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Clean and simple
With 99% of NAV coming from four centrally located Mumbai properties,
Oberoi follows a fast turnover business model with live projects by FY12
on all the land parcels. 64% of the NAV comes from the commercial
segment, where its existing properties of 1.4m sf provide a rental stream
of Rs250m+/qtr already. Balance sheet is also the best amongst Indian
developers with net cash of Rs15bn – providing a hedge during downturn
and paving way for NAV upgrades via land banking. The stock deserves to
trade at close to / above our Mar’12 NAV of Rs309/share if the perception
of aboveboard corporate governance sustains.
Premium play on Mumbai property
Oberoi offers a unique exposure to Mumbai city property through its highly
concentrated project portfolio of 19m sf, spread over 5 properties - 4 of which
are present in Mumbai city and contribute for 99% of its NAV. Oberoi’s
properties usually command a premium, partly on better execution and partly
due to mixed-use development which offer better lifestyles.
Commercial portfolio lends stability to earnings and cashflows
Oberoi derives 64% of its NAV by the non-residential segment. Company
already has 0.9m sf of office and retail properties and a further 0.5m sf of
hotel and educational properties on its books, totalling an investment of
Rs7bn. Annual rental income from currently leased assets is c.Rs1.1bn and
we expect the same to scale up to c.Rs4bn by FY15 as its ongoing
developments get built up and leased.
Net cash balance sheet can lead to NAV upgrades
The balance sheet has been net cash since FY07 as company stuck to
developing its properties instead of adding more to its land bank. Post its IPO
in Oct10, Oberoi has a net cash balance of Rs15bn. The cash balance gives
the company strength to hold its commercial developments. Oberoi will look
to add to its land bank, which may have a higher possibility of being NAV
additive due to the premium associated with Oberoi’s development.
Premium valuations but scope for upside
Oberoi is trading at a discount of 19% to its NAV of Rs309/share, higher than
the 51% average for mid-cap peers. We believe Oberoi should trade close to
its NAV, and at a premium to its peers on account of high visibility landbank,
better corporate governance and high proportion of leased assets. Better
disclosure standards also help. However, given that nearly 71% of the GAV is
attributable to its Goregaon project, concentration risks are higher. Our
12mth target price of Rs309/share implies 12x FY13 earnings.
Mumbai focussed developer
Oberoi is a Mumbai focussed premium end developer. The Oberoi family (not
related with East India Hotels promoter Oberoi’s) has been in the real estate
business since 1983 with 33 projects completed by them. Total developed
area till date of 5m sf has all been in Mumbai, concentrated in the Western
suburbs of the city. Currently, company has a 19.2m sf of saleable area of
which 93% is in Mumbai and 7% in neighbouring Pune. 99% of the GAV
comes from its well located Mumbai properties.
Mar’12 NAV of Rs309/share
We have valued Oberoi for a total saleable area of 19.2m sf. 11.7m sf of the
same is assumed to be developed as residential – 1.8m sf of which is nearly
completed (Splendour I – Andheri), 3.1m sf more has been launched for sales
and the remaining 6.8m sf is expected to be launched and sold in the next 7
years. The existing lease asset portfolio of 0.9m sf is part of the total planned
5.1m sf of commercial development. We have used a discount rate of 14%;
cap rate of 11%. We assume flat average residential property prices in FY12
over FY11 average and annual property price increase of 7% thereafter. Cost
inflation has been assumed at 5% per annum. We have not valued the 1.3m
sf Juhu Hotel project where Oberoi has already paid a land advance of
Rs375m (Rs1/share). If the dispute on the land were to be decided in
Oberoi’s favour, it can potentially add Rs15-30/share (5-10%) to company’s
NAV.
Figure 3
NAV calculation table
Rs bn Comment
EV from projects on sales 36.8 Sale of 10m sf of residential and 1m sf commercial
property by FY18
EV from assets on lease 38.9 Rental portfolio of 4.1m sf by FY20; 11% cap rate.
