9122 3982 5436 Investors are advised to refer through disclosures made at the end of the Research Report. 1
Key results highlights Revenue booking above estimate led by stronger execution progress; INR16b unrecognized order book 2QFY13 revenues stood at INR2.6b (v/s est of INR2.1b), up 16% YoY/29% QoQ. Key contributors are: (1) Exquisite (38%), (2) Grande (27%), (3) Completed projects (Splendor 11%) and (4) Annuity projects (20%). The higher revenue booking is attributable to better-than-expected construction progress in Exquisite (6% QoQ v/s 4% in 1QFY13) and Grande (13% QoQ v/s 7% in 1QFY13) and higher sales at Splendor. The better execution progress is attributable to the nature of work (more of internal finishing and post slab casting works) being done in both Grande and Exquisite, which typically have faster turnaround time and are not impacted by monsoon. Oberoi Esquire (with ~50% sales contribution in 2QFY13) is yet to cross the revenue recognition threshold of 25%. Its current unrecognized order book stood at INR16b (including INR11b from Esquire), thus rendering strong revenue visibility over the forthcoming quarters (expect one-off jump in 4QFY13/1QFY14 with Esquire expected to generate revenues). Annuity income down QoQ, led by seasonally weaker hotel operations; occupancy, margins improve YoY Rental income from Commerz, Oberoi Mall and Hotel Westin accounted for ~INR518m (down 5% QoQ). Hotel Westin witnessed a 5% QoQ decline in revenues led by seasonal weakness, albeit up 10% YoY, along with ~8.6pp YoY increase (down 1.7pp QoQ) in occupancy and 7.1pp YoY uptick (down 2.9pp QoQ) in EBITDA margins. We estimate FY13/FY14 rental income at INR2.2b (stable YoY)/INR2.9b, assuming Commerz II to start operations in 4QFY13-end, where the façade work is in progress and management has guided for strong leasing transactions in the pipeline. Core EBITDA margins down 600bp EBITDA grew 19.5% YoY to INR1.5b, while EBITDA margins were up 1.1pp QoQ and 6.2pp YoY to 58.1%. Core EBITDA (ex hotel) was stable QoQ at 61% but down YoY (from 65% in 2QFY12) on account of the change in project mix and cost escalations at Exquisite and Grande. PAT grew 11.6% YoY to INR1.2b due to lower other income (a decline in cash balance at INR11.1b v/s INR13.5b in 1HFY12). Sales, realizations marginally up QoQ Sales momentum has improved marginally to 0.13msf (INR2.2b) v/s 0.12msf (INR2.1b) in 1QFY13 and 0.19msf (INR2.3b) in 2QFY12. Esquire accounted for ~50% of sales value. Average realizations stood at INR17,077/ sf (up 2% QoQ, 37% YoY), led by the double 10% price hikes taken in FY12. Downside risks to our sales estimate for FY13 of 1msf (INR14b) would depend on absence of any new launch (Mulund/Worli/Garden City Phase III). 22 October 2012 2
Collections deteriorate QoQ due to maturing collection curve at Exquisite and Grande Customer collections are down across projects to INR1.6b v/s INR2.3b in 1QFY12 and INR2.9b in 2QFY12. Oberoi typically has aggressive payment plan and it collects almost 40% at booking. Thus, the company has a steeper construction-linked collection curve which reaches almost 85-90% by the time it completes 60-70% of the construction work (till completion of slab casting). Post this stage, the construction-linked payment pace declines significantly. Thus, weak collections in 2QFY13 is on account of (1) decline in the collection pace at Grande and Exquisite (reached post slab casting stage) and (2) slower execution in Esquire due to pending construction approvals. We believe, going forward, the key to cash flow uptick would be driven by (1) new launches, (2) progress in Esquire and (3) incremental sales in ongoing projects, as collections from pre-sales of Exquisite and Grande would remain weak. Lower collection has resulted into operational cash flow of negative INR580m v/s +INR604m in 1QFY13. Cash flow weakness due to lower collections Cash flow estimates 1QFY13 2QFY13 Remarks Collections 2,260 1,563 Collection deteriorated Rent (at EBITDA) 353 343 Hotel seasonally weak Other income 309 250 Lower due to decline in cash balance Tax 368 541 Higher due to higher PBT, including DDT Admin expense 163 171 Stable QoQ Capex project 380 377 Stable QoQ Construction cost 1,478 1,774 Including purchase of TDR of INR1b Operating Cashflow 604 (580) Cash flownegative due to lower collections Investing cash flow (605) (480) Capex, Other income and land advances Financing cash flow (107) (657) Payment fo Dividend of INR2/share Net Cashflow (107) (1,716) Source: Company, MOSL Other updates Construction progress in Prism remains slow (spent INR10m in 2QFY13) broadly due to sluggish commercial market outlook, while it has spent almost INR570m in Worli projects, which has witnessed considerable progress in construction before official launches. Commerz II (Phase I) is expected to start operations at 4QFY13 with façade work in progress. The company has spent ~INR380m among both phases of Commerz in 2QFY13. The management has guided for higher focus on residential vertical on the back of weakness in commercial demand. It plans to change a meaningful portion of commercial area at JVLR project residential. 22 October 2012 3
