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Oberoi Realty (OBER)
Property
Cash is king. We have a positive view on Oberoi led by (1) front-loaded NAV realization
with over 85% of NAV accruing from projects to be launched by end-FY2012E,
(2) established premium brand and balanced portfolio except geographic concentration
in Mumbai, (3) escaped previous downturn without much impact and (4) a clean landbuying
track record. We initiate coverage with a BUY rating and a target price of Rs334
for a potential 23% upside over next 12 months.
BUY with target price of Rs334 at par with our March 2012E NAV
Our price target for ORL is Rs334/share at par with our March 2012E NAV of Rs334/share.
We are setting our price target at par with NAV as we believe key risks such as (1) concentrated
portfolio—Mumbai is over 95% of gross NAV and a single location (Goregaon) is 71% of the
same, (2) absence of recent land buying implies limited visibility of upside to our NAV estimate
from new projects and (3) relatively nascent listing history, are balanced by the positives—
(1) Oberoi is the only debt-free developer company operating in the lucrative Mumbai region,
(2) NAV realization is relatively more front-loaded than peers and (3) RoE in the mid-20s is again
higher than peers.
Diversified portfolio with an established brand in Mumbai real estate market
The Oberoi brand has been associated with real estate development in Mumbai since 1983, which
has helped the brand build a franchise in reliability and quality and enables it to charge premium
prices. Although ORL’s primes focus is residential (comprising 56% of total portfolio), it has a
presence in other segments as well with a healthy pipeline of and/or operational projects in
commercial (Commerz I), retail (Oberoi Mall) and hospitality (Westin hotel) segments with rental
revenues of Rs523 mn in 1HFY2011 and Rs833 mn in FY2010.
Expect rapid scale-up over FY2011-12E
We expect ORL to sell 1.4/1.6 mn sq. ft in FY2012E/13E (versus 0.8 mn sq. ft in FY2011E) largely
led by launches in Mulund and Worli locations (by 1QFY12) and continuing ramp-up in its wellestablished
Goregaon location. We expect this to drive a revenue and EBITDA CAGR
(FY2012E/FY2010) of 63% and 72%, respectively.
Key risks—inability to buy land for further expansion is the key risk
The key issue that investors need to grapple with is whether Oberoi will be able to buy land at
competitive prices to fuel future expansion. We see the following other risks—(1) very high
dependence on a single market (Mumbai) and location (Goregaon), (2) decrease in property prices,
(3) changes in Mumbai slum rehabilitation scheme, (4) sharp increases in interest rates, (5) slowerthan-
expected economic growth and (6) higher-than-expected input costs
Valuation: NAV-based target of RS334/share
Our price target for ORL is Rs334/share at par with our March 2012E NAV. We believe ORL
has the following positives—(1) ORL is the only debt free company operating in the lucrative
Mumbai region, (2) NAV realization is relatively more front-loaded than peers and (3) RoE in
the mid-20s is again higher than peers. We believe these balance out the key risks such as
(1) concentrated portfolio—Mumbai is over 95% of gross NAV and a single location
(Goregaon) is 71% of the same, (2) absence of recent land-buying implies limited visibility of
upside to our NAV estimate from new projects and (3) relatively nascent listing history and
are therefore setting our price target at par with our March 2012E NAV. We prefer to value
Oberoi on an NAV basis rather than using multiples (P/E or EV/EBITDA) as we believe the
NAV method factors in the long-term growth potential, accounts for long gestation projects
and reduces the effect of real estate cycles.
Target price of Rs334 based on March-12E NAV
Key assumptions for our NAV calculation –
Our valuation taken into account 114 acres of land representing 18.6 mn sq ft of saleable
area. We have included all of ORL’s land reserves and our valuation takes into account
property being developed/to be developed on land for which (1) Oberoi has acquired land
or (2) Oberoi is in the process of acquiring land.
We have used the following formula to value Oberoi’s properties: Net value of project
(land) = present value of revenues – present value of (development cost + overheads +
contingencies + taxes).
Properties generating annuity income have been valued using a capitalization rate of
10%.
Present value has been calculated using a discount rate of 14%.
In our valuation we have assumed that prices in FY2011E remain the same as in FY2010
and have assumed a 5% growth thereafter.
Our model assumed a construction cost inflation of 5%.
We estimate that ORL’s entire land bank will run out in FY2018E with 75% of the land
bank used up by FY2014E.
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