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Omaxe Limited
Results below expectation; Maintain Underperform
„Disappointing 3Q results
Omaxe reported weak 3Q earnings at Rs226mn against our expectation of
Rs336mn due to lower EBIDTA margin as it offered discounts on its under
construction projects for upfront advance from customers to improve cash flow
and higher interest costs. The pre sales were in line with estimate at 2.7mn sq ft
and higher by 10% QoQ, and the realizations were better due to sale in
commercial project. We maintain our Underperform rating with PO of Rs86
offering potential downside of 35% from the current level.
Cash flows improving but leverage remains high
Omaxe reported improvement in cash flows leading to marginal reduction in debt
to 16.4bn in 3Q. But leverage still remains high at 0.9x and in the current
environment where financial institutions have become wary of lending to the
sector, could pose challenge in servicing the same. It has over Rs5.5bn of debt
repayments over next 12 months and therefore would need to look for new funds
to meet its obligations.
Margin to remain under pressure
We expect Omaxe’s margin to remain under pressure as it focuses on cash
realization against margin maximization (due to high leverage it cannot afford
lower volumes). Also rising construction and interest cost is further expected to
pressure margin in coming quarters. We have therefore reduced our EBIDTA
margin estimate by 100-200bps for FY11-12 leading to cuts in our earnings
estimate by 8-12%.
Maintain Underperform with PO of Rs86
Our Underperform rating reflects high leverage and company’s lack of pricing
power in the current environment of high inflation – leading to higher construction
cost and interest rates would keep margin and cash flow under pressure.
Maintain Underperform- Expensive valuations
We maintain our Underperform rating on Omaxe, PO of Rs86 with potential
downside of 35% from current levels. Our PO is based on 30% discount to our
NAV of Rs122. We believe Tier 2 & 3 towns where Omaxe has 87% of its land
bank will continue to underperform compared with larger metros and Tier 1 towns,
both in terms of pricing and volume over next 12-18 months. The lack of pricing
power would also mean that EBIDTA margins will be under pressure due to rising
costs. The high debt to equity of close to 0.9x and large repayment obligation of
over Rs5.5bn in next 12 months would further strain the cash flows.
Earnings cut by 8-12% for FY11 and FY12
We have cut our earning estimates for FY11 and FY12 by 8-12% to factor in
higher interest cost due to rising interest rates, higher construction cost and
flattish sales realization. Therefore we have reduced our EBIDTA margin
estimate for FY11 and FY12 by 100-200bps and expect margin to remain below
20%.
Price objective basis & risk
Omaxe Limited (XOMXF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate project. Our price objective of Rs86 is therefore
based on our NAV of Rs122. We expect Omaxe to trade at a discount of 30% to
large developers like DLF on discount to NAV basis, because of its high leverage,
concentration of land bank in Tier 2 and 3 towns and smaller size. Key
assumptions underlying our NAV are WACC of 16%, capitalization rate of 11%
and inflation of 5% from FY12 on both selling price and construction costs. On a
P/E basis, at our PO of Rs86, the stock would trade at 11x FY12E earnings.
Upside risks are higher than expected volume and sale of assets leading to
reduction in debt. Downside risks are a larger than expected slow down in
volumes for mid income residential property in tier 2 and 3 locations and a
prolonged delay in refinancing debt obligations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Omaxe Limited
Results below expectation; Maintain Underperform
„Disappointing 3Q results
Omaxe reported weak 3Q earnings at Rs226mn against our expectation of
Rs336mn due to lower EBIDTA margin as it offered discounts on its under
construction projects for upfront advance from customers to improve cash flow
and higher interest costs. The pre sales were in line with estimate at 2.7mn sq ft
and higher by 10% QoQ, and the realizations were better due to sale in
commercial project. We maintain our Underperform rating with PO of Rs86
offering potential downside of 35% from the current level.
Cash flows improving but leverage remains high
Omaxe reported improvement in cash flows leading to marginal reduction in debt
to 16.4bn in 3Q. But leverage still remains high at 0.9x and in the current
environment where financial institutions have become wary of lending to the
sector, could pose challenge in servicing the same. It has over Rs5.5bn of debt
repayments over next 12 months and therefore would need to look for new funds
to meet its obligations.
Margin to remain under pressure
We expect Omaxe’s margin to remain under pressure as it focuses on cash
realization against margin maximization (due to high leverage it cannot afford
lower volumes). Also rising construction and interest cost is further expected to
pressure margin in coming quarters. We have therefore reduced our EBIDTA
margin estimate by 100-200bps for FY11-12 leading to cuts in our earnings
estimate by 8-12%.
Maintain Underperform with PO of Rs86
Our Underperform rating reflects high leverage and company’s lack of pricing
power in the current environment of high inflation – leading to higher construction
cost and interest rates would keep margin and cash flow under pressure.
Maintain Underperform- Expensive valuations
We maintain our Underperform rating on Omaxe, PO of Rs86 with potential
downside of 35% from current levels. Our PO is based on 30% discount to our
NAV of Rs122. We believe Tier 2 & 3 towns where Omaxe has 87% of its land
bank will continue to underperform compared with larger metros and Tier 1 towns,
both in terms of pricing and volume over next 12-18 months. The lack of pricing
power would also mean that EBIDTA margins will be under pressure due to rising
costs. The high debt to equity of close to 0.9x and large repayment obligation of
over Rs5.5bn in next 12 months would further strain the cash flows.
Earnings cut by 8-12% for FY11 and FY12
We have cut our earning estimates for FY11 and FY12 by 8-12% to factor in
higher interest cost due to rising interest rates, higher construction cost and
flattish sales realization. Therefore we have reduced our EBIDTA margin
estimate for FY11 and FY12 by 100-200bps and expect margin to remain below
20%.
Price objective basis & risk
Omaxe Limited (XOMXF)
Our preferred valuation methodology is NAV, calculated by discounting the cash
flows from each of the real estate project. Our price objective of Rs86 is therefore
based on our NAV of Rs122. We expect Omaxe to trade at a discount of 30% to
large developers like DLF on discount to NAV basis, because of its high leverage,
concentration of land bank in Tier 2 and 3 towns and smaller size. Key
assumptions underlying our NAV are WACC of 16%, capitalization rate of 11%
and inflation of 5% from FY12 on both selling price and construction costs. On a
P/E basis, at our PO of Rs86, the stock would trade at 11x FY12E earnings.
Upside risks are higher than expected volume and sale of assets leading to
reduction in debt. Downside risks are a larger than expected slow down in
volumes for mid income residential property in tier 2 and 3 locations and a
prolonged delay in refinancing debt obligations.
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