Valuation and view: Re-leveraging, cash deployment key to restore high RoCE Despite the sluggishness in Mumbai market, Oberoi has been able to hold a stable sales momentum due to strong product propositions, smart pricing and superior customer preference. Oasis (Worli) is witnessing strong response at the pre-sales stage and we expect the official launch in 3QFY13. This along with the long pending MoEF approval in Mulund project would be key factors to protect downside risks to our sales estimate. Strong balance sheet with INR11.1b of idle cash renders competitive advantage in a liquidity strapped environment. But delays in deployment of surplus cash in value-accretive projects have been an overhang on RoCE and could dilute the advantage if broad-based liquidity improves. So far, the company has been a strong defensive bet due to the high cash surplus and existing annuity assets (~40% of market cap), thus rendering resilience to downcycle risks. Going forward, deployment of cash in attractive projects and new launches would be the key drivers of the stock price. Concern over leasing at near-completed commercial projects is another factor to be seen. The stock is trading at 10.9x FY14E EPS, 1.8x FY14E BV and ~21% discount to our NAV of INR337. Maintain Buy with a target price of INR320. 22 October 2012 4
Sales improves marginally QoQ (msf) Realizations up 2%QoQ (INR/sf) EBITDA Margin up marginally (%) Sales up volume trend across key ongoing projects Construction progress impressive in 2QFY13 Customer collection declines QoQ Annuity income down (INR m) with weaker seasonality effect in Westin hotel (INR m) Source: Company/MOSL 22 October 2012 5
: an investment profile Company description Limited is a Mumbai-based real estate developer. It was incorporated in May 1998 as Kingston Properties Private Ltd. ORL s primary focus is to develop residential property but it has diversified into retail, commercial, hospitality and social infrastructure projects. ORL has undertaken ~5msf of RE development across 35 projects so far. Key investment arguments ORL has a strong brand in Mumbai s RE market due to its (1) diversified products, (2) superior product quality and (3) management goodwill, which enable it to command a pricing premium over peers. ORL is expected to successfully monetize its land bank over 6-7 years as its healthy cash position and hassle-free land imply certainty of execution. This provides high cash flow visibility, adding to its net cash surplus of ~INR13b. ORL enjoys steady cash flow from its annuity assets, which insulates it from vagaries of the RE cycle. Recent developments Customer collections are down across projects to INR1.6b v/s INR2.3b in 1QFY12 and INR2.9b in 2QFY12. Sales momentum has improved marginally to 0.13msf (INR2.2b) v/s 0.12msf (INR2.1b) in 1QFY13 and 0.19msf (INR2.3b) in 2QFY12. Valuation and view The stock is trading at 10.9x FY14E EPS, 1.8x FY14E BV and ~21% discount to our NAV of INR337. Maintain Buy with a target price of INR320. Sector view RE sector has been a major underperformer over the last 12 months with multiple operational and nonoperational headwinds such as volume slowdown (due to declining affordability), monetary tightening, pilling liquidity pressure etc. However, with a buoyant macro-picture, likelihood of interest rate cut and increasing focus on execution, we believe the outlook will improve going forward. Key investment risks Land acquisition challenges due to high cost of land in Mumbai. Idle cash for long time could impact RoE Sluggish Mumbai market. Comparative valuations Oberoi Indiabulls Phoenix P/E (x) FY13E 17.3 14.8 24.1 FY14E 10.9 10.3 11.7 P/BV (x) FY13E 2.1 0.4 1.5 FY14E 1.8 0.4 1.4 EV/Sales (x) FY13E 7.0 2.9 9.8 FY14E 4.2 2.3 4.7 EV/EBITDA (x) FY13E 12.3 10.3 16.8 FY14E 7.1 8.1 9.9 EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY13 15.5 20.3-23.8 FY14 24.7 29.6-16.7 Target Price and Recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 269 320 19 Buy Stock performance Shareholding pattern (%) Sep-12 Jun-12 Sep-11 Promoter 78.5 78.5 78.5 Domestic Inst 0.9 0.7 1.4 Foreign 19.5 19.8 19.1 Others 1.1 1.0 1.1 22 October 2012 6
Financials and Valuations 22 October 2012 7
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