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Oberoi Realty (OEBO.BO; Buy): Strong Bs—Brand, Balance-sheet
Investment view
We initiate coverage on Oberoi Realty (ORL) with a Buy rating and 12-m
RNAV-based target price of Rs327. We see two key revenue drivers for
the company—its brand and balance-sheet.
Robust brand: We believe that the Oberoi brand-name helps the
company get premium pricing as compared with similar offerings
by other developers. The promoters have experience in the Mumbai
real estate market since 1983 and the company has sold an average
455 units annually in the past 5 years.
Unlevered balance-sheet: ORL has an unlevered balance-sheet and
we forecast cash balances of Rs17 bn by end-FY2011E. This allows
the company to leverage its balance-sheet to take advantage of a
favorable business cycle or market opportunity.
Rental portfolio to provide a steady income stream: The
company currently manages about 1 mn sqft of commercial/retail
lease portfolio as well as the Westin branded hotel. We forecast
annuity income of about Rs2 bn in FY12E, thus giving the company
further flexibility to raise long-term funds.
Widening horizons: ORL has two large project launches planned in
Mumbai and the company should expand from two locations to four
by end-FY2012 (see Exhibit 55). At present the two major sites for
the company are Goregaon and Andheri (E), but two more large
projects are in the pipeline in Mulund and Worli, respectively.
Robust record of value creation. ORL has demonstrated a track
record of acquiring large contiguous parcels through the acquisition
of adjacent pieces of land and subsequently creating value by
developing the integrated land parcel. Oberoi Garden City (launched
in CY2004) is a good example of this where ORL acquired patches of
land to later create an integrated development spanning more than
11 mn sqft.
High returns. ORL has consistently maintained an RoE of 20%+
despite reducing leverage. We believe its RoE could improve further
in the event of ORL deploying the large cash balances.
Valuation
Valuations appear attractive in the context of industry leading ROEs:
(1) ORL is currently trading at an 30% discount to our FY12E-based
RNAV of Rs327, (2) 1.9X FY2012E book value vs ROE of 20%, and (3)
FY2012E P/E of 10.1X vs sector average of 11.1X.
Our 12-m target price of Rs327 is set at par to FY12E RNAV of Rs327.
We believe that Oberoi’s proven execution track record, debt-free
balance sheet and attractive land parcels do not warrant any
discount to RNAV.
Key risks
(1) Lower than expected volumes, (2) delay in project launches, (3)
policy changes in Mumbai.
Launches at new locations to drive growth
We expect 38% revenue CAGR in FY10-FY13E driven by the residential business. The key
revenue drivers, in our view, are:
Residential: Oberoi currently has 5 ongoing and 4 planned residential projects with a total
saleable area of almost 13 mn sqft. These projects are set in 4 primary locations in Mumbai
and 1 location in Pune. The Mumbai locations are based in the suburbs of Goregaon-East,
Andheri-East, Mulund-West and Worli. The Pune project is located in the suburb of
Sangamwadi. The company has a track record of acquiring large contiguous land parcels
over a period of time to enhance the land value. We expect Oberoi to sell 3.97 mn sqft of
residential space in FY11E-FY13E and forecast residential revenue recognition of Rs11.2 bn
in FY12E and Rs14.7 bn in FY13E.
Commercial: Oberoi currently has 5 ongoing and 2 planned office projects totaling about
4mn sqft of saleable/leasable area. These projects are also based on the land parcels
mentioned above. Currently the company leases out its office space at ‘Commerz I’ and
plans to lease an additional 2.4 mn sqft at the same location. We forecast commercial lease
income to increase from Rs502 mn in FY11E to Rs931mn in FY13E.
Retail: The company currently operates one retail mall and plans to add two more by
FY16E. At present the company operates the Oberoi Mall in Goregaon-East with an area of
about 0.49 mn sqft and plans to add 0.4 mn sqft of additional mall space. We forecast retail
revenues to remain steady at about Rs663 mn during FY11E-FY13E and expect revenues for
the two additional projects to kick in from FY14E.
Hospitality: The company currently operates the Westin (managed by Starwood Asia
Pacific Hotels and Resorts) in Goregaon-East and plans to add one more project in Worli.
The company also has a planned hotel project at Juhu but the land is currently under
litigation, and we have not included it in our valuation. We forecast revenues from the
hotel segment to increase from Rs817 mn in FY11E to Rs1,350 mn in FY13E.
Others: The company also operates one school at the Goregaon-East site and plans to add
a couple more educational complexes and one hospital. These projects were started to
comply with land reservation laws.
Strong track record of value creation
Oberoi focuses on large mixed-use developments such as Oberoi Garden City to enhance
capital returns. ORL acquired land totaling 83 acres in various phases over a six-year period
and has converted this into a 11.2 mn sqft mixed use development with around 3 mn sqft
of rental assets. Selling prices have increased significantly with the progress of the project,
thus enhancing returns.