0.9m sf already operational
EV from Goregaon Hotel 3.5 Valued at 12.5x FY13 Ebitda; Implies Rs13m/room;
1.3x book
EV from school & others 4.7 Valuing completed school at 1.5x BV; Rest at FSI
based value
(Net debt)/Cash 17.6 Mar'12. Oberoi is net cash
Land cost outstanding 0.0
Implied Mkt value 101.5
No of o/s shares 328.2 Post IPO share count
NAV / share 309.3
Source: CLSA Asia-Pacific Markets
Concentrated land parcels makes analysis simple
Oberoi’s key advantage is the high concentration of its land bank at six
distinct locations – just four of which contribute for 99% of its NAV. The four
locations are in the middle of Mumbai city and 2 of them (Goregaon and
Andheri) have a completed or running project – establishing a valuation
benchmark and removing doubts about ownership, commercialization etc. The
other two locations (Worli and Mulund) are also expected to have a project
running by mid-CY11 which will give visibility to 99% of the NAV.
Good mix of Residential and commercial
Oberoi’s GAV is split in favour of commercial properties. Of the Rs83.9bn of
Mar’12 based GAV attributable to its property portfolio, 36% is from
residential and 54% is from office/retail properties.
26% of the commercial GAV of Rs45.5bn comes from the two operating
properties of Oberoi Mall and Commerz – I at the Goregaon township. 76% of
the incremental lease area will come at the existing Goregaon township itself
(Commerze II office buildings). Construction is already under progress at
Commerz II - Phase I. The rental portfolio is likely to grow to 4.1m sf with
annual rental income projected to hit Rs9.5bn by FY20.
We expect Oberoi to sell 9.0m sf of residential space between FY12-18.
Residential sales in FY12/13 are expected to be 1.0 and 1.2m sf respectively
as new locations (Mulund, Worli) and follow-on launches at existing projects
(Exquisite –II at Goregaon, Splendour Grande at Andheri – both launched in
2HFY11) contribute to sales.
High margins likely to sustain
Larger land locations in Mumbai suburbs have also allowed Oberoi to go for
planned/mixed-use development which has resulted in better realizations
over standalone buildings. Oberoi will continue to enjoy high margins (50%+)
as ongoing monetization of lower cost land bank and rental income provides
enough cushion for the company in the event of a property price correction.
We currently assume FY12 average residential prices to be flat against FY11
average, which imply a discount of 5-10% against prevailing prices.
Balance sheet strength paves way for NAV addition
Oberoi is unique in its strong, net cash balance sheet which provides comfort
in a tightening liquidity environment. Oberoi had Rs14.7bn of net cash on its
balance sheet as of Dec10. We expect that the company will spend Rs5bn on
lease asset construction during FY12-13, which should be more than
adequately funded from Rs18bn expected in net sale/lease property inflows
during the period. Company additionally has a rental stream of Rs1bn/annum
which can be leveraged to take on additional debt of Rs10bn – increasing
balance sheet scope for project addition.
Balance sheet items are explainable
Oberoi’s balance sheet is not only net cash but also has clearly identifiable
ongoing/completed projects, unlike peers. Rs9.3bn of fixed assets are largely
(Rs8bn) Goregaon commercial assets. The land cost paid for Goregaon and
Mulund lands is visible as inventory and the amount spent upfront for Worli
project (Rs3.5bn, recoverable) forms a big chunk of loans and advances.
Operations have been consistently cash flow positive
Operations for Oberoi continue to be cashflow positive from FY08 onwards – a
period when most realty companies suffered heav negative cashflows.
Adjusting for the expenditure on Worli project acquisition (part of working
capital), Oberoi has generated Rs11bn+ from its operations between FY08-
10, Rs6bn of which has been utilized for funding capex in lease assets.
Lower sensitivity to prices; cap rate compression may help
With 17% of NAV coming from cash on the balance sheet and margins
remaining high, sensitivity of Oberoi to fluctuations in property prices is lower
than peers. Upside can come from cap rate compression as Oberoi’s exposure
to leased assets is relatively high.
Figure 17
NAV sensitivity table
1% higher discount rate -3.0%
1% higher cap rate -2.8%
1% lower residential prices -0.5%
1% higher construction cost -0.3%
Source: CLSA Asia-Pacific Markets
Valuations leave scope for upside
While Oberoi trades at a lower discount to NAV than other mid-cap peers, we
believe that the stock can trade upto its NAV. Factors in its favour include –
high proportion of rental assets, a net cash balance sheet, highly visible /
quick monetization land parcels and better corporate governance than peers.
