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ORBIT CORPORATION
Share pledge a key monitorable
Numbers ahead of estimates, but volumes drop
Orbit Corporation (Orbit) reported Q3FY11 revenue of INR 1,138 mn, higher than
our estimate of INR 960 mn, due to higher–than-expected bookings from Orbit
Haven (Napean Sea Road) and Orbit Terraces (Lower Parel) projects. Reported
PAT, of INR 231 mn, was higher than our estimate of INR 154 mn due to higher–
than-expected EBITDA margin and lower tax rate. Orbit sold ~62,000 sft in
Q3FY11 compared to 158,000 sft in Q2FY11 and 54,000 sft in Q1FY11, primarily
due to bump-up in sales from Mandwa project in Q2FY11 coming off in Q3FY11.
Cash flow position stressed; receivables coming off in FY12 remains key
The company reported negative operating cash flow of INR 759 mn for Q3FY11,
with debt increasing INR 870 mn Q-o-Q to ~INR 8.07 bn (D/E of 0.84x ex-
Rodere CCDs). This is attributable to receivables in existing projects as of
Q3FY11 continuing to remain flat compared to FY10, accompanied by a decline in
customer advances (debtors net of customer advances at INR 4.0 bn as of
Q3FY11 compared to INR 3.2 bn in FY10). Management intends to focus on fasttrack
completion of these projects in FY12 to generate cash flows and this is the
key monitorable over the next 6-9 months, in our view.
Pipeline projects key for turnaround, but near-term visibility is muted
Although execution in ongoing projects such as Orbit Terraces and Residency
Park was healthy during the quarter, major pipeline projects such as Orbit
Magnum (0.3 msf at Napean Sea Road), Orbit Midtown (0.9 msf at Lalbaug), and
Santacruz slum rehab (0.57 msf) may be launched only in FY12 (Phase I of all
these projects were expected to begin in FY11). Accordingly, we factor in delay
of 12-18 months across these projects.
Outlook and valuations: Release of share pledge key; maintain ‘BUY’
We are revising our FY12E NAV for Orbit to INR 110/share (INR 181 earlier)
factoring in higher cost of capital, project delays and higher construction costs.
Although cash flows may remain under near-term pressure, a turnaround in cash
conversion cycle, coupled with improved visibility on pipeline projects, makes the
stock attractive from a medium to long-term perspective with it currently trading
at P/B of ~0.6x on FY11E basis. However, ~73% of promoter holding is
pledged—promoter holding as of December 31, 2010, is 46.99%. Release of
share pledge remains a key monitorable for the stock performance. We maintain
‘BUY’ recommendation and rate it ‘Sector Performer‘ on relative return basis.
Company Description
Orbit is a real estate construction and development company with primary focus on
redevelopment of existing properties. It specialises in developing, designing, and
managing high-end residential and ‘build-to-suit’ commercial properties. The company’s
promoter directors have over 18 years of experience in the real estate sector.
Investment Theme
Strong play on large redevelopment opportunity
As per the 1969 census, the government declared over 19,642 buildings cessed and
dilapidated in the island city of Mumbai (henceforth referred to as Mumbai). According to
other informal sources, the number crossed 50,000 by March 2007. Orbit, with its brand
equity in the redevelopment segment, is well-positioned to play this huge opportunity.
Majority land bank in Island city of Mumbai
Majority of the company’s land bank is in the Island city of Mumbai, where demand for
high-end property is significantly higher than its supply. Orbit has total land bank of ~7
msf out of which ~3 msf is in prime location of Island city such as Worli, Napean Sea
road, Nana Chowk and Prarthana Samaj. The company creates premium properties in
such locations by using state-of-the-art amentities and advanced construction
technologies. This focus on superior quality enables Orbit to command a premium on its
properties over peers in the same locations.
Key Risks
Cashflow to remain under pressure
Orbit’s debt has increased significantly to ~INR 8.07 bn (D/E of 0.84x ex-Rodere CCDs).
Majority of this has been utilised to acquire new project. Requirement to infuse cash in new
project acquisition and execution of existing projects, along with subdued recovery from
debtors, will keep cash flow under pressure.
Unique problems associated with redevelopment projects
Orbit’s business requires getting consent from at least 70% of tenants, consensus between
various groups of tenants, providing accommodation to tenants during the interim period of
demolition and construction, and rehabilitation of occupants. Delay in any of the aforesaid
activities could have adverse financial implications on the company.
Exposure to several risks due to long gestation period of projects
Orbit’s projects have long gestation periods and all the related costs, market cycles, and
revenues (estimated for three-four years) are subject to a number of assumptions. If
these plans or assumptions change or prove to be inaccurate, or if the cash flow from
operations proves to be insufficient due to unanticipated expenses or otherwise, they
may adversely affect the company’s financial performance.
