BSE SENSEX S&P CNX 17,151 5,202 Bloomberg OBER IN Equity Shares (m) 328.2 52-Week Range (INR) 323/205 1,6,12 Rel. Perf. (%) 4/15/16 M.Cap. (INR b) 87.0 M.Cap. (USD b) 1.7 26 April 2012 4QFY12 Results Update Sector: Real Estate Oberoi Realty CMP: INR264 TP: INR315 Buy Margin improves with price escalations and project mix; sales pick-up across projects Oberoi Realty (OBER) reported higher than estimated EBITDA for 4QFY12. Revenue was INR2.5b (v/s our estimate of INR2.2b) due to stronger sales in (a) completed projects (Spender, Spring and Seven), and (b) revenue contributing projects (Exquisite and Grande). EBITDA grew 13% YoY to INR1.6b (v/s our estimate of INR1.3b). EBITDA margin expanded to 64.5% (v/s 60.5% in 3QFY12) due to (1) price escalations across ongoing projects in 3QFY12, and (2) higher revenue contribution from completed projects, where average realization has been at 30-40% premium to under construction projects. 4QFY12 has proved to be a strong quarter for the company, with ~42% QoQ growth in sales volume. OBER sold ~0.18msf (INR2.8b) as against 0.12msf (INR1.8b) in 3QFY12. Sales volume contribution from Esquire declined to ~42% (v/s 60-70% over 9MFY12) due to higher sales from other under construction projects (Exquisite and Grande), which are at advanced stages. Overall sales for FY12 remained steady at 0.7msf (~INR9.6b). Despite concerns over delay in launches, deployment of idle cash and subdued Mumbai market, we consider Oberoi as one of the better placed companies with a) strong liquidity to drive growth, and b) robust pre-sales of ~INR36b to drive cash flow (pending~inr8.7b) and revenue (~INR15b yet to be booked). The stock currently trades at 15.1x FY13E EPS and 2.1x FY13E BV, and at ~24% discount our NAV estimate. Maintain Buy. Sandipan Pal (Sandipan.Pal@MotilalOswal.com); +9122 3982 5436
Key results highlights Revenue booking above estimate; up 35% QoQ: Revenue for the quarter was INR2.5b (v/s our estimate of INR2.2b) due to stronger sales in (a) completed projects (Spender, Spring and Seven), and (b) revenue contributing projects (Exquisite and Grande). While revenue from completed projects was ~INR660m (100% recognition), revenue from other contributing projects jumped ~80% QoQ. Rental income from Commerz, Oberoi Mall and Hotel Westin accounted for ~INR564m (up 2% QoQ). Core EBITDA margin expanded 400bp: EBITDA grew 13% YoY to INR1.6b (v/s our estimate of INR1.3b), while EBITDA margin expanded to 64.5% (v/s 60.5% in 3QFY12) due to (1) price escalations across ongoing projects in 3QFY12, and (2) higher revenue contribution from completed projects, where average realization has been at 30-40% premium to under construction projects. PAT increased 5% YoY to INR1.4b (v/s our estimate of INR1b). Overall de-growth in FY12: For the full year, revenue declined 17% to INR8.2b, EBITDA declined 16% to INR4.8b and PAT was down 11% to INR4.6b. Delay in revenue recognition from key sales driving project, Esquire has been the key reason for de-growth in revenue booking. We expect Esquire to reach revenue recognition threshold by 2/3QFY13, giving a strong boost to revenue recognition; the project has already achieved sales of ~INR8.5b. Sales volume in-line; up 42% QoQ, despite double price hike: 4QFY12 has proved to be a strong quarter for the company, with ~42% QoQ growth in sales volume. OBER sold ~0.18msf (INR2.8b) as against 0.12msf (INR1.8b) in 3QFY12. This is despite the company taking 10% price appreciation twice in 3QFY12 and 4QFY12 across all ongoing projects. We believe strong execution progress, goodwill and lack of choice for buyers has led to strong demand for Oberoi products. Sales contribution from Grande, Exquisite improves: During 4QFY12, sales volume contribution from Esquire declined to ~42% (v/s 60-70% over 9MFY12) due to higher sales from other under construction projects (Exquisite and Grande), which are at advanced stages. While volumes at Exquisite grew 90% QoQ, Grande witnessed 55% QoQ volume uptick. Overall sales for FY12 remained steady at 0.7msf (~INR9.6b). Expect a moderate growth in annuity income in FY13: In FY12, rental income grew 22% YoY to INR2.2b; we estimate ~INR2.5b in FY13, post commencement of Commerz II in 3QFY13. During 4QFY12, after long stagnation, the company leased out ~15,000sf of incremental area in Commerz-I, taking the occupancy to 79%. Management commentary, guidance and other updates Loans and advances have increased by ~INR1.5b during 4QFY12, largely towards additional advances of INR1.85b given to JV partner at Worli (Oasis) project due to possibility of increase in project FSI. Hence the advances to JV partner increased to INR4.8b from INR3b. Management hopes to archive meaningful growth in revenue booking in FY13, given ~36%YoY growth in unrecognized order book from ~INR11b to INR15b. With recent leasing at Commerz, the management has indicated over its improved outlook on commercial leasing in Goregaon. Due lack of competition and increased enquiry from large corporate and MNCs, it sees robust demand for Commerz II. 26 April 2012 2