Though company will be looking to deploy its cash flow by buying new land
parcels, high land prices may imply that the land bank purchase may not be
outright NAV accretive. We take comfort from the fact that Oberoi usually
commands a premium for its offerings and has also shown a strong operating
performance for its leased assets – implying that the company may be able to
extract higher value from its projects than peers.
Data disclosure standards – far higher than Indian peers
None of the larger Indian real estate companies disclose orderbook status for
the company as a whole. Oberoi, has disclosed it at the project level in it’s a
first quarterly update. Additionally, the company also disclosed cash collection
levels project by project which are again hard to come by for the Indian real
estate companies even at the corporate level. We hope that the company
maintains its disclosure standards at these higher levels, which we believe,
might improve the disclosure standards for the sector as a whole.
Nonetheless, as the company continues to maintain high disclosure
standards, its perception of above average corporate governance standards
will sustain.
Key issues
• Oberoi promoters hold 50% stake in another project located at Worli. The
other JV partner here is ICICI Ventures (I-Ven). The tenure of the fund
has expired and I-Ven is likely to exit soon. The stake may be purchased
by the promoters and project eventually transferred to Oberoi Realty. This
may result in related party issues later on. The project has been stuck
due to approval issues and the case looks long drawn.
• The company currently has a land bank of 21m sf and we expect the last
project from existing land bank will be launched in FY14. Thus, the
company will need to act fast to replenish its landbank – which creates
the possibility of the company overpaying for land. However, we note that
this risk is partially mitigated by Oberoi’s premium brand image which can
help it turn a potentially expensive land acquisition into a profitable
venture.
• The promoter group has executed 33 projects aggregating 5m sf over the
last 3 decades. Currently though the company plans to deliver 20m sf of
projects in the next 7 years, which will imply implementation and scale up
challenges. We take comfort from the fact that Oberoi is using L&T as a
contractor and has already scaled up well since IPO with c.10m sf of
projects already under various stages of construction.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Clean and simple
With 99% of NAV coming from four centrally located Mumbai properties,
Oberoi follows a fast turnover business model with live projects by FY12
on all the land parcels. 64% of the NAV comes from the commercial
segment, where its existing properties of 1.4m sf provide a rental stream
of Rs250m+/qtr already. Balance sheet is also the best amongst Indian
developers with net cash of Rs15bn – providing a hedge during downturn
and paving way for NAV upgrades via land banking. The stock deserves to
trade at close to / above our Mar’12 NAV of Rs309/share if the perception
of aboveboard corporate governance sustains.
Premium play on Mumbai property
Oberoi offers a unique exposure to Mumbai city property through its highly
concentrated project portfolio of 19m sf, spread over 5 properties - 4 of which
are present in Mumbai city and contribute for 99% of its NAV. Oberoi’s
properties usually command a premium, partly on better execution and partly
due to mixed-use development which offer better lifestyles.
Commercial portfolio lends stability to earnings and cashflows
Oberoi derives 64% of its NAV by the non-residential segment. Company
already has 0.9m sf of office and retail properties and a further 0.5m sf of
hotel and educational properties on its books, totalling an investment of
Rs7bn. Annual rental income from currently leased assets is c.Rs1.1bn and
we expect the same to scale up to c.Rs4bn by FY15 as its ongoing
developments get built up and leased.
Net cash balance sheet can lead to NAV upgrades
The balance sheet has been net cash since FY07 as company stuck to
developing its properties instead of adding more to its land bank. Post its IPO
in Oct10, Oberoi has a net cash balance of Rs15bn. The cash balance gives
the company strength to hold its commercial developments. Oberoi will look
to add to its land bank, which may have a higher possibility of being NAV
additive due to the premium associated with Oberoi’s development.
Premium valuations but scope for upside
Oberoi is trading at a discount of 19% to its NAV of Rs309/share, higher than
the 51% average for mid-cap peers. We believe Oberoi should trade close to
its NAV, and at a premium to its peers on account of high visibility landbank,
better corporate governance and high proportion of leased assets. Better
disclosure standards also help. However, given that nearly 71% of the GAV is
attributable to its Goregaon project, concentration risks are higher. Our
12mth target price of Rs309/share implies 12x FY13 earnings.
Mumbai focussed developer
Oberoi is a Mumbai focussed premium end developer. The Oberoi family (not
related with East India Hotels promoter Oberoi’s) has been in the real estate
business since 1983 with 33 projects completed by them. Total developed
area till date of 5m sf has all been in Mumbai, concentrated in the Western
suburbs of the city. Currently, company has a 19.2m sf of saleable area of
which 93% is in Mumbai and 7% in neighbouring Pune. 99% of the GAV
comes from its well located Mumbai properties.
Mar’12 NAV of Rs309/share
We have valued Oberoi for a total saleable area of 19.2m sf. 11.7m sf of the
same is assumed to be developed as residential – 1.8m sf of which is nearly
completed (Splendour I – Andheri), 3.1m sf more has been launched for sales
and the remaining 6.8m sf is expected to be launched and sold in the next 7
years. The existing lease asset portfolio of 0.9m sf is part of the total planned
5.1m sf of commercial development. We have used a discount rate of 14%;
cap rate of 11%. We assume flat average residential property prices in FY12
over FY11 average and annual property price increase of 7% thereafter. Cost
inflation has been assumed at 5% per annum. We have not valued the 1.3m
sf Juhu Hotel project where Oberoi has already paid a land advance of
Rs375m (Rs1/share). If the dispute on the land were to be decided in
Oberoi’s favour, it can potentially add Rs15-30/share (5-10%) to company’s
NAV.
Figure 3
NAV calculation table
Rs bn Comment
EV from projects on sales 36.8 Sale of 10m sf of residential and 1m sf commercial
property by FY18
EV from assets on lease 38.9 Rental portfolio of 4.1m sf by FY20; 11% cap rate.
0.9m sf already operational
EV from Goregaon Hotel 3.5 Valued at 12.5x FY13 Ebitda; Implies Rs13m/room;
1.3x book
EV from school & others 4.7 Valuing completed school at 1.5x BV; Rest at FSI
based value
(Net debt)/Cash 17.6 Mar'12. Oberoi is net cash
Land cost outstanding 0.0
Implied Mkt value 101.5
No of o/s shares 328.2 Post IPO share count
NAV / share 309.3
Source: CLSA Asia-Pacific Markets
Concentrated land parcels makes analysis simple
Oberoi’s key advantage is the high concentration of its land bank at six
distinct locations – just four of which contribute for 99% of its NAV. The four
locations are in the middle of Mumbai city and 2 of them (Goregaon and
Andheri) have a completed or running project – establishing a valuation
benchmark and removing doubts about ownership, commercialization etc. The
other two locations (Worli and Mulund) are also expected to have a project
running by mid-CY11 which will give visibility to 99% of the NAV.
Good mix of Residential and commercial
Oberoi’s GAV is split in favour of commercial properties. Of the Rs83.9bn of
Mar’12 based GAV attributable to its property portfolio, 36% is from
residential and 54% is from office/retail properties.
26% of the commercial GAV of Rs45.5bn comes from the two operating
properties of Oberoi Mall and Commerz – I at the Goregaon township. 76% of
the incremental lease area will come at the existing Goregaon township itself
(Commerze II office buildings). Construction is already under progress at
Commerz II - Phase I. The rental portfolio is likely to grow to 4.1m sf with
annual rental income projected to hit Rs9.5bn by FY20.
We expect Oberoi to sell 9.0m sf of residential space between FY12-18.
Residential sales in FY12/13 are expected to be 1.0 and 1.2m sf respectively
as new locations (Mulund, Worli) and follow-on launches at existing projects
(Exquisite –II at Goregaon, Splendour Grande at Andheri – both launched in
2HFY11) contribute to sales.
High margins likely to sustain
Larger land locations in Mumbai suburbs have also allowed Oberoi to go for
planned/mixed-use development which has resulted in better realizations
over standalone buildings. Oberoi will continue to enjoy high margins (50%+)
as ongoing monetization of lower cost land bank and rental income provides
enough cushion for the company in the event of a property price correction.
We currently assume FY12 average residential prices to be flat against FY11
average, which imply a discount of 5-10% against prevailing prices.
Balance sheet strength paves way for NAV addition
Oberoi is unique in its strong, net cash balance sheet which provides comfort
in a tightening liquidity environment. Oberoi had Rs14.7bn of net cash on its
balance sheet as of Dec10. We expect that the company will spend Rs5bn on
lease asset construction during FY12-13, which should be more than
adequately funded from Rs18bn expected in net sale/lease property inflows
during the period. Company additionally has a rental stream of Rs1bn/annum
which can be leveraged to take on additional debt of Rs10bn – increasing
balance sheet scope for project addition.
Balance sheet items are explainable
Oberoi’s balance sheet is not only net cash but also has clearly identifiable
ongoing/completed projects, unlike peers. Rs9.3bn of fixed assets are largely
(Rs8bn) Goregaon commercial assets. The land cost paid for Goregaon and
Mulund lands is visible as inventory and the amount spent upfront for Worli
project (Rs3.5bn, recoverable) forms a big chunk of loans and advances.
Operations have been consistently cash flow positive
Operations for Oberoi continue to be cashflow positive from FY08 onwards – a
period when most realty companies suffered heav negative cashflows.
Adjusting for the expenditure on Worli project acquisition (part of working
capital), Oberoi has generated Rs11bn+ from its operations between FY08-
10, Rs6bn of which has been utilized for funding capex in lease assets.
Lower sensitivity to prices; cap rate compression may help
With 17% of NAV coming from cash on the balance sheet and margins
remaining high, sensitivity of Oberoi to fluctuations in property prices is lower
than peers. Upside can come from cap rate compression as Oberoi’s exposure
to leased assets is relatively high.
Figure 17
NAV sensitivity table
1% higher discount rate -3.0%
1% higher cap rate -2.8%
1% lower residential prices -0.5%
1% higher construction cost -0.3%
Source: CLSA Asia-Pacific Markets
Valuations leave scope for upside
While Oberoi trades at a lower discount to NAV than other mid-cap peers, we
believe that the stock can trade upto its NAV. Factors in its favour include –
high proportion of rental assets, a net cash balance sheet, highly visible /
quick monetization land parcels and better corporate governance than peers.
Though company will be looking to deploy its cash flow by buying new land
parcels, high land prices may imply that the land bank purchase may not be
outright NAV accretive. We take comfort from the fact that Oberoi usually
commands a premium for its offerings and has also shown a strong operating
performance for its leased assets – implying that the company may be able to
extract higher value from its projects than peers.
Data disclosure standards – far higher than Indian peers
None of the larger Indian real estate companies disclose orderbook status for
the company as a whole. Oberoi, has disclosed it at the project level in it’s a
first quarterly update. Additionally, the company also disclosed cash collection
levels project by project which are again hard to come by for the Indian real
estate companies even at the corporate level. We hope that the company
maintains its disclosure standards at these higher levels, which we believe,
might improve the disclosure standards for the sector as a whole.
Nonetheless, as the company continues to maintain high disclosure
standards, its perception of above average corporate governance standards
will sustain.
Key issues
• Oberoi promoters hold 50% stake in another project located at Worli. The
other JV partner here is ICICI Ventures (I-Ven). The tenure of the fund
has expired and I-Ven is likely to exit soon. The stake may be purchased
by the promoters and project eventually transferred to Oberoi Realty. This
may result in related party issues later on. The project has been stuck
due to approval issues and the case looks long drawn.
• The company currently has a land bank of 21m sf and we expect the last
project from existing land bank will be launched in FY14. Thus, the
company will need to act fast to replenish its landbank – which creates
the possibility of the company overpaying for land. However, we note that
this risk is partially mitigated by Oberoi’s premium brand image which can
help it turn a potentially expensive land acquisition into a profitable
venture.
• The promoter group has executed 33 projects aggregating 5m sf over the
last 3 decades. Currently though the company plans to deliver 20m sf of
projects in the next 7 years, which will imply implementation and scale up
challenges. We take comfort from the fact that Oberoi is using L&T as a
contractor and has already scaled up well since IPO with c.10m sf of
projects already under various stages of construction.
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