Oberoi RealtyIPO analysis by JM Financial,

Presence in well-known Mumbai locales, strong
balance sheet
 A Mumbai-centric realty offering: Oberoi Realty (‘Oberoi’) is a Mumbaicentric
real estate developer with strong focus on residential projects (61% of
current development potential) and also has presence in commercial, retail
and social infrastructure developments. Its business model is largely based
on creation of integrated mixed-use developments offering a combination of
all product categories: Residential, retail mall, hotel, school etc in one project
site or its immediate vicinity. Key differentiating features of Oberoi, in our
view: (a) A debt-free company with net cash balance of `3.7bn as at Jun’10;
this, to us, would allow Oberoi to realise right prices for its land-parcels, (b)
Strong brand recall, (c) Decent execution history (c.2.8mn sq ft); plus, c.22%
(2.7mn) of upcoming residential developments (mostly in well-known
localities of Mumbai) have commenced sales bookings.
 Zero-debt, an industry exception: Oberoi has zero-debt, having paid off its
loans over a period of time (Exhibit 5). It is currently net cash positive: `3.7bn
as at Jun’10 – different picture vs other industry players (DLF’s Jun’10 gross
debt at `234bn with a net-debt to equity ratio of 0.8x, Unitech `60bn/0.5x,
HDIL `40bn/0.5x). This, to us, is a major positive in an industry prone to
symptoms of cash-deficiencies, which in periods of poor demand often
results in repayment defaults and high finance costs, slow-down of
construction-progress due to lack of funding and in some cases, distress
assets sale, which poses a key risk to a valuation exercise. In our view, an
unlevered balance sheet also lends Oberoi flexibility to tap future growth
opportunities. Oberoi has c.`1.5bn of land payments outstanding at present.
 Decent execution record, good project potential; presence in well-known
Mumbai locales a key valuation driver: Oberoi’s execution track record
spans c.3mn sq ft across 12 completed projects (c.5mn including
promoter/promoter-group). Its current development plan spans c.20mn sq ft
(24 projects), of which sales have begun for c.2.7mn sq ft (22% of total
residential area); this provides some visibility on near-term project cash flows,
in addition to rental revenues from existing leased assets (`834mn rental
revenues in FY10). As per the company, 50% of its current project pipeline is
‘ongoing’. Of its development plan: (a) Residential projects comprise c.12mn
sq ft. These are across well-established locations of Mumbai: Goregaon
(c.5.2mn), Mulund (c.3.2mn), Andheri – East (1.6mn). Oberoi has a c.2.1mn sq
ft land-parcel in Worli, part of which is being planned on a ‘branded
residence’ concept, (b) Commercial land parcels comprise c.4mn sq ft. Oberoi
acquired substantial portions of its land parcels between 2002-05 when
prices were more reasonable, e.g. the average land cost of its flagship
Goregaon project (‘Oberoi Garden City’), which is also its largest land parcel
(45% of development potential) was acquired for <`100 per sq ft.
 Key risks: Compliances pending for some land parcels, costs of future
land acquisition: (a) Possible risk of delayed monetisation as some of
Oberoi’s land parcels (Worli, Pune, Juhu) are still awaiting some necessary
statutory clearances/compliances/registrations, (b) While the current land
parcels were acquired at reasonable prices, scarcity of land in Mumbai and
high land prices (evident from recent textile mill auctions) could lead to
future project accretion being an expensive affair.