Subject to extensive laws and regulations
The company has to comply with extensive and intricate regulations for acquisition and
land development. These regulations could impose additional costs and delays on the
company, which could adversely affect its business and operations. In particular, Orbit is
required to obtain approvals from local government authorities regulating matters such as
permitted land uses, installation of utility services like electricity, water, sewage, etc. This
could lead to increased costs and even delay prospective or existing projects, and therefore,
could adversely affect the company’s business and operations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ORBIT CORPORATION
Share pledge a key monitorable
Numbers ahead of estimates, but volumes drop
Orbit Corporation (Orbit) reported Q3FY11 revenue of INR 1,138 mn, higher than
our estimate of INR 960 mn, due to higher–than-expected bookings from Orbit
Haven (Napean Sea Road) and Orbit Terraces (Lower Parel) projects. Reported
PAT, of INR 231 mn, was higher than our estimate of INR 154 mn due to higher–
than-expected EBITDA margin and lower tax rate. Orbit sold ~62,000 sft in
Q3FY11 compared to 158,000 sft in Q2FY11 and 54,000 sft in Q1FY11, primarily
due to bump-up in sales from Mandwa project in Q2FY11 coming off in Q3FY11.
Cash flow position stressed; receivables coming off in FY12 remains key
The company reported negative operating cash flow of INR 759 mn for Q3FY11,
with debt increasing INR 870 mn Q-o-Q to ~INR 8.07 bn (D/E of 0.84x ex-
Rodere CCDs). This is attributable to receivables in existing projects as of
Q3FY11 continuing to remain flat compared to FY10, accompanied by a decline in
customer advances (debtors net of customer advances at INR 4.0 bn as of
Q3FY11 compared to INR 3.2 bn in FY10). Management intends to focus on fasttrack
completion of these projects in FY12 to generate cash flows and this is the
key monitorable over the next 6-9 months, in our view.
Pipeline projects key for turnaround, but near-term visibility is muted
Although execution in ongoing projects such as Orbit Terraces and Residency
Park was healthy during the quarter, major pipeline projects such as Orbit
Magnum (0.3 msf at Napean Sea Road), Orbit Midtown (0.9 msf at Lalbaug), and
Santacruz slum rehab (0.57 msf) may be launched only in FY12 (Phase I of all
these projects were expected to begin in FY11). Accordingly, we factor in delay
of 12-18 months across these projects.
Outlook and valuations: Release of share pledge key; maintain ‘BUY’
We are revising our FY12E NAV for Orbit to INR 110/share (INR 181 earlier)
factoring in higher cost of capital, project delays and higher construction costs.
Although cash flows may remain under near-term pressure, a turnaround in cash
conversion cycle, coupled with improved visibility on pipeline projects, makes the
stock attractive from a medium to long-term perspective with it currently trading
at P/B of ~0.6x on FY11E basis. However, ~73% of promoter holding is
pledged—promoter holding as of December 31, 2010, is 46.99%. Release of
share pledge remains a key monitorable for the stock performance. We maintain
‘BUY’ recommendation and rate it ‘Sector Performer‘ on relative return basis.
Company Description
Orbit is a real estate construction and development company with primary focus on
redevelopment of existing properties. It specialises in developing, designing, and
managing high-end residential and ‘build-to-suit’ commercial properties. The company’s
promoter directors have over 18 years of experience in the real estate sector.
Investment Theme
Strong play on large redevelopment opportunity
As per the 1969 census, the government declared over 19,642 buildings cessed and
dilapidated in the island city of Mumbai (henceforth referred to as Mumbai). According to
other informal sources, the number crossed 50,000 by March 2007. Orbit, with its brand
equity in the redevelopment segment, is well-positioned to play this huge opportunity.
Majority land bank in Island city of Mumbai
Majority of the company’s land bank is in the Island city of Mumbai, where demand for
high-end property is significantly higher than its supply. Orbit has total land bank of ~7
msf out of which ~3 msf is in prime location of Island city such as Worli, Napean Sea
road, Nana Chowk and Prarthana Samaj. The company creates premium properties in
such locations by using state-of-the-art amentities and advanced construction
technologies. This focus on superior quality enables Orbit to command a premium on its
properties over peers in the same locations.
Key Risks
Cashflow to remain under pressure
Orbit’s debt has increased significantly to ~INR 8.07 bn (D/E of 0.84x ex-Rodere CCDs).
Majority of this has been utilised to acquire new project. Requirement to infuse cash in new
project acquisition and execution of existing projects, along with subdued recovery from
debtors, will keep cash flow under pressure.
Unique problems associated with redevelopment projects
Orbit’s business requires getting consent from at least 70% of tenants, consensus between
various groups of tenants, providing accommodation to tenants during the interim period of
demolition and construction, and rehabilitation of occupants. Delay in any of the aforesaid
activities could have adverse financial implications on the company.
Exposure to several risks due to long gestation period of projects
Orbit’s projects have long gestation periods and all the related costs, market cycles, and
revenues (estimated for three-four years) are subject to a number of assumptions. If
these plans or assumptions change or prove to be inaccurate, or if the cash flow from
operations proves to be insufficient due to unanticipated expenses or otherwise, they
may adversely affect the company’s financial performance.
Subject to extensive laws and regulations
The company has to comply with extensive and intricate regulations for acquisition and
land development. These regulations could impose additional costs and delays on the
company, which could adversely affect its business and operations. In particular, Orbit is
required to obtain approvals from local government authorities regulating matters such as
permitted land uses, installation of utility services like electricity, water, sewage, etc. This
could lead to increased costs and even delay prospective or existing projects, and therefore,
could adversely affect the company’s business and operations.
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