Potential for RoE to improve further
ORL has consistently maintained RoEs of 20%+ despite reducing leverage. We believe its
RoE could improve further in the event of ORL deploying the large cash balances.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oberoi Realty (OEBO.BO; Buy): Strong Bs—Brand, Balance-sheet
Investment view
We initiate coverage on Oberoi Realty (ORL) with a Buy rating and 12-m
RNAV-based target price of Rs327. We see two key revenue drivers for
the company—its brand and balance-sheet.
Robust brand: We believe that the Oberoi brand-name helps the
company get premium pricing as compared with similar offerings
by other developers. The promoters have experience in the Mumbai
real estate market since 1983 and the company has sold an average
455 units annually in the past 5 years.
Unlevered balance-sheet: ORL has an unlevered balance-sheet and
we forecast cash balances of Rs17 bn by end-FY2011E. This allows
the company to leverage its balance-sheet to take advantage of a
favorable business cycle or market opportunity.
Rental portfolio to provide a steady income stream: The
company currently manages about 1 mn sqft of commercial/retail
lease portfolio as well as the Westin branded hotel. We forecast
annuity income of about Rs2 bn in FY12E, thus giving the company
further flexibility to raise long-term funds.
Widening horizons: ORL has two large project launches planned in
Mumbai and the company should expand from two locations to four
by end-FY2012 (see Exhibit 55). At present the two major sites for
the company are Goregaon and Andheri (E), but two more large
projects are in the pipeline in Mulund and Worli, respectively.
Robust record of value creation. ORL has demonstrated a track
record of acquiring large contiguous parcels through the acquisition
of adjacent pieces of land and subsequently creating value by
developing the integrated land parcel. Oberoi Garden City (launched
in CY2004) is a good example of this where ORL acquired patches of
land to later create an integrated development spanning more than
11 mn sqft.
High returns. ORL has consistently maintained an RoE of 20%+
despite reducing leverage. We believe its RoE could improve further
in the event of ORL deploying the large cash balances.
Valuation
Valuations appear attractive in the context of industry leading ROEs:
(1) ORL is currently trading at an 30% discount to our FY12E-based
RNAV of Rs327, (2) 1.9X FY2012E book value vs ROE of 20%, and (3)
FY2012E P/E of 10.1X vs sector average of 11.1X.
Our 12-m target price of Rs327 is set at par to FY12E RNAV of Rs327.
We believe that Oberoi’s proven execution track record, debt-free
balance sheet and attractive land parcels do not warrant any
discount to RNAV.
Key risks
(1) Lower than expected volumes, (2) delay in project launches, (3)
policy changes in Mumbai.
Launches at new locations to drive growth
We expect 38% revenue CAGR in FY10-FY13E driven by the residential business. The key
revenue drivers, in our view, are:
Residential: Oberoi currently has 5 ongoing and 4 planned residential projects with a total
saleable area of almost 13 mn sqft. These projects are set in 4 primary locations in Mumbai
and 1 location in Pune. The Mumbai locations are based in the suburbs of Goregaon-East,
Andheri-East, Mulund-West and Worli. The Pune project is located in the suburb of
Sangamwadi. The company has a track record of acquiring large contiguous land parcels
over a period of time to enhance the land value. We expect Oberoi to sell 3.97 mn sqft of
residential space in FY11E-FY13E and forecast residential revenue recognition of Rs11.2 bn
in FY12E and Rs14.7 bn in FY13E.
Commercial: Oberoi currently has 5 ongoing and 2 planned office projects totaling about
4mn sqft of saleable/leasable area. These projects are also based on the land parcels
mentioned above. Currently the company leases out its office space at ‘Commerz I’ and
plans to lease an additional 2.4 mn sqft at the same location. We forecast commercial lease
income to increase from Rs502 mn in FY11E to Rs931mn in FY13E.
Retail: The company currently operates one retail mall and plans to add two more by
FY16E. At present the company operates the Oberoi Mall in Goregaon-East with an area of
about 0.49 mn sqft and plans to add 0.4 mn sqft of additional mall space. We forecast retail
revenues to remain steady at about Rs663 mn during FY11E-FY13E and expect revenues for
the two additional projects to kick in from FY14E.
Hospitality: The company currently operates the Westin (managed by Starwood Asia
Pacific Hotels and Resorts) in Goregaon-East and plans to add one more project in Worli.
The company also has a planned hotel project at Juhu but the land is currently under
litigation, and we have not included it in our valuation. We forecast revenues from the
hotel segment to increase from Rs817 mn in FY11E to Rs1,350 mn in FY13E.
Others: The company also operates one school at the Goregaon-East site and plans to add
a couple more educational complexes and one hospital. These projects were started to
comply with land reservation laws.
Strong track record of value creation
Oberoi focuses on large mixed-use developments such as Oberoi Garden City to enhance
capital returns. ORL acquired land totaling 83 acres in various phases over a six-year period
and has converted this into a 11.2 mn sqft mixed use development with around 3 mn sqft
of rental assets. Selling prices have increased significantly with the progress of the project,
thus enhancing returns.
Potential for RoE to improve further
ORL has consistently maintained RoEs of 20%+ despite reducing leverage. We believe its
RoE could improve further in the event of ORL deploying the large cash balances.
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