Sales increased QoQ (msf), with contri- Realization improved due to price EBITDA margin witnessing bution from completed and U/C projects appreciation (INR/sf) upward trend (%) Both Grande and Splendor witnessed So is the case with Exquisite, while Construction progress steady, sales uptick sales at Esquire remained steady Esquire to cross threshold in 2Q/3QFY12 Annuity income remains steady (INR m) Annuity income break-up (INR m) Customer collection has declined QoQ Source: Company/MOSL On improved uptick in sales at Goregoan (back to 0.1msf+ run-rate per quarter), it expects the steady demand to continue, also driven by spillover demand from Powai. The company plans to launch Worli (waiting for tie-up with Hotel brand) and Mulund projects (waiting for MoEF approvals) over next couple of quarters. 26 April 2012 3
Valuation and views On the back of prevailing headwinds, we expect ability to improve operating leverage would be the key differentiating factor among real estate developers over FY13. While Oberoi is enjoying customer preferences due to its a) strong product propositions and goodwill (high salability) and b) execution progress, the overhangs over the third most important aspect i.e. severe delay in new launches has been a major concern. Hence successful launch of Mulund and Worli (expect sales value of ~INR30b each) would be prime driver for stock performance over FY13. Additionally, there has not been any meaningful progress in deployment of surplus cash of ~INR13b over past 18months, which has been a long drag over its RoE. Any improvement in liquidity and market outlook could curb the competitive advantage the company was enjoying till date since a better liquidity could escalate land cost. Despite above concerns, we consider Oberoi as one of the better placed companies with a) strong liquidity to drive growth, and b) robust pre-sales of ~INR36b to drive cash flow (pending~inr8.7b) and revenue (~INR15b yet to be booked). The stock currently trades at 15.1x FY13E EPS and 2.1x FY13E BV, and at ~24% discount our NAV estimate. Maintain Buy. NAV Calculation Particulars (INR m) NAV/share % GAV Residential 81,006 247 55.2 Commercial (Lease) 33,994 104 23.2 Commercial (Sale) 11,602 35 7.9 Retail (Lease) 7,941 24 5.4 Retail (Sale) 2,768 8 1.9 Hotels 4,322 13 2.9 Infra Business+Land holding 4,994 15 3.4 Gross Asset Value 146,629 447 100.0 Add: Cash 12,925 39 8.8 Less: Other Op Exp 13,197 40 9.0 Tax 32,258 98 22.0 Net Asset Value 114,099 348 77.8 Source: Company/MOSL 26 April 2012 4
Oberoi Realty: an investment profile Company description Oberoi Realty 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. 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. Recent developments 4QFY12 has proved to be a strong quarter for the company, with ~42% QoQ growth in sales volume. The company plans to launch Worli (waiting for tieup with Hotel brand) and Mulund projects (waiting for MoEF approvals) over next couple of quarters. Valuation and view The stock currently trades at 15.1x FY13E EPS and 2.1x FY13E BV, and at ~24% discount our NAV estimate. Maintain Buy. 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. Comparative valuations Oberoi Indiabulls Phoenix P/E (x) FY13E 15.1 14.6 23.0 FY14E 9.8 9.7 10.8 P/BV (x) FY13E 2.1 0.4 1.6 FY14E 1.7 0.4 1.4 EV/Sales (x) FY13E 6.1 2.8 9.2 FY14E 3.7 2.2 4.4 EV/EBITDA (x) FY13E 10.6 10.3 13.4 FY14E 6.2 8.0 7.5 EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY13 17.5 22.6-22.4 FY14 27.0 32.7-17.3 Target Price and Recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 264 315 19.3 Buy Stock performance (since 19 October 2010) Shareholding pattern (%) Mar-12 Dec-11 Mar-11 Promoter 78.5 78.5 78.5 Domestic Inst 0.7 1.2 1.0 Foreign 19.8 19.2 19.0 Others 1.0 1.1 1.5 Oberoi Realty Sensex - Rebased 340 300 260 220 180 Apr-11 Jul-11 Oct-11 Ja n-12 Apr-12 26 April 2012 5
Financials and Valuations 26 April 2012 6
N O T E S 26 April 2012